Delaware Business Litigation Report

Delaware Rejects Adequate Alternative Forum as an Independent Threshold Consideration for Forum Non Conveniens Applications

The Delaware Supreme Court recently issued an important decision clarifying Delaware’s forum non conveniens FNC law in Hupan v. Philip Morris USA, Consol. No. 526, 2016 (Del. 3/22/2018). Delaware FNC law has long permitted defendants otherwise subject to jurisdiction to seek dismissal of an action if defending it in Delaware would result in an “overwhelming hardship.”  In Hupan, the court declined the plaintiffs invitation to adopt the rule followed by the federal courts and a majority of state courts, which requires the court to determine first, as a threshold consideration, that an available alternative forum exists. Instead, the court ruled that the availability of an alternative forum should be considered as part of the FNC analysis, but not as outcome determinative if such a forum is lacking. Although the court’s ruling allows for the possibility of an FNC dismissal even when the plaintiff lacks an alternative forum, the decision affords Delaware control over the use of its limited judicial resources and protection of its citizens from overwhelming hardship when the disputes and litigants have no meaningful contact with Delaware. More ›

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Court Of Chancery Applies LLC Contractual Fiduciary Duty

MHS Capital LLC v. Goggin, C.A. No. 2017-0449-SG (May 10, 2018)

Alternative entity agreements may eliminate common law fiduciary duties and often do, supplanting them with contractual fiduciary duties.  These frequently include an obligation to act “in good faith” or “in the best interests of the company,” broadly or in certain circumstances.  Thus, even with fiduciary duty exculpation clauses in LLC agreements, managers may still find themselves exposed to a member’s allegations that they failed to satisfy their standard of conduct, as this decision illustrates.  This decision also is interesting for its discussion of the potential impact of bankruptcy court sale orders on the Court of Chancery’s ability to enter equitable relief.

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Court Of Chancery Upholds Exclusive Remedy Clause

PR Acquisitions LLC v. Midland Funding LLC, C.A. 2017-0465-TMR (April 30, 2018)

This is an important decision because it teaches two important lessons. First, when an asset sale agreement contains explicit requirements on how to give notice of a claim on an escrow account, those requirements must be followed or the claim will be waived. Second, absent fraud, a contractual provision will be enforced that provides that the exclusive remedy for a buyer is a claim on an escrow fund. Thus, for example, a separate breach of contract or negligent representation claim will be dismissed.

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Court Of Chancery Denies Garner Exception Absent A Fiduciary Duty

Morris v. Spectra Energy Partners (DE) GP, LP C.A. 12110-VCG (May 7, 2018)

The famous Garner case permits inspection of otherwise privileged communications when its strict criteria are satisfied. But as this decision decides for the first time in Delaware, Garner does not apply when there is no fiduciary relationship between the party seeking discovery and the party claiming the privilege. Here the LLP agreement waived any fiduciary duties. Thus, Garner did not apply and discovery was denied.

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Chambers USA: America's Leading Lawyers for Business Recognizes 14 Morris James Lawyers and Issues 5 Firm Practice Rankings in the 2018 Edition

Fourteen Morris James partners have been named leaders in their respective fields by Chambers USA, and two additional partners were named “recognized practitioners” in Delaware for Corporate/M&A: Alternative Entities.  Morris James also received five practice recognitions.  

Recognitions:

Chancery**
Clarkson Collins Jr.
Lewis H. Lazarus
Edward M. McNally

Bankruptcy/Restructuring**
Carl N. Kunz III
Stephen M. Miller

Corporate/M&A: Alternative Entities
Ross Antonacci*
Lewis Ledyard*

Real Estate**
John M. Bloxom IV

Real Estate & Zoning/Land Use
Kimberly Hoffman

Labor & Employment**
James H. McMackin III
David H. Williams

Intellectual Property**
Kenneth Dorsney
Richard K. Herrmann
Mary B. Matterer

 * Recognized Practitioner
** Recognized Practice Areas

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Chancery Court Nullifies Cancellation of Certificate of Formation of Delaware LLCs

Parties who form Delaware limited liability companies to organize their business affairs do so to structure their relationships contractually. This enables them to organize the governance and economic rights in a manner tailored to the enterprise they are establishing. They do so secure in the knowledge that the Delaware Limited Liability Company Act expressly provides that it is the policy of the Delaware act “to give maximum effect to the principle of freedom of contract and to the enforcement of limited liability company agreements.” If the parties ever have a dispute over their internal affairs, then a Delaware court will apply well-settled principles of contract interpretation to resolve it. The recent decision of Capone v. LDH Management Holdings, C.A. No. 11687-VCG (Del. Ch. Apr. 25, 2018), illustrates the court’s application of contract law principles to determine that two Delaware LLCs’ affairs were not wound up in compliance with the Delaware LLC Act resulting in the nullification of prior-filed certificates of cancellation. More ›

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Ryan Keating Contributes to Bloomberg Law on Delaware Data Breach Compliance

Ryan T. Keating was quoted in the Bloomberg Law article, "Delaware Ramps Up Data Breach Compliance Mandates," regarding the impact of the new statute.

"The most significant change in the new statute, which updates the state’s 2005 data breach notification law, is that companies are required to “implement and maintain reasonable procedures and practices” to prevent data breaches, Ryan Keating, a member of Wilmington, Del.-based Morris James LLP’s data privacy and information governance group, told Bloomberg Law.

The amended statute does not offer guidance on what constitutes “reasonable” security, so companies developing security programs “would be wise to consider security standards published by NIST and other organizations,” Keating said, referring to the Commerce Department’s National Institute of Standards and Technology."

To view the full article, click here.

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Court of Chancery Explains What Is A Proper Claim Reserve When Dissolving

Capone v. LDH Management Holdings LLC, C.A. No. 11687-VCG (April 25, 2018)

Under the LLC Act, as with the DGCL, an entity planning to dissolve and distribute its assets is required to set aside some reserve of assets to pay all known claims.  Failure to set aside sufficient assets may result in revocation of the entity’s certificate of cancellation, thereby reviving the entity, as happened in this case.  This decision explains when claims are “known” by the entity (i.e., the entity has actual knowledge of the claims) and how the entity may value those claims for purposes of retaining sufficient assets to potentially satisfy them.  Importantly, the reserve need not match all potential damages dollar-for-dollar.  The value of claims may be discounted based on their lack of merit, for example.

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Court Sustains 'Bad Faith' Claim Challenging Compensation Paid to Allegedly Incapacitated Executive

In Feuer v. Redstone, (Del. Ch. Apr. 19, 2018), the Delaware Court of Chancery considered a motion to dismiss derivative claims challenging compensation CBS Corp. paid to nonagenarian Sumner Redstone after he allegedly became physically and mentally incapacitated and ceased rendering meaningful services. Based on the “extreme factual scenario” alleged, the court declined to dismiss certain claims stemming from CBS’s board of directors’ alleged failure to consider terminating Redstone’s “at will” employment, resulting in his continued receipt of millions of dollars in salary payments. More ›

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Delaware Superior Court Clarifies Jurisdiction Over Negligent Representation Claims

Wypie Investments LLC v. Homschek, C.A. N14C-08-140 WCC CCLD (March 28, 2018)

This decision clarifies that negligent representation claims can only be brought in the Delaware Court of Chancery. The opinion is also a useful review of the law on when opinions and projections may be used as the basis for a fraud claim. The short answer is that mere opinions and projections disclosed as just that are not generally sufficient to show fraud.

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Delaware Superior Court Denies Dismissal On Forum Non Conveniens

Lincoln Benefit Life Company v. Wilmington Trust N.A., C.A. N17C-08-301 ALR (April 5, 2018)

This decision holds that a case will not be dismissed on forum grounds just because it involves the interpretation of another state's law. Note that it is a different situation when the case involves the law of another country.

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Delaware Superior Court Explains Limits Of Choice Of Law In Contracts

Change Capital Partners Fund I, LLC v. Volt Electrical Systems LLC, C.A. N17C-05-290 RNC (April 3, 2018)

This decision holds that a contractual provision adopting Delaware law will generally be upheld.  However, when applying Delaware law will violate the public policy of another state whose law would have applied but for the contractual choice of law, Delaware will not enforce that choice of law.  This distinguishes the Ascension case that declined to apply Delaware law to a non-compete contract that violated California law.

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Court Of Chancery Explains Need To Prove Real Damages

Leaf Invenergy Company v. Invenergy Wind LLC, C.A. 11830-VCL (April 19, 2018)

This is an important decision because it points out that the breach of a contract does not always mean damages will be awarded. For example, an investor's right to consent to certain transactions or to receive a payment absent that consent does not mean that the failure to get his consent must entitle him to that payment. Rather if the contract does not provide for a measure of damages for its breach, the plaintiff must prove the breach harmed him. Here the transaction in question actually benefitted the plaintiff so that he would have consented to it had he been asked. While the no damages result may seem counterintuitive at first, the result makes sense.

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Court Of Chancery Upholds Waste Claims

R.A. Feuer v. Redstone, C.A. 12575-CB (April 19, 2018)

This decision involves the rare case where a waste claim is well plead. As a result, the directors who gave away company money are sufficiently exposed to liability that demand upon them to bring the suit is excused.

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Court Of Chancery Addresses Conflicted Transaction And Secondary Liability

RCS Creditor Trust v. Schorsch, C.A. No. 2017-178-SG (Del. Ch. Apr. 5, 2018)

This is an interesting decision for two reasons. First, it distinguishes between classic self-dealing claims and tag-along challenges to business decisions. Just because a plaintiff successfully pleads that a controller is looting a company in some respects, does not mean all allegedly-related challenges will survive dismissal.  Second, it explores when an alternative theory of secondary liability or a claim for unjust enrichment may accompany a sufficiently plead breach of fiduciary duty.

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