When may a partnership demand advancement of its litigation expenses from a limited partner who has arguably breached the partnership agreement? Only when the partnership agreement is very clear in granting that right, according to this decision.
This decision gives a good explanation of how to calculate fees in a supplemental disclosure case. It is particularly noteworthy in comparing the fees awarded to those won in other cases.
This decision affirms the rule that attorney fees should be apportioned between those claims that succeeded and those that did not.
As this decision points out, an agreement to indemnify against loss does not necessarily mean that the indemnitee also recovers its attorney fees.
This is a somewhat unusual fee award because of the way the Court did the calculation of the amount. The court divided the award into two parts, one for the additional disclosures and the second part for the settlement fund created by the plaintiff's efforts. The disclosure award is also larger than typical awards for added disclosures.
This decision illustrates the need for careful drafting of bylaws regarding advancement rights. The plaintiff claimed entitlement to mandatory advancement under the Company's bylaws. However, the bylaws also provided that advancement was required "unless" the Board decided otherwise. The Court held that the word "unless" made advancement discretionary. In contrast, a different bylaw that made advancement subject to board approval has been held to be mandatory so long as the request met the board's technical requirements as to the form of the requested advancement. A word can make a lot of difference.
Too often a plaintiff will file suit just to put pressure on the other side to get a settlement of a business dispute. In this decision, after finding that the complaint included knowingly false factual allegations, the Court imposed attorneys' fees on the plaintiff for suing when it had decided "not to bring his claim to definitive adjudication." This illustrates the Court of Chancery's understandable lack of tolerance for litigants who waste its time and the other side's money.
This is a classic example of what not to say in an argument unless you want to get the Court mad. In addition, this decision again explains how to calculate a fee award when the corporate benefit achieved is non-monetary.
The Delaware Supreme Court has upheld the largest attorney fee award in Delaware history. In doing so, the Court has squarely upheld the use of percentages to award fees out of the common fund created by the litigation and disclaimed the so-called "lodestar" approach.
The decision is also noteworthy for its upholding of the Court of Chancery's damages award, also probably the largest in Delaware history.
On September 27, 2012, the Supreme Court aslo denied a motion for reargument. The reargument opinin is noteworty bcaue it rejected te "look through" theory that the benefit confererd by a derivative suit should be limited to the interest in the corporation held by its the non-defendant stockholders.
Allocating a fee claim between various losing parties in the case that you won is difficult most of the time. This decision shows that when all the claims are sufficiently related, you may not need to do so. The defendants are then jointly and severally liable.
In a "man bites dog" case, the Court of Chancery awards attorney fees for opposing a Rule 11 claim for fees. This illustrates that the Court really does not like Rule 11 motions and those need to be made only after careful thought.
Recovering attorney fees is rare in Delaware litigation. However, this decision enforces another of the few exceptions to the American rule that usually denies a fee award. The exception is for when a fraud requires a plaintiff to spend the fees in defense or prosecution of a claim involving a third party. In that case, the fees are really just damages caused by the fraud and may be recovered.
The Delaware Supreme Court has once again confirmed that substantial attorney fee awards may be appropriate even when the plaintiff has not won a large monetary recovery. That is particularly so when the plaintiff has protected stockholder voting rights, as in this litigation.
Among the more vexing tasks of a Court is setting the fees to be awarded in an advancement case. If left to itself, this can become a monthly job as the parties endlessly quarrel over how much is to be paid. The Court of Chancery has tried several approaches to avoid getting stuck in this endless quagmire. Here is a new one. The Court is charging the senior Delaware lawyers for each party with the duty to resolve any difference through a detailed process including monthly meet and confer sessions. That may be enough to interject some sanity into these disputes.
This is the leading decision on how to establish the "good faith" requirement for permissive indemnification after the indemnitee has lost his case. As the opinion notes, that may require a mini-trial when the good faith of the indemnitee has not been settled in the underlying action.
The opinion is also helpful in setting out what constitutes and how to prove "successful on the merits or otherwise," the usual test both under the statute and most bylaws for mandatory indemnification.
Delaware officers and directors are usually entitled to have their litigation expenses advanced when they are sued for their conduct in those corporate capacities. Exactly what conduct is alleged to be wrongful is key to determining if that right to advancement applies. For example, if after a merger a director ceases to be a director, then he is not entitled to advancement for litigation over that conduct. This decision illustrates how the Court will decide what conduct is involved in the underlying litigation so as to decide if advancement is required.
How do you set the fee to be awarded when there is no monetary recovery in a representative action? For example, if the litigation creates a benefit to shareholders by reducing deal protection measures to permit a possible topping merger bid, but no topping bid appears, what should be the fee? Using studies that attempt to calculate the benefits of such litigation, this decision sets out a methodology to guide applicants.
A frequent issue is how to calculate a fee award when the prevailing party has only been partially successful. This decision turns on the unique provisions of English law, but is still an interesting exercise in awarding some but not all the fees to a party who only partially prevailed.
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.
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.
This article originally appeared in the Delaware Business Court Insider | August 03, 2011
How would you like to advance your opponent's legal fees as you fight out your dispute in court? That is bad enough when you are the plaintiff. It is even worse when you have been sued and you find your company paying the plaintiff's attorney fees and expenses to prosecute his or her claims against you. Yet all that can and does happen in suits involving directors and officers in litigation with their former company. How can this happen?
First, some background helps. The American "rule" is that litigants pay their own legal fees, even if they win the case. "Loser pays" is rarely true in the United States in business litigation. Because of that rule, companies have sought to attract good directors and high-level employees by providing them with the employment benefit of indemnification against litigation costs at the end of a trial and advancement of their costs throughout the trial. Indeed, in Delaware and most states, directors have a statutory right to be indemnified in most business litigation. That seems reasonable enough, in the abstract.
But consider what happens when a dispute arises between the company and a former director or officer. Frequently, those former company officials have been given contracts that require they be indemnified against loss in any litigation they win and have their litigation expenses advanced to them throughout the litigation. In those circumstances, the courts have repeatedly upheld the right to have expenses advanced, subject to the company's right to recover those advances later if it wins the litigation. Still, that does not seem so bad. It is just another cost of doing business.
However, the reality may be far more onerous. When the company is paying the lawyer bills without any right to pick the lawyer or even to review his or her statements, there is little restraint on fees. Millions of dollars then are spent, cases settled just to stop the cash drain and rarely is there ever a recovery of expenses advanced to the former official, who is then cash poor. Perhaps even more surprising, there is little the courts can do to control this result.
Companies do object to paying what they see as unreasonable legal expenses. But when their former officials sue to compel payment of those fees, the courts are not able to effectively determine the reasonableness of any bills. After all, it is an abuse of the courts' resources to expect a judge to sit down each month to review a party's legal bills, which often are dozens of pages of minute detail. Solving this problem has proved elusive.
Various remedies have been tried. Courts have appointed special masters to review the legal bills, with the parties sharing the master's fees for his or her services. Under the so-called "Duthie" rules used in the Delaware Court of Chancery, uncontested fees are to be promptly paid, counsel are required to certify their good faith in any dispute, and guidelines are provided as to what may be disputed.
Even those limited remedies to prevent abuses have been undermined, often by the very contracts the company agreed to without much thought. For example, in a decision just last month, the Court of Chancery held that the company must pay all of the fees of the special master because it had promised its former official to advance all of her "expenses" in litigation. Considering that the legal fees in dispute exceeded $5.5 million, paying the special master's fees as well must have felt like the last straw.
What then can be done about this problem? To begin with, companies must recognize that the problem arises out of the indemnification and advancement contracts they sign. No one is forcing them to give overly generous benefits, and no one should expect the courts to change their contracts just because they have become burdensome. Proper contract drafting helps here.
Several examples come to mind and should be acceptable even to the potential new officials the company seeks to retain. These include: limitations on advancement rights when the official is acting as a plaintiff; approval rights on the counsel to be selected; forum choices for any disputes; and fee caps on advancements. Until some of these or more creative terms are used, the problem will remain.
The real problem is not indemnification, but advancement. Delaware law limits the right to be indemnified, even by contract. It is against Delaware law to indemnify a director for wrongful acts, and a contract that attempts to do so is not enforceable. Advancement, on the other hand, is virtually unlimited if the contract is drafted that way. Yet, there is no reason why companies should have to agree to pay unlimited sums to attract talent. To do so is to let some lawyer charge without any restraint. Future articles will show how to avoid that problem.
Recently, the Court of Chancery has permitted fee applications before a case is finally decided. This decision notes that practice should and will be limited to unusual situations. That cuts off that trend before it goes too far.
When a director is sued, he often is entitled to have his attorney fees advanced by his company, even when it is his former company. A fight over the fees sometimes results, however, when the fees are high and the relationship with the director is not the best. The Court of Chancery, after having to referee several of these fee fights, adopted what are known as the Duthie procedures where a percentage of the fees are paid and any disputed fees are sent to a special master to determine reasonableness. The parties then split the fees of the master. This decision modifies the Duthie procedures by having the fees of the special master paid by the company and not split with the director when his advancement agreement calls for payment not just of his fees but of any "expenses."
This is another in a series of detailed explanations of how attorney fees are to be calculated in representative litigation in Delaware. First, the Court explained when an interim application may be considered, noting that it may be preferable to do so when the matter is still fresh. That is particularly so when any appellate review is not likely to change the benefit conferred by the litigation.
Next, the Court explained that uncovering facts not known before the litigation began is particularly important and deserving of a fee award at the higher end.
Finally, the Court set out examples of prior fee awards and explained how those informed its decision in this case.
This will probably be the definitive decision on how to set the attorneys' fees in representative litigation where the benefit to the company and its stockholders is additional disclosures. Not only does the decision explain how the Court will approach that issue, but it also contains a detailed table of fee awards in prior cases to serve as a guideline.
How to divide the fees awarded in a multi-jurisdiction case is a recurring problem. As the Chancellor explains in this opinion, it is preferable if the various courts are notified of a settlement and asked to decide which court should resolve any problems. That has worked well.
However, when the lawyers are too stubborn to do so, then the Court will apply the principle established long ago in the fabled story, The Little Red Hen. She who bakes the bread is she who eats the bread.
Delaware lawyers are often asked to estimate what the Court of Chancery will award in fees following settlement or trial of a derivative action. Well this decision summarizes those fee awards:
10 - 15% for a fast settlement
15 - 25% for contesting motions and other pretrial work that leads to a settlement
25 - 33% for winning after trial
All these percentages apply to monetary settlements, but the Court also explains how to determine fees in cases invovling non-monetary settlements.
In this report of a well-respected Delaware attorney serving as a special master, there is much to be learned about how to seek advancement of fees. He does a good job of explaining Duthie v CorSolutions Medical Inc., 2008 WL 4173850 (Del. Ch., Sept. 10, 2008), a leading decision on the administration of advancement claims. Finally, he comes up with the procedures going forward to avoid all the bickering over fees that so dominates this area.
If you doubt this is a real problem, note that the earnings restatement that gave rise to the underlying litigation involved $4.8 million. The attorney fees for just this one defendant approached $7 million.
Once the right to fee advancement has been determined, there remains the potentially vexing question of how to determine if the fees on any given statement are reasonable. The last thing the Court wants to do is become the monthly fee arbitrator for a case. Hence, the Court has now several times established the procedures to follow including certification that any question or objection to a request is in good faith, payment of undisputed amounts and the use of special masters to resolve any remaining disputed fee issues.
Now all the Court has to do is get someone to sit between 2 lawyers arguing over fees and to resolve the fees of the special masters.
For all the occasional griping the plaintiffs' bar does over how it is sometimes treated in the Court of Chancery, this is a good example that a large fee award may be justly earned. The decision is particularly interesting in that the benefit conferred was intangible, a fact that usually has led to smaller awards. Here the benefit was to enhance or preserve voting rights, a sacred right under Delaware corporate law.
O'Brien v. IAC/Interactive Corp. , C.A. 3892-VCP (August 27, 2010), affirned, August 11, 2011 (Del. Supr).
This is an interesting decision because, perhaps for the first time, the Court explicitly orders payment of a contingent fee in an indemnification case. The fee in question involved a bonus for success in the underlying arbitration proceedings. As the Court held, if the fee is due and is reasonable, it should be paid.
This is an interesting decision for its explanation of the criteria the Court will consider in reviewing a fee application. The Court held that when the fee award is under the terms of a contract, then the primary criteria is to make the applicant whole for the fees it paid. Of course, the fees must still be reasonable.
To its credit, the Court of Chancery has recently reminded attorneys of their obligations to cooperate in litigation. Here it levied a $5,000 fee to be paid personally by a lawyer who failed to carry out that responsibility.
When may a former director obtain advancement of his attorney fees when he files suit? A series of past decisions held that a counterclaim plaintiff may, in the right circumstances, obtain advancement for prosecuting his counterclaim and other decisions have upheld advancement for a plaintiff under a bylaw or other right that was broadly drafted to require such advancement.
However, when the bylaw or other contractual provision requires advancement for litigation "in defense" of a claim, this decision holds a plainitff may not obtain advancement for bringing suit on his behalf.
This decision awards 26% of a large recovery to the prevailing attorneys. If you are successful, then you will be well rewarded, just as it should be.
This decision explains what should be in a fee application to the Court of Chancery. Redacted bills, explanations of what the time was for and why it was spent are all required in a contested matter.
In this decision, the Court modestly reduced an attorney fee award because too much of the legal work was done by a senior partner when a lower cost associate could have been used. While perfectly reasonable, it only shows getting old is not for sissies.
In the famous Cox Communications case, the Court was critical of attorneys who settle fast after getting a modest and usually expected price increase in a merger and then ask for a big attorneys fee. This decision shows how the newest Vice Chancellor will calculate such fees. He is no pushover either.
Most importantly, the Court explains in detail how it approaches fee requests. The analysis is very fair and the award was ample. This added explanation is very useful in helping to predict future awards and thus facilitate settlements.
This decision upholds the unremarkable proposition that a class member whose attorneys do not contribute to an increase in merger consideration do not deserve a fee award. The case is interesting because it reflects an unusual clash among plaintiffs' attorneys over who did what to get the price increased and a company's successful defeat of a fee petition.
There is a dilemma over the broad rights to advancement of legal fees given the sometimes very large amounts demanded. This decision holds that some limits on advancement rights may be placed in the bylaws, even when advancement is provided for in the certificate of incorporation. Note that the bylaw cannot be inconsistent with a certificate provision and must be in place when the director began his term of office for the period when his acts are in question in the underyling litigation.
In this unusual decision, the Court of Chancery awarded attorney fees after having previously declined to do so in a November 26, 2008 decision in the same case. The prior decision had been decided because of pending litigation that the Court did not want to affect by a premature approval of a settlement in this case. When that other litigation was settled, it was time to address the settlement here. This illustrates the flexibility of the Court of Chancery in dealing with competing litigation.
The settlement was approved and fees awarded based on the plaintiff’s success in opening up a limited offer to purchase stock to all of the entity's stockholders.
In this decision the Court examines when a corporate officer is entitled to have his fees advanced in defending a counterclaim against him. The opinion does so in the context of a full explanation of the Cochran. line of cases that determine when an employee is entitled to indemnification (when sued for acting in an official capacity) and when he is not (when sued for breaching his employment contract). That is not as easy a distinction as it may seem, and this case helps us understand it
There is a recurring problem of what is the Court to do when the parties fight over the reasonableness of fees requested in an advancement case. As the fee requests are recurring, the Court has made it clear it does not want to be put in the role of monitoring play in the sandbox every month. In the past, the Court has appointed a special master as in Duthie v. CorSolutions Medical Inc., C.A. 3048-VCP (September 10, 2008). That approach has its own problems, as under Delaware law the decisions of a master are reviewable de novo by the Court.
The solution to this problem adopted by this decision is to have the parties submit any disputed bills to the court who will then rule on the dispute in a teleconference. See the order attached. While the Vice Chancellor involved in this case is the most patient of men, he will need some good luck with this process.
In this decision, the Court dealt with an odd set of facts that are not likely to be repeated. However, the opinion is noteworthy because the Court declined to bar a suit for indemnification even when the complaint had been filed more than three years after the right to indemnification arose. The plaintiff was, in a sense, a victim of a judicial nightmare in Florida where his claim had first been barred and then reinstated by an appeal court after the statutory limitations period expired. In permitting his claim to go forward, the Court of Chancery again showed its support for indemnification claims.
This decision deals with an unusual right to have attorney fees advanced to an employee who is suing to enforce her interpretation of her employment agreement. The Court upheld the right to advancement based on the broad language used that made it clear that even if the employee lost her suit, she was entitled to attorney fees.
As the Court again points out in its opinion, companies need be carefully if they want to limit attorney fee claims, and, if they do not, they will lose the argument under Delaware's broad public policy of enforcing such agreements.
This is an example of the Court of Chancery, even absent an objection from the corporation involved, carefully examining a fee request. The Court cut the request, because the benefit conferred was not significant. Too often critics claim the Court awards fees too generously, but here the Court again shows that it is mindful of its oversight duty.
This is possibly the best decision to read to understand how to interpret the often confusing advancement and indemnification rights contained in limited partnership agreements. The discussion of the history of those rights under Delaware law is very useful as well.
There are three basic holdings that should be noted: (1) ambiguous agreements are to be construed against the entity, be it partnership or corporation, (2) acquittal of criminal charges puts the burden on the entity to show why any conditions to indemnification have not been meet (such as the lack of good faith, etc.) by the claimant, and (3) there is no need to wait until all proceedings against a director are concluded before he is entitled to indemnification for the proceedings that he won.
In this order, the Court awarded 27.5% of the class recovery of $964,086 to class counsel. This illustrates that sometimes, the smaller the pie, the larger the slice for class counsel. Even when the recovery is not large, the work involved is often the same as in a larger case.
It is well known that directors with advancement rights may call on those rights even when acting as a plaintiff. This decision explains the limits on that doctrine. In general, when there is no need to bring suit as a defensive maneuver to protect the director, then the right to have expenses advanced ends for a plaintiff.
In the good old days, the multiple counsel for plaintiffs class or derivative litigation always seemed to be able to agree on how to split the fee awarded by the Court. Well, the good old days are over. Here the Court explains how to split the fee in a complex settlement.
This decision deals with when a plaintiff may receive a fee when a merger price is increased after he files suit and then his case is mooted. The general rule applied here is that while the defense has the burden of proving the plaintiff did not contribute to the increased price, when the merger consideration was increased without any help from the plaintiff, there is no fee. In short, no help, no fee.
This is another in a line of cases where substantial attorney fees ($8,400,000) are awarded to a stockholder whose complaint achieves an intangible benefit for the corporation. Here the benefit was the end of Yahoo's employee severance plan that made it harder to sell Yahoo.
This decision points to a new method of handling attorney fee requests following a settlement. The Court referred the request to one of its Masters for a report, reviewed the report, and upheld the Master's award.
In what surely must have been a boring use of judicial time, in this case the Court of Chancery was required to decide what fees were reasonable in a complex indemnification case. The decision is helpful in showing how the Court went about a task that the parties should have been able to do for themselves. In any event, the Court carefully went over the fee request and did what it had to do under the circumstances.
When a party is entitled to have her attorney fees advanced while litigation is pending, the Court of Chancery is faced with the possible task of reviewing each monthly bill to decide what is reasonable. At the end of the case, of course, a final accounting will occur, but that is too late and would defeat the whole purpose of a right to advancement.
To avoid the onerous task of acting like an attorney fee audit firm, the Court of Chancery has explored using formulas to decide how much of each month's bills should be paid. That way the bills are paid at least at a level that provides enough compensation to obtain representation, while not awarding so much as to encourage a complete lack of restraint. For example, the Court may decide that 65% of the bills should be paid promptly and the balance left to a final accounting. That is what it did here.
When attorney fees are awarded under the terms of a contract, the question sometimes comes up on how to calculate the fees when there was only partial success by the prevailing party. This decision answers that question. Basically, if you win, then you win your fees when the contractual right to fees does not say otherwise and even if you are only partially successful.
This decision answers the question of whether the normal rules governing attorney fee awards in derivative litigation will be applied in closely held entities. This has been a concern because some have argued that when the entity is closely held, the recovery in the derivative litigation benefits the few owners more directly and immediately than in the case of publicly held companies. For example, in subchapter S companies, the recovery is often distribution to the owners; hence, the argument goes, there is no need to award fees to give an incentive to the plaintiff to bring a derivative suit.
Here the Court rejected that argument and awarded fees. After all, the amount distributed to the successful owner in such cases may not be enough to pay her attorneys and some additional incentive is appropriate.
The opinion is also interesting in its discussion of how to calculate those fees. Given that the recovery is fairly small, so should the fees and a multiple of hourly rates may not be warranted in such cases.
In this decision the Court approves the settlement of a stock option back dating case. The opinion carefully goes through all the analysis of when to approve a settlement, particularly when the recovery is adequate under the circumstances.
The attorney fee award of $9,000,000 or about $1,100 per hour shows that contrary to some beliefs, the Court is prepared to award significant fees for hard, excellent work that achieves a good result.
District Court Awards Punitive Damages Based in Part on Discovery Abuse, Denies Attorneys' Fees for Inadequate Proof
In this opinion the Court sanctioned the defendant’s conduct, including discovery abuse, by awarding punitive damages. The Court first entered default judgment against the defendant after his “repeated dilatory discovery conduct and his refusal to appear for deposition.” The plaintiff sought punitive damages in addition to compensatory damages, and the Court found that the entry of default did not preclude awarding punitive damages. The failure to appear for deposition was “but one example of the kind of willful conduct that requires an award of punitive damages.” The plaintiff also sought attorneys’ fees and expenses both for the Delaware action and proceedings in South Africa. The Court, however, denied this claim, finding that an award for fees in the South African litigation was unsupported by law, and the summary information submitted for fees for the Delaware proceeding was inadequate as a matter of law because it did not allow the Court to make a thorough analysis of the time records.
When advancement is sought, the amounts are often objected to as too large. While the Court of Chancery in the past has not wanted to monitor fees in such cases (leaving the amounts to be finally determined at the indemnification stage), here the Court agreed to appoint a special master to review the advancement requests. It remains to be seen whether the Court will regret this step because the Delaware Supreme Court requires a master's decision to be reviewed de novo by the Court of Chancery.
This decision will counsel plaintiffs to seek indemnification under a contract during the underlying action for breach of that contract, and not to initiate a subsequent, separate action.
The plaintiff shareholders of a subsidiary brought an action against the parent company for breach of the merger agreement between the two companies. The plaintiffs prevailed in that action and were awarded damages. They sought attorneys’ fees and costs, but the Court of Chancery’s final order did not address that issue.
After the final order and judgment was entered, the plaintiffs requested reimbursement for their attorneys’ fees, pursuant to the indemnification provision in the merger agreement. When the defendant refused, the plaintiffs filed this action in Superior Court.Continue Reading...
In the latest decision in the long running saga of Conrad Black, the Court of Chancery has decided that he is entitled to advancement of his legal fees until his appeals from his criminal conviction are concluded. The holding turns on the phase that required advancement until there was a "final disposition" of Black's case. The Court held that included all appeals. The conclusion seems almost unavoidable for all the persuasive reasons given by the Court.
This case involved many millions of dollars in fees and illustrates that such "blank check" advancement provisions can be very expensive indeed.
It is widely assumed that the right to be indemnified does not include the right to have attorneys’ fees advanced as the litigation proceeds. Actually, as this decision notes, lawyers deal in this area who do not even know the difference between indemnification and advancement. That is not entirely accurate as this decision holds it is all a matter of contract. When the contract or bylaw defines indemnification in such a way as to include advancement rights, then that is the deal and advancement is required.
The plan of allocation approved in Ginsburg v. Philadelphia Stock Exchange et. al., C.A. No. 2202-CC is a landmark decision for those in the business of litigation arbitrage, buying shares of a company that is involved in a class action that may lead to substantial settlement proceeds.Continue Reading...
Recently, whether outside counsel is entitled to advancement under a corporate bylaw that provides for payment of the fees incurred by “agents” has become a hot issue. When the attorney is acting as an “agent” depends on whether he is acting on behalf of the company in its relationship with a third party. Thus, an attorney who files litigation meets the test, but one who advises the company on a legal issue does not for lack of acting with a third party.
This somewhat odd distinction reflects a policy of restricting advancement of fees to attorneys who are expected to have the possible cost of litigation built into their fees and malpractice coverage.
The Delaware Supreme Court has upheld a claim for fee advancement in litigation instituted by a former director, even though advancement has usually been thought of as a right to defense fees. This decision shows how limited that right may be when the advancement provision relied upon does not clearly provide for fees when the director starts the fight. For in such a case, the court held that there is no right to have fees advanced.
The decision has some unusual facts and may not cover another case were the director is clearly threatened with ligitaion and wins the race to the couthouse.
There is a continuing tension between D&O insurers and the companies whose directors they insure to use the D&O coverage to pay for corporate transactions or, as in this case, for a settlement that no one but the company wants. In this decision the Court of Chancery has strongly upheld the right of former directors to refuse a settlement of litigation against both them and their company when they do not want to settle.
This decision arose out of the company's wish to have its former directors agree to liability in litigation that would then permit the company to sue the D&O carrier for the remaining insurance coverage and so-called bad faith failure to settle damages, all under a side deal that the company would not actually ask the directors to pay anything themselves. The former directors did not want to settle, however, particularly when the insurer also did not want to settle and was defending them under a reservations of rights letter that may have permitted the insurer to go after the directors for the fees advanced.
The Court determined the directors were entitled to the continued advancement of their attorney fees and fees for fees in this case as well.
Form bylaws taken from treatises or filings with the SEC are often copied without much thought. In this decision, the Court of Chancery warns that a very common set of those bylaws does not properly set out advancement rights for attorney fees. Hence, using that form without modification is now a sure way to lose those rights. Check out the form involved in this case and be sure to change it to more accurately reflect what is intended as to advancement.
When a board is about to be sued, it is a good idea to review the bylaws to see if they provide the right to have your attorney fees advanced by the corporation. Here the claim was that the board's decision to amend the bylaws to cover advancement rights was an interested transaction that was subject to the intrinsic fairness rule. Prior case law had applied that rule when the litigation was actually pending and a board acted to confer advancement rights as a result. The Court ruled that the decision to confer advancement rights for any future litigation was protected by the business judgment rule. Hence, the fact that the litigation had not yet been brought was important.
It is possible to overstate the holding of this case as it involved an odd set of facts. If the filing of suit against the directors was virtually assured, the decision might have been different. Some caution is required before deciding that the rule of this case applies to all pre-litigation decisions on advancement.
Determining when indemnification rights apply is sometimes tough to do. The claims for which indemnification are sought are often drafted so as to avoid alleging that the defendant is being sued for something he did as an officer or director, but instead allege that he acted in a personal or agency relationship such as a lawyer. In this case, the Court of Chancery offers an insight into how that Court will parse through this problem. Put simply (and perhaps too simply), if there is a doubt as to the basis for the claim, the person seeking indemnification will prevail. This is as it should be given the importance of preserving the right of indemnification.
This opinion also has some interesting insights into how to apply the Roven analysis that permits a defendant to counterclaim and still obtain indemnification for the fees incurred for acting offensively.
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.
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.
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.
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.
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.Continue Reading...
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.Continue Reading...
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.Continue Reading...
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 .
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.Continue Reading...
Superior Court Declines to Perform Post-Settlement Allocation of Class Claims and Holds Insurer Responsible for Negotiated Settlement and for Insured's Attorneys' Fees
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.Continue Reading...
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 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.
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.
Court of Chancery Grants Plaintiffs' Motion for Judgment on the Pleadings on Claim for Attorneys' Fees and Expenses Incurred in Bringing Action
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.Continue Reading...
Court of Chancery Finds Majority Stakeholder, Chief Executive Officer and General Partner of Limited Partnership Breached His Fiduciary and Contractual Duties to Limited Partnership
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.Continue Reading...
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.Continue Reading...
Court of Chancery Finds Breach of Oral Contract Regarding Executive Compensation and Breach of Fiduciary Duty for Failure of Such Compensation to Satisfy Entire Fairness Test
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.Continue Reading...
Court Of Chancery Awards Litigation Fees Advancement Under LLC Agreement And Fees On Fees For Present Suit
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.Continue Reading...
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.Continue Reading...
Court Of Chancery Grants Plaintiff's Rule To Show Cause And Finds Defendant Was Contemnor Despite Wrongful TRO
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.Continue Reading...
Class Representative Awarded Additional Fee Compensation For Shouldering Extra Burden By Court Of Chancery
This is a class action involving board actions and fee requests by the plaintiff representative.Continue Reading...
Court Grants Significantly Smaller Fee Award Than That Sought by Plaintiffs' Counsel in Connection with Settlement of Derivative Action
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.Continue Reading...
Federal Court Permits Reconsideration of Fees and Costs Award, and Imposes Them Entirely on Other Defendant for Bad-Faith Conduct
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.Continue Reading...
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.Continue Reading...
Federal Court Awards Attorney Fees And Expenses Despite Lack Of Bad Faith In Eleven Month Discovery Delay
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.Continue Reading...
Court of Chancery Finds that Substantial Litigation Expenses Not a Sufficient Material Adverse Effect to Rescind a Contract
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.Continue Reading...
Court of Chancery Finds Misappropriation of Trade Secrets and Awards Attorneys' Fees for Defendants' Willful and Malicious Misappropriation
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.Continue Reading...
This is an action for plaintiff's attorney fees following settlement of fiduciary duty-based shareholder class actions.Continue Reading...