Delaware Business Litigation Report

Helaba Invest Kapitalanlagegesellschaft v. Fialkow, C.A. No. 2683-VCL (Del. Ch. April 11, 2008)

Attorneys who cause a benefit for stockholders are entitled to be awarded. However, the benefit must be caused by the litigation they filed and not just happen to follow the institution of litigation. This gets tricky to determine sometimes as the plaintiff's attorneys insert themselves into the process of negotiating a higher merger price and then claim credit for it. Who gets that credit is the question.

That issue will be decided based on a record that includes the views of the participants in the merger discussions. Hence, that needs to be kept in mind and the record made at the time the events occur. 

Reinhard  & Kreinberg v. The Dow Chemical Co., C.A. 3003-CC (Del. Ch. March 28, 2008)

Corporate bylaws sometimes provide advancement rights in litigation filed by a director, but that is rare. However, when a director is sued, the question remains if he has advancement rights in that circumstance, and whether he may get those rights to cover a counterclaim in the absence of a bylaw right to do so when bringing litigation. This decision holds that if the counterclaim is compulsory under the rules of procedure, advancement is possible.

Schoon v. Troy, C.A. 2362-VCL (Del. Ch. March 28, 2008)

Directors who rely on advancement rights under a corporate bylaw need to be aware that those rights may be lost if the bylaw is amended. Delaware law, as this decision notes, permits elimination of advancement rights in a bylaw at least up to the moment those rights "vest" by the filling of a suit that entitled the director to advancement.

This decision is also interesting for its discussion of the Levy case that held when a director has his fees paid for by a third party, he may lose his right to seek advancement from the corporation. This decision limits Levy to cases where the third party is obligated to pay the fees.

Sassano v. CIBC World Markets Corp., C.A. No. 3066-VCL ( January 17, 2008).

It is not widely recognized that Delaware law permits a corporation to grant advancement of attorney fees to employees who are not directors and may even be fairly minor employees. Here, the bylaws provided advancement of fees for an officer with "management supervisory functions". The court carefully went over whether the plaintiff had those duties and found that he did and thus, should be advanced his fees for the defense of an SEC investigation.

In re James River Group Inc. Shareholders Litigation, C.A. No. 3173-VCL ( January 8, 2008).

Here, the court awarded $400,000 in fees in connection with the settlement of a class action when the relief obtained was a supplement to the proxy statement.

While the company claimed it was always going to send the supplemental materials, the court noted that was contrary to the recital in the settlement agreement. Seems like it is not good to go back on your word in Chancery Court.

Bernstein v. Tractmanager Inc., C.A. No. 7263-VCL (November 20, 2007).

This decision illustrates the perils in converting from an LLC to a corporate form without considering the consequences. Here, the LLC involved did not provide for mandatory advancement rights. The LLC was then converted into a Delaware corporation whose bylaws did provide for advancement as a matter of right. Quite possibly this was thought to be a good idea as the attorney who did the conversion was about to be sued by the entity and was a director who now thought he was covered. Unfortunately, the LLC did not provide for advancement and the Court of Chancery held that it was the LLC's operating agreement that controlled the right to advancement. Thus, advancement was denied.

The lesson here is that in converting from one form of entity to another do not assume that the new entity is obligated to fulfill all the obligations that might have been the responsibility of its predecessor. That was the losing party's argument. The problem was that the LLC was not obligated to him and thus, there was no liability to follow upon conversion. If you want the new entity to be liable then say so.

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.

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.

Levy v. HLI Operating Company, Inc., C.A. No. 1395-VCL (May 16, 2007).

It is widely thought that fee provisions in indemnification agreements are always enforceable. Think again. This decision held void a provision in an indemnification agreement that would have provided for payment of attorney fees even when the plaintiff lost his right to indemnification.  Hence, agreements to pay attorneys fees to directors will need to be redrafted to make sure that an employment benefit is not dependent on the right to indemnification itself.

Dittrick v. Chalfant, C.A. No. 2156-S (Del. Ch. May 8, 2007).

Provisions for payment of the attorney's fees of the winning party are not uncommon in contracts. What is "winning" is not always clear, however. This decision holds that when the contract says you must win to collect, then you must win it all to invoke the contract or at least the contract at issue in this case. In other words, you do not get paid for winning half the loaf.

Chase Manhattan Bank v. Iridium Africa Corp., 2007 WL 518440 (D.Del. Feb. 16, 2007)

In this breach of contract case, the defendant members of a bankrupt LLC asserted various defenses to their alleged contractual obligation to make capital contributions after the bankruptcy. The plaintiff lender had made an $800 million dollar loan to the LLC, and asserted that the members were contractually obligated to continue capital contributions despite the bankruptcy. The District Court entered summary judgment for the plaintiff on its breach of contract claim, but delayed entering final judgment until the parties could brief remaining “open issues”. The defendants argued that the plaintiff’s alternate theory of recovery should be dismissed as moot prior to a final entry of summary judgment for the plaintiff, that the plaintiff was not entitled to attorneys’ fees, and that the Court’s grant of summary judgment had left unresolved various defenses asserted by the defendants. The Court concluded that the entry of summary judgment was appropriate without addressing the plaintiffs’ alternate theories of recovery and did not leave any defenses unresolved, and that the plaintiff was contractually entitled to attorneys’ fees. The Court therefore found that the entry of final judgment for the plaintiff was appropriate.

FGC Holdings Limited v. Teltronics, C.A. No. 883-N (Del. Ch. Jan. 22, 2007).

In this precedent setting decision, the Court of Chancery held that a party prevailing in a Section 225 proceeding to compel his recognition as a director was not entitled to his attorney fees as a matter of right. The Court noted that no prior decision had dealt with the circumstance where the plaintiff seeking fees in a Section 225 case was not already a director at the time the suit was filed. In that situation, the Court held that Section 145 indemnification of fees did not apply because Section 145  requires the party seeking indemnification to be or have been a "director". That the plaintiff won recognition of his right to be a director did not make him a director automatically for purposes of indemnification under Section 145.

This case involves some odd facts that may distinguish it from other Section 225 litigation. Here, the corporation was limited to five directors by its charter and had five sitting directors when the plaintiff was elected by the preferred stockholder. Perhaps for that reason the Court concluded that his election alone was not enough to make him a director.

In Re William Lyon Homes Shareholders Litigation, C.A. No. 2015-N (Del. Ch. December 21, 2006).

When there are two competing class or derivative actions, there may arise a conflict between them. This is particularly so when one is settled and the settlement will affect the right to proceed in the other litigation. That conflict may generate a fight among plaintiff's counsel over the fees to be awarded by the Court in the settlement. That is what occurred here.

Such fee split cases are governed by the rules set out in In re Infinity Broad. Corp. Shareholders Litigation, 802 A2d 285 (Del. 2002). In effect, this requires the Court to allocate the fees among the claimants based on the Court's views of their respective contributions to the settlement.

The plaintiff in a related California case that sought some of the fees to be awarded ended up with nothing for failure to justify their claim.

On December 21, 2007, the Delaware Supreme Court reversed, in part, the Court of Chancery decision. The Supreme Court held that there was enough in the record to support a presumption that the plainitff in the California case had contributed to a price rise that benefited the class and remanded for further proceedings .

Majkowski v. American Imaging Management Services LLC, C.A. No. 1797-N (Del. Ch. December 6, 2006).

The right to have attorneys fees paid in advance of the final result in litigation is illustrated by this recent decision. The Court held that an agreement to "hold harmless" does not give the right to advancement of legal fees. Instead, "hold harmless" language only confers the right to be indemnified at the end of the litigation.

Premier Parks, Inc. v. TIG Insurance Co., C.A. No. 02C-04-126-PLA, 2006 WL 2709235 (Del. Super. Ct. Sept. 21, 2006).

The parties filed cross-motions for summary judgment on counterclaims in an ongoing declaratory judgment action. The plaintiff, TIG Insurance Company ("TIG"), sought a declaration that it was only liable to pay an allocated share of a global settlement that its insured, Six Flags, Inc. ("Six Flags") negotiated in a class action civil rights lawsuit that alleged that Six Flags had engaged in discriminatory practices at one of its amusement parks. TIG also sought a declaration that it was not responsible for covering the attorneys' fees that Six Flags incurred in defending the class action and negotiating the settlement.

Citrin v. International Airport Centers LLC, C.A. No. 2005-N (Del. Ch. September 7, 2006).

This decision awards interest on the fees due to a corporate officer who was wrongly denied advancement of those fees. While this award of interest is the normal rule, the decision is interesting because it dealt with an instance where the corporate defendant had discouraged the plaintiff from even submitting the fees in dispute and then argued that failure to submit a bill precluded interest when the plaintiff prevailed. Not surprising, this effort to avoid interest failed for want of any equity.

In re Grupo Dos Chiles LLC, C.A. No. 1447-N (Del. Ch. August 17, 2006).

In a rare case awarding fees for bad faith litigation, the Court stressed that litigants who change their sworn testimony to gain an advantage face a fee award if the Court is convinced they lied. The Court will look to the surrounding circumstances to assess if a lie has occurred.

Augenbaum v. Forman, C.A. No. 1569-N, 2006 WL 1716916 (Del. Ch. June 21, 2006).

In this decision, the Court of Chancery awarded $225,000 in attorney fees for the additional disclosures that the plaintiff achieved as part of the settlement of litigation attacking a merger.

Lillis v. AT&T Corp., C.A. No. 717-N, 2006 WL 1468709 (Del. Ch. May 22, 2006).

Plaintiffs moved pursuant to Court of Chancery Rule 12(c) for judgment on the pleadings on one count of their complaint, which sought attorneys' fees and expenses incurred in bringing the case.

McGovern v. General Holding, Inc., C.A. No. 1296-N, 2006 WL 1468850 (Del. Ch. May 18, 2006).

Plaintiffs brought action individually and on behalf of limited partnership against 90% owner of limited partnership for, among other things, breach of fiduciary duty and breach of limited partnership agreement.

In re Triarc Companies, Inc. S'holders Litig., C.A. No. 16700, 2006 WL 903338 (Del. Ch. Mar. 29, 2006).

After the voluntary dismissal of a class action, plaintiffs petitioned the Court of Chancery for attorneys' fees and expenses. The court found that plaintiffs' counsel was entitled to fees for the preparation of the amended complaint and litigation efforts undertaken before the action that caused the voluntary dismissal. Plaintiffs' counsel was not entitled to fees for their work in connection with the original complaint nor for their work performed after the claims in the amended complaint were mooted.

Carlson v. Hallinan, C.A. Nos. 19808, 19466, 2006 WL 771722 (Del. Ch. Mar. 21, 2006).

This case involved a direct and derivative action arising out of a dispute between two men engaged in the business of making short term, unsecured loans. Plaintiffs asserted direct claims for breach of contract and derivative claims for breach of fiduciary duties. Specifically, plaintiffs alleged that defendant Hallinan breached an oral contract with plaintiffs by paying himself and another defendant executive compensation. Plaintiffs also asserted that the defendants breached fiduciary duties they owed nominal defendant CR Services Corp. by paying themselves an excessive amount of executive compensation. The Court of Chancery found, among other things, that Hallinan breached the oral contract with plaintiffs and defendants committed multiple breaches of their fiduciary duties to CR because they failed to meet the entire fairness standard regarding their compensation.

Joyce C. Delucca v. KKAT Management, L.L.C. et al., C.A. No. 1384-N, 2006 WL 224058 (Del. Ch. Jan. 23, 2006).

This case was decided on a motion for judgment on the pleadings. Plaintiff sought to obtain advancement of attorney fees allegedly contractually agreed, to defend a New York action and fees on fees for initiating and prosecuting this action. The plaintiff was sued in the New York action by affiliates-entities of her then employer.

Radiancy, Inc. v. Zion Azar, et al., C.A. No. 1547-N, 2006 WL 224059 (Del. Ch. Jan. 23, 2006).

This is a summary judgment motion for advancement of legal fees made by defendant-officers. Their corporation alleged fraud, fiduciary violations and usurpation of corporate opportunity against defendants as a bar to advancement. Defendants replied with counterclaims under their respective employment contracts. The motion was granted and denied in part.

Richard Y. Johnson & Son, Inc. v. Just-In Construction, Inc., et al., C.A. No. 1735-S, 2006 WL 75308 (Del. Ch. Jan. 06, 2006).

This case involved the issue of a TRO to prevent defendant from alienating goods and effects and imposition of a constructive trust pursuant to 6 Del. C. §3501 under a claim of breach of fiduciary duties, to capture receipts to defray vendors and contractors retained to complete DMV related work.

Raider v. Sunderland, et al., C.A. No. 19357 NC, 2006 WL 75310 (Del. Ch. Jan. 04, 2006) (Revised Jan. 05, 2006).

This is a class action involving board actions and fee requests by the plaintiff representative.

In re Instinet Group, Inc. Shareholders Litig., C.A. No. 1289-N, 2005 WL 3501708 (Del. Ch. Dec. 14, 2005).

Following the court's approval of settlement of derivative claims, Plaintiffs' counsel applied for an allowance of $1,450,000 in contingency fees and $173,031.07 in costs. Defendants agreed that Plaintiffs' attorneys were entitled to some award of fees and expenses, but objected to counsel's request as excessive under the circumstances on the grounds that (1) the litigation benefits achieved were modest, (2) the case settled at an early stage, and (3) Plaintiffs' counsel litigated the case ineffectively.

Money Centers Of America, Inc. v. Regen, No. Civ. A. No. 04-1516-KAJ, 2005 WL 3309610 (D.Del. Dec. 6, 2005).

This Memorandum Order ruled on three motions related to the Court's Order of October 17, 2005 ("October Order"): (1) reconsideration or, in the alternative, alter or amend judgment; (2) Protective Order related to depositions; and (3) stay, pending appeal. The October Order granted relief to plaintiffs Money Centers of America, Inc., and Available Money Inc., to reopen the Order to allow the settlement agreement between the parties to be entered on the record and permitted defendant Available Money to take additional discovery.

The Court ruled that: (1) defendant Coast ATM and Mrs. Regen would not be liable to the extent of the attorney fees and costs incurred with regard to the October motion to reopen the judgment; (2) that Coast ATM's motion for reconsideration was appropriate; (3) denied the relief requested as moot with respect to the relief sought from earlier Delaware-based depositions; and (4) denied Defendant Mr. Regen's motion to the extent that it would have relieved him from bearing all attorney fees and costs related to the October Order.

Tafeen v. Homestore, Inc., C.A. No. 023-N, 2005 WL 1314782(Del. Ch. May 26, 2005)

The Court considered the motion of defendant Homestore for a stay pending appeal of the Court's rulings which ordered Homestore to pay director Tafeen's advancement fees and assessed the costs of the Special Master's services against Homestore.

The Court denied the Motion.

Tracinda Corp. v. Daimlerchrysler AG, No. Civ.A. 00-993-JJF, 2005 WL 927187 (D.Del. Apr. 20, 2005).

This opinion relates to plaintiff's motion for sanctions for defendants' late production of documents in discovery. The matter was referred to a Special Master for a hearing in 2003. The Special Master found for the plaintiff who then filed the present motion for relief including: (1) witness Valade be barred from testifying about matters included in the delayed production unless his responses were required by the plaintiff's or the Court's questions; (2) that two witnesses be recalled to testify at trial; and (3) that the defendants be ordered to pay plaintiff's fees and costs incurred towards resolving the matters connected with the late production of the Valade documents.

The Court denied plaintiff's request to bar Valade's testimony and permitted him to testify on all matters. It dismissed the second relief as moot because the parties had agreed to permit recall of the two witnesses. The Court however granted plaintiff's motion and awarded all costs and fees associated with the delayed production of the Valade notes.

Frontier Oil Corporation v. Holly Corporation, 2005 WL 1039027 (Del. Ch. April 29, 2005).

Frontier Oil Corporation and Holly Corporation are petroleum refiners that sought to merge. In conducting its due diligence review of Frontier, Holly discovered that activist Erin Brockovich was planning to bring a toxic tort suit claiming that an oil rig that had been operating for decades on the campus of Beverly Hills High School caused the students to suffer from a disproportionately high incidence of cancer. This raised concerns for Holly because a subsidiary of Frontier had previously operated the Beverly Hills drilling facility. Although the terms of the merger agreement were modified to address the situation, including broadening the representation to apply to litigation that would reasonably be expected to have a material adverse effect ("MAE") on Frontier, the court found that substantial litigation costs were not a MAE and therefore the contract could not be rescinded.

NuCar Consulting, Inc. v. Doyle, 2005 WL 820706 (Del. Ch. April 5, 2005).

Plaintiff NuCar Consulting, Inc., claimed that Defendants, former employee Timothy Doyle and Doyle's newly created company, Dealer Rewards, Inc., misappropriated certain of NuCar's trade secrets. NuCar requested that the court determine whether Defendants misappropriated NuCar's trade secrets under the Delaware Uniform Trade Secrets Act and the extent to which NuCar should receive monetary damages or injunctive relief for the alleged misappropriation. NuCar also sought an award of attorney's fees pursuant to 6 Del. C. - 2004 for Defendants' allegedly willful and malicious misappropriation. The Court granted NuCar's request for a permanent injunction prohibiting Defendants' further use of the contract used for automotive deals and found Defendants liable for $69,750 in unjust enrichment damages for their misappropriation of the potential client list. Finally, the Court found that Defendants' misappropriation was willful and malicious and awarded NuCar its reasonable attorney's fees expended on its misappropriation of trade secrets claims.

In re Plains Resources Inc. Shareholders Litigation, C.A. No. 071-N, 2005 WL 332811 (Del. Ch. Feb. 04, 2005).

This is an action for plaintiff's attorney fees following settlement of fiduciary duty-based shareholder class actions.