Delaware Business Litigation Report

Intersection Between Fiduciary Duties and Contract Rights May Be Headed For a Showdown

by Peter B. Ladig
This article was originally published in the Delaware Business Court Insider l 08.17.2011

In recent years, the tension between fiduciary duty principles and contract rights, particularly with respect to fiduciary duties in unincorporated entities, has received a great deal of attention from the members of the Delaware judiciary in their written opinions and in extrajudicial commentary.

On the one hand, many decisions of the Court of Chancery have held that fiduciary duties apply in unincorporated entities unless specific language eliminates those duties. On the other, Chief Justice Myron T. Steele wrote an article in the 2009 American Business Law Journal that stated, "Delaware courts should not apply default fiduciary duties even if the parties have not specifically provided for the elimination of fiduciary duties."

Although the Delaware Supreme Court has not yet directly addressed whether fiduciary duties apply to unincorporated entities by default, it has held — in the 2010 case Nemec v. Shrader — that the exercise of contractual rights is not subject to fiduciary duties.

The tension between fiduciary duties and contract principles in unincorporated entities was visited again in the Court of Chancery's recent opinion in Paige Capital Management LLC v. Lerner Master Fund LLC. Although the court's opinion addressed many factual and legal issues, the facts of Paige as they relate to fiduciary duty issues are straightforward.

Michele and Christopher Paige, wife and husband, sought to enter the world of hedge fund management. They recruited Lerner Master Fund LLC, the investment arm of the Lerner family, founders of MBNA and current owners of the NFL's Cleveland Browns and English Premier League's Aston Villa Football Club, to provide the hedge fund with $40 million in "seed money" so that the Paiges could use the Lerners' investment to attract other qualified investors. The Lerner group became a limited partner of the hedge fund, but also signed a separate agreement with additional terms and conditions that were applicable to the Lerners' investment. Pursuant to this side agreement, the Lerners were not permitted to remove their investment from the hedge fund for three years, unless, among other things, the Paige entities breached the contract or a fiduciary duty. In exchange, the Lerners received reduced management fees, incentive payments and other benefits.

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Two Vice Chancellors, Two Preferences for Interim Fee Applications

by Lewis Lazarus
Originally published in the Delaware Business Court Insider | August 31, 2011

Stockholder litigation challenging a merger transaction before it is consummated often has two phases. First, plaintiffs seek to enjoin the transaction. Second, if that fails, plaintiffs proceed with claims that the transaction was unfair because of a flawed process and an inadequate price.

When plaintiffs succeed in causing the corporation to issue corrective disclosure prior to a stockholder vote, they generally will be found to have conferred a benefit upon the corporation and its stockholders. Having done so, they are then entitled to an award of attorney fees. But can they get fees before the case is finally resolved?

Two recent decisions, Frank v. Elgamal and In re Del Monte Foods Company Shareholders Litigation, illustrate that the question is one for the discretion of the court and that that discretion may be exercised differently depending upon the chancellor or vice chancellor deciding the case and the underlying facts and circumstances.

Although the Frank court declined to entertain an application for interim fees while the Del Monte court did and awarded $2.75 million in interim fees, the court in each opinion agreed that "interim fee awards may be appropriate where a plaintiff has achieved the benefit sought by the claim that has been mooted or settled and that benefit is not subject to reversal or alteration as the remaining portion of the litigation proceeds," quoted from the 2001 decision in Louisiana State Employees Retirement System v. Citrix Systems Inc.

The court in each opinion also recognized that a trial court is never required to consider an interim fee application and that a trial court may well prefer to have applications determined at the end, when a single fee can be awarded. Vice Chancellor John W. Noble in Frank noted that "judicial economy and the orderly conduct of litigation are usually better served if interim awards of attorneys' fees are avoided."

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Superior Court Emphasizes Need for Speed in Litigation

by Edward M. McNally
Originally published in the Delaware Law Weekly  l  08-31-2011

In years gone by, Delaware’s courts had much of the same flavor as a small town. The local bar was small. Few firms from outside Delaware had Delaware outposts. The lawyers were part of a community where everyone at least knew someone who knew who they were and how they practiced law. As a result, it was often true that lawyers got away with not complying with scheduling orders and continuances were freely granted. Even today, some of that atmosphere remains, with Delaware lawyers maintaining civility.

To view the full article, login to Delaware Law Weekly.

Supreme Court Affirms Creditors May Not Sue Derivatively In LLC

CML V LLC v. Bax,  C.A. 735, 2010 (September 2, 2011, corrected September 6, 2011)

This decision upholds the prior decision of the Court of Chancery that creditors of an insolvent LLC may not bring a derivative claim against its managers.  This follows because the Delaware LLC Act limits such claims to members.  This result is another example of the differences between LLCs and corporations.  For in the corporate context, a creditor may file a derivative claim when the entity is insolvent.

Court Of Chancery Explains Books And Records Rights In An LLC

DFG Wire Company LLC v. Eight Estates Wine Holdings LLC, C.A. 6110-VCN (August 31, 2011)

Inspection rights in LLCs are different from those in corporations.  The statute is different and the relationship between the owners is different.  This decision does a good job of explaining inspection rights in an LLC, including when those rights may reach the records of a subsidiary.

17 Morris James Attorneys Named In Best Lawyers in America® 2012 in 20 Practice Areas

Seventeen Morris James attorneys are listed as being among the most elite lawyers in their practices in The Best Lawyers in America® 2012.

The Best Lawyers in America® has become universally regarded as the definitive guide to legal excellence. Their rigorous research is based on an exhaustive peer-review where leading attorneys cast votes on the legal abilities of other lawyers in their practice areas.

The Morris James attorneys listed in the 18th edition of the guide and the areas of law in which they are recognized include:

Richard P. Beck
Litigation – Real Estate (1983)
Real Estate Law (1983)

John M. Bloxom IV
Real Estate Law (2010)

P. Clarkson Collins, Jr.
Corporate Law (2005)
Litigation – Mergers and Acquisitions (2005)

Mary M. Culley
Elder Law (2008)

Keith E. Donovan
Personal Injury Litigation (2009)

Dennis D. Ferri
Medical Malpractice Law (2007)
Personal Injury Litigation – Defendants (2007)

Richard Galperin
Personal Injury Litigation – Defendants (2005)

Richard K. Herrmann
Information Technology Law (2003)
Technology Law (2003)

Francis J. Jones, Jr.
Personal Injury Litigation – Defendants (2008)
Personal Injury Litigation – Plaintiffs (2008)

Gretchen S. Knight
Family Law (2007)

Lewis H. Lazarus
Commercial Litigation (2006)
Corporate Law (2006)
Litigation – Mergers and Acquisitions (2006)

Mary B. Matterer
Litigation – Intellectual Property (2009)

Edward M. McNally
Corporate Law (2005)
Litigation – Mergers and Acquisitions (2005)

Mark D. Olson
Tax Law (2011)

James W. Semple
Commercial Litigation (2009)

Bruce W. Tigani
Tax Law (2011)

David H. Williams
Education Law (2007)
Employment Law – Management (2007)
Labor Law – Management (2007)
Litigation – Labor and Employment (2007)

(Year indicates first year listed in practice area)

17 Morris James Attorneys Named In Best Lawyers in America® 2012 in 20 Practice Areas

Seventeen Morris James attorneys are listed as being among the most elite lawyers in their practices in The Best Lawyers in America® 2012.

The Best Lawyers in America® has become universally regarded as the definitive guide to legal excellence. Their rigorous research is based on an exhaustive peer-review where leading attorneys cast votes on the legal abilities of other lawyers in their practice areas.

The Morris James attorneys listed in the 18th edition of the guide and the areas of law in which they are recognized include:

Richard P. Beck

Litigation – Real Estate (1983)

Real Estate Law (1983)

John M. Bloxom IV

Real Estate Law (2010)

P. Clarkson Collins, Jr.

Corporate Law (2005)

Litigation – Mergers and Acquisitions (2005)

Mary M. Culley

Elder Law (2008)

Keith E. Donovan

Personal Injury Litigation (2009)

Dennis D. Ferri

Medical Malpractice Law (2007)

Personal Injury Litigation – Defendants (2007)

Richard Galperin

Personal Injury Litigation – Defendants (2005)

Richard K. Herrmann

Information Technology Law (2003)

Technology Law (2003)

Francis J. Jones, Jr.

Personal Injury Litigation – Defendants (2008)

Personal Injury Litigation – Plaintiffs (2008)

Gretchen S. Knight

Family Law (2007)

Lewis H. Lazarus

Commercial Litigation (2006)

Corporate Law (2006)

Litigation – Mergers and Acquisitions (2006)

Mary B. Matterer

Litigation – Intellectual Property (2009)

Edward M. McNally

Corporate Law (2005)

Litigation – Mergers and Acquisitions (2005)

Mark D. Olson

Tax Law (2011)

Bruce W. Tigani

Tax Law (2011)

David H. Williams

Education Law (2007)

Employment Law – Management (2007)

Labor Law – Management (2007)

Litigation – Labor and Employment (2007)

(Year indicates first year listed in practice area)

Court Of Chancery Denies Interim Fee Application

In re Novell Inc. Shareholder Litigation, C.A. 6032-VCN (August 30, 2011)

Once again, the Court of Chancery has denied an application for interim fees in a shareholder litigation.  The application was based on so-called curative disclosures made as a result of the plantiff's efforts.  While such applications are certainly disfavored as premature, that is perhaps all the more so when they are based on just additional disclosures.  Several other recent decisions have reached the same conclusion.

Court Of Chancery Upholds Attorney Lien

Judy v. Preferred Communications Systems, Inc., C.A. 4662-VCL (August 19, 2011)

This is the first decision in Delaware to uphold an attorney's lien for unpaid legal fees.  Hence it is welcome news to us all.  The Court conditioned the release of the documents subject to the lien on the client posting security to cover the disputed fees pending an arbitration.

The opinion is particularly noteworthy for its exhaustive scholarship and its modification of the old rule that such a lien might only be justified to prevent a client fraud.

Supreme Court Clarifies Test Of Pleadings

Central Mortgage Company v. Morgan Stanley Mortgage Capital Holdings LLC, No. 595, 2010 (August 18, 2011)

This important decision clarifies that Delaware courts should apply the "conceivability" test to determine if a complaint states adequate facts to state a claim.  Previously, Delaware's trial courts had applied the "plausibility" test from the United States Supreme Court's Twombly decision.  As the Delaware Supreme Court makes clear, the "conceivability" test is the more liberal test and will result in sustaining more complaints in response to motions to dismiss.

For years, the Chief Justice has cautioned in public statements that Twombly was not Delaware law.  While his opinion in this case may leave that open for a later review,  for now he has the last word.

The decision also significantly liberalizes the scope of a "good faith and fair dealing" claim.  So long as such a claim does not depend on an actual breach of the contract involved, it may survive a motion to dismiss as well.

Court Of Chancery Permits Innovative Use Of Declaratory Judgment

K&K Screw Products LLC v. Emerick Capital Investments Inc., C.A. 5633-VCP (August 9, 2011)

Sometimes a lingering contract dispute causes problems in obtaining financing or just getting on with a company's business.  Here the Court upheld the use of a declaratory judgment action to establish the parties rights in such a dispute.

Court Of Chancery Permits Full Transfer Of Membership

Achaian Inc. v. Leemon Family LLC, C.A. 6261-CS (August 9, 2011)

It is often unclear when a member of an LLC may transfer not just her financial interests but her voting rights as well.  The LLC Act leaves that issue to be determined by the LLC operating agreement.  Here the Court closely examines this issue and an LLC agreement and decides that a member's full interest may be transferred by her without the other members' consent.

Court Of Chancery Upholds Fiduciary Duty In An Alternative entity

Paige Capital Management LLC. v. Lerner Master Fund LLC, C.A. 5502-CS (August 8, 2011)

This is an important decision and a lot of fun to read to boot.  The fun is in the all-too-human story it tells of personal ambition frustrated and what happens then.

There are 3 key points in its holding.  First, those who control an LLC owe fiduciary duties to the members unless the LLC Agreement clearly cancels those duties. This may be contrary to the views of at least 1 Supreme Court Justice who favors requiring those duties be spelled out in the agreement.

Second, vesting in a manager the "sole discretion" to decide a matter only means she is the only one who gets to vote on it.  It does not mean she can vote anyway she likes even if that is unfair. Here better drafting is needed.

Third, the Court will decide cases on their legal merits even if the winning party is a jerk.  Of course, here there was a bit of a contest to see who could be the biggest jerk.  Nonetheless, it is reassuring that the Court saw though all that to get to the real merits.

CCLD Explains Pleading Rules For Fraud

Brevet Capital Special Opportunities Funds L.P. v. Fourth Third LLC, C.A. N10C-12-071 JRS (CCLD)

The Superior Court's Complex Commercial Civil Division is issuing more and more opinions in the various matters that are now becoming ripe for decision.  Here the Court explains when both fraud and breach of contract claims may be filed in the same case and how to adequately plead the fraud count under the particularity standard required.

Paying for Your Opponent's Lawyer: A Common Dilemma