Posts tagged Case Summaries

Court of Chancery Applies Issue Preclusion To Derivative Suit

In re Career Education Corporation Derivative Litigation, C.A. No. 1398-VCP (September 28. 2007).

This decision decides when to give preclusive affect to a prior decision of a federal court that a derivative case should be dismissed under Rule 23.1. Basically, the standard that the Delaware court applied was whether the claims in the prior litigation that had been dismissed for failure to meet Rule 23.1 had a substantial overlap with the claims in the case here in Delaware. Finding that this overlap existed, the Court of Chancery dismissed the Delaware case.

What is unusual about this result is that the Delaware case was brought by a different party than the prior federal litigation. However, as the 'real' party in interest in both cases was the corporate nominal party, the rights litigated in the federal case were the same as those litigated in Delaware-the right to control the litigation.

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Court of Chancery Upholds Use of Merger to Change Partnership Governance

Twin Bridges Limited Partnership v. Draper, C.A. No. 2351-VCP (September 14, 2007).

This decision deals with how to change the governance structure of a limited partnership by using a merger to amend the partnership agreement. At the outset, the Court ruled that the doctrine of independent legal significance would not be applied to a two-step transaction involving an amendment to a limited partnership agreement to permit a merger and then the merger itself. Instead, the Court ruled that the two transactions were integrated and thus, considered as if they were a single event. This may mean that the corporate law concept of treating two transactions separately if they are authorized by two different sections of the corporate law will not apply in the context of a limited partnership that is based on contract law.

In addition, the Court held that using a merger to add an additional, tie-breaking general partner to the partnership governance structure was permissible absent a clear prohibition in the partnership agreement.

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Court of Chancery Permits Option Backdating Case To Proceed

Conrad v. Blank, C.A. No. 2611-VCL (September 7, 2007).

In the latest of the Delaware option cases, the Court of Chancery permits the action to go forward when it appears that the Board considered the option backdating and did nothing about it. It is noteworthy from its decision that this apparent indifference to a wrong served to distinguish this case from others where the backdating appeared to be a simple mistake.  In the case of a simple mistake, the error would not be enough to expose the board to liability and that would excuse demand before the derivative suit was filed.

The Court also declined to apply the "continuing wrong" theory. Under that theory, a plaintiff who acquires her stock during the series of wrongful acts has the right to challenge all the actions including even those that occurred before she acquired her stock. Instead, here the court held that each backdated option was a separate wrong and the plaintiff could only sue for those that had occurred  after she bought her stock.

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Court of Chancery Explains Weight of Evidence

LaPoint v. Amerisourcebergen Corporation, C.A. No. 327-CC (September 7, 2007).

In this otherwise fairly common breach of contact case, the Court of Chancery has once again emphasized the importance of evidence that is contemporaneous with the parties' contract and their conduct. Explanations after the fact are viewed as much less convincing than, as in this case, emails created at the time when litigation was not on everyone's mind.

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Supreme Court Upholds Contract Based Fee Award

Mahani v. EDIX Media Group, Inc., Del. Sup. C.A. No. 91, 2007 (September 4, 2007).

In this decision upholding a fee award by the Court of Chancery, the Delaware Supreme Court held that a fee based on a contract right to recover fees is not limited by the results in the case. That limitation, the Court held, is more appropriate in fee shifting pursuant to a statute. Instead, the fees awarded under a contract should take into account the 8 factors set out in Rule of Professional Conduct 1.5(a)(1). The results obtained are among those factors but not the driving force to a decision.

This case had an odd set of facts involving a misbehaving litigant - never a good idea in a Delaware court. Hence, the fee award of a multiple of the actual recovery is not often to be repeated.

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Superior Court Holds Measure of Damages in Quasi-Contract Action is Value of Services Provided, Not Benefit Received

Hynansky v. 1492 Hospitality Group, Inc., C.A. No. 06C-03-200, 2007 WL 2319191 (Del. Super. Ct. Aug. 15, 2007).

This case sets forth the appropriate measure of damages under a quasi-contract theory (in this instance quantum meruit): the value of the services provided, not the value of the benefit received. 

The plaintiff made a typical business loan to the defendant to be paid back with interest, but also agreed to provide additional services to help the defendant avoid foreclosure on other loans, reduce the businesses debt load, and restore profitability. In return for these services, the defendant offered the plaintiff a partnership interest in the business. 

But when the business improved, the defendant allegedly stopped working with the plaintiff—and eventually sold the business for a profit.  More ›

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Court of Chancery Adopts New Approach For Insurance Company Appraisal

Highfields Capital LTD. v. AXA Financial Inc., C.A. No. 804-VCL (August 17, 2007).

This decision illustrates the point that in an appraisal proceeding the  type of business involved may lead to a different approach to valuation. Typically, Delaware courts use the discounted cash flow method to set an appraisal value. Here, however, the Court held that a combined sum of the parts and shared synergies analysis was more appropriate for an insurance company valuation.

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Court of Chancery Adopts New Standard of Review

Mercier v. Inter-Tel (Delaware) Incorporated, C.A. No. 2226-VCS (August 14, 2007).

In a precedent setting opinion, the Court of Chancery has recast the standard of review that applies when determining if a board has acted to affect a stockholder vote. Under the previous Blasius standard, the board had to prove a "compelling justification" before taking any action, such as postponing a stockholder meeting, that affected the stockholders' right to vote.

This opinion recasts the standard closer to the familiar Unocal test where director action that affected a proposed takeover had to be a reasonable response to a perceived threat to corporate policy or interests. Now, in the case of board action that may affect the stockholders' vote, the board must show its actions were: (1) designed to achieve a legitimate corporate objective; (2) taken for a proper motive in good faith; and (3) were reasonable means to their proper objective. This test should be substantially easier to meet than the "compelling justification" standard.

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District Court Allows Breach of Fiduciary Duty Claim Under ERISA, Dismisses State Contract Claim

Roarty v. Tyco Int'l Ltd. Group, 2007 WL 2248086 (D. Del. Aug. 2, 2007)

In this action alleging violations of ERISA and state contract law, Defendants moved to dismiss two of the claims under F.R.C.P. Rule 12(b)(6). Plaintiff’s husband was employed by one of the defendants. Plaintiff brought the action against the employer and its insurance company, alleging that Defendants wrongfully denied her claim under an employee welfare benefit plan after her husband was killed while on a business trip. She alleged that defendants wrongfully denied benefits under ERISA, breached fiduciary duties owed under ERISA, and violated state contract law. Defendants moved to dismiss the fiduciary breach and state contract claims. The Court allowed the breach of fiduciary duties claim, but dismissed the state contract claim.
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Court of Chancery Interprets Change of Control Provision

Law Debenture  Trust Company of New York v. Petrohawk Energy Corp., C.A. No. 2422-VCS (August 1, 2007).

Change of control provisions are common in employment contracts and other contexts. Here the provision was in a debenture. While primarily focusing on the specific language involved, this opinion is useful to others to see how to avoid triggering a change in control provision while at the same time implementing a merger.

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Superior Court Holds Punitive Damages Are Not Precluded Where Separate Tort Claim Exists Alongside Contract Claims

Data Mgmt. Int’l v. Saraga, C.A. No. 05C-05-108, 2007 WL 2142848 (Del. Super. Ct. July 25, 2007).

Generally, a plaintiff bringing a claim based entirely upon the breach of a contract must sue in contract and is limited to contract remedies. No tort exists merely because a party breaches a contract—even if intentionally. But, the same conduct upon which the breach of contract claim is grounded may give rise to a tort claim if the conduct independently amounts to the breach of such an independent duty imposed by law. And with a tort claim comes the availability of punitive damages. More ›

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District Court Rejects Dismissal of Bad Faith Breach of Contract and Fraud Claims Against Insurer

Homsey v. Vigilant Ins. Co., C.A. No. 07-338-JJF (D. Del. July 31, 2007)

 

In this action alleging, inter alia, bad faith breach of contract and consumer fraud, the defendant insurance company sought dismissal of those counts pursuant to F.R.C.P. Rule 12(b)(6) for failure to state a claim for which relief could be granted. Plaintiffs held an insurance policy with Defendant that contained provisions covering credit card fraud and check forgery. Plaintiffs submitted a claim pursuant to those provisions for over $250,000 in allegedly fraudulent credit card charges and forged checks. Nearly one year later, Defendant tendered payment of $10,000 for the claim, contending that this amount represented the maximum amount due under the policy. Plaintiffs argued that the policy provided broader coverage, and alleged that Defendant denied or delayed payment on Plaintiffs’ claim without reasonable justification.   Defendants argued that there was a bona fide dispute as to the policy’s language, such that Defendant could not be found to have acted unreasonably. Defendant also argued that Plaintiffs did not plead consumer fraud with particularity. The Court denied Defendant’s motion, finding that Plaintiffs pled sufficient facts to state both the bad faith and consumer fraud claims. More ›

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Court of Chancery Limits Dilution Claims

Feldman v. Cutaia, C.A. No. 1656-VCL (August 1, 2007), affrimed, Del Supr. (May 30, 2008).

Classifying a claim as derivative has big consequences. Among those is that the claim is then subject to the continuous ownership rule that requires the plaintiff to hold his shares throughout the litigation to maintain his standing. A merger that eliminates the plaintiff's ownership thus also eliminates his ability to proceed with a derivative suit.

In an effort to avoid this problem, plaintiffs that bring dilution claims asserting their interests have been wrongfully diminished need to fit into an exception to the general rule that dilution claims are derivative. This decision illustrates the limits on such claims. Basically, a dilution claim is derivative unless the claim is that a controlling stockholder has wrongly diluted the interests of the minority stockholders. For this purpose, "control" means having a greater than 50% interest or active domination of a board. Moreover, it is not possible to aggregate the stock holdings of a group of stockholders to get over the 50% threshold.

This opinion also discusses the exceptions to the general rule that a merger deprives a stockholder of standing, such as when the merger itself is an attempt to fraudulently end the derivative suit. It also notes that aiding and abetting claims based on derivative claims are themselves also derivative and subject to the same standing rules.

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Court of Chancery Permits Security For Advancement

Thompson v. The Williams Companies, Inc., C.A. No. 2716-VCS (July 31, 2007).

Companies often find that they are required to provide advancement of attorney fees to former directors or others when the company really does not want to do so because of the conduct involved. Here, in a case involving an employee with an advancement  right, the Court held that requiring security for the amounts advanced is appropriate to insure repayment.

Note, however, that this discretion to require security was based on the terms of the provisions providing for advancement. Without that language in a mandatory advancement provision, it is doubtful that a company might require more than the usual and customary undertaking to repay.

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District Court Denies Motion to Dismiss Fiduciary Duty Claims Under ERISA

Cannon v. MBNA Corp., 2007 WL 2009672 (D. Del. July 6, 2007)

In this class action lawsuit brought by former MBNA employees, Plaintiffs asserted various breaches of fiduciary duty arising under ERISA in connection with administration of their 401(k) plan. Plaintiffs’ claims arose out of MBNA’s 2005 announcement of expected 10% annual growth for several years. Plaintiffs’ 401(k) plan contained MBNA stock. Several months later MBNA announced lower-than-expected earnings and MBNA stock fell nearly 35%. Plaintiffs alleged that the Defendants breached various fiduciary duties that resulted in this loss. Defendants were MBNA, the former CEO of MBNA, the committee responsible for the administration of the 401(k), and the individual committee members. Defendants moved to dismiss the various claims under F.R.C.P. 12(b)(6). The District Court found that dismissal as to all counts in the complaint was inappropriate at the pleading stage, and denied the motion. More ›

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