Crothall, et al. v. Zimmerman, et al., Del. No. 608, 2013 (May 28, 2014)
By Eric Feldman and Naomi Ogan
In Crothall, et al. v. Zimmerman, et al., the defendants in a derivative suit sought to reverse the Delaware Court of Chancery’s decision awarding attorneys’ fees to counsel for Robert Zimmerman, the plaintiff in the underlying action. Zimmerman, a common unitholder of Adhezion Biomedical, LLC (“Adhezion”), originally brought a derivative suit against the directors and certain investors of Adhezion, claiming that (i) certain financing transactions involving the sale of Adhezion units were substantively unfair, and (ii) the units issued in those transactions were not properly authorized in accordance with Adhezion’s operating agreement. The Chancery Court’s opinion rejected Zimmerman’s claim of substantive unfairness, but agreed that Adhezion’s operating agreement had been violated because the units issued in the financing transactions had been issued without an amendment approved by a separate vote of the common unitholders.
The Chancery Court, however, awarded only nominal damages for the breach of the operating agreement, and, before a final judgment was entered, Zimmerman decided to sell his Adhezion units and abandon the lawsuit, thus rendering his claims moot. As a result, the Chancery Court granted the defendants’ motion to dismiss Zimmerman’s claims. Nevertheless, Zimmerman’s counsel was allowed to intervene in the case, and was ultimately awarded $300,000 in attorneys’ fees, on the theory that Adhezion had realized a corporate benefit from the Chancery Court’s decision that a vote of the common unitholders was required to authorize additional units under the operating agreement.
The defendants, while unable to appeal the Chancery Court’s ruling directly due to the absence of a final judgment, asked the Delaware Supreme Court to re-consider the merits of the Chancery Court’s finding that attorneys’ fees were warranted on the basis of a corporate benefit to Adhezion. The Supreme Court reversed the Chancery Court’s ruling, finding that Zimmerman’s counsel had not created a corporate benefit, and therefore was not entitled to the $300,000 in attorneys’ fees originally awarded by the Chancery Court. Without evaluating the Chancery Court’s substantive reading of the Adhezion operating agreement, the Supreme Court held that when a plaintiff takes action to moot his own claim, as Zimmerman did by selling his units and abandoning his claims before entry of a final judgment after trial, no corporate benefit can be created and therefore no attorneys’ fees should be awarded on that basis. The Supreme Court noted that, while attorneys’ fees have previously been awarded on the basis of mooted claims, those claims were rendered moot by the actions of the defendant, not the plaintiff. In contrast, in this case the Supreme Court refused to award fees on the basis of a claim that even the plaintiff himself had chosen not to pursue.