Delaware Docket

Timely, brief summaries of cases handed down by the Delaware Court of Chancery and the Delaware Supreme Court.

 

Levey v. Brownstone Asset Mgmt., LP, et al., C.A. No. 5714-VCL (Del. Ch. Aug. 1, 2014) (Laster, V.C.)

By Scott Waxman and Marisa DiLemme

In Levey v. Brownstone Asset Mgmt., LP, et al., the plaintiff, Gordon Levey (“Levey”), and the three individual defendants worked together as principals in a financial services boutique, Brownstone Investment Group LLC.  Operating out of the same office, Levey and the three defendants also ran a hedge fund.  In this action, Levey, after resigning from the financial services boutique, sought a declaration that he continued to own equity in two of the entities through which the boutique operated: (1) Brownstone Investment Partners LLC, a Delaware limited liability company, which was the passive manager of the hedge fund (the “Passive Manager”); and (2) Brownstone Asset Management LP, a Delaware limited partnership, which was the active manager of the hedge fund (the “Active Manager”). Levey sought a declaration that he continued to hold a 5% interest in the Passive Manager and the Active Manager, and if he did remain an owner of those interests, he demanded his proportionate share of all past distributions made by those entities.  He also sought an order requiring the defendants to identify any undisclosed profits (from which he would presumably also seek his share).

The court first addressed the critical factual issue of whether Levey withdrew from the Passive Manager and the Active Manager on January 26, 2006.  Levey argued that he may have tried to withdraw but failed in the attempt, while the defendants argued that he could and did withdraw.  The court found that an objective viewer would regard Levey as withdrawing, listing actions that support this conclusion – he turned in his keys, he cut up his corporate charge card and building identification card, and the other principals and employees of the firm gathered together and said goodbye to him.  He also withdrew his personal funds that were invested in the hedge fund.  Levey argued that he intended to resign as an employee and to withdraw from the financial services boutique, but not to withdraw from the Passive Manager and the Active Manager.  However, based on the dislike Levey had expressed for his partners, the court did not find it credible that he wanted to maintain his relationship with his partners through the Passive Manager and the Active Manager.  Therefore, the court found that Levey withdrew from the Passive Manager and the Active Manager on January 26, 2006.

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Zutrau v. Jansing, C.A. No. 7457-VCP (Del. Ch. July 31, 2014) (Parsons, V.C.)

By David Bernstein and Meredith Laitner

On July 31, 2014, the Delaware Chancery Court issued its decision in Zutrau v. Jansing, C.A. No. 7457-VCP (Del. Ch. July 31, 2014) (Parsons, V.C.), requiring the parties to recalculate the payment to which the plaintiff was entitled because her 22% minority interest in a Delaware corporation was squeezed out through a reverse split that reduced her holding to less than one full share.  The plaintiff in this case, a former employee of Ice Systems, Inc., brought a derivative suit in which she challenged numerous business decisions made by Ice Systems after her employment terminated and challenged  compensation and expense reimbursement payments made to the CEO, who was also the 78% stockholder and the sole director.   The plaintiff also (a) asked the Court to set aside the reverse split on the ground that it was made for the improper purpose of depriving her of the ability to bring a derivative suit, or alternatively (b) to increase the sum to which she was entitled as a result of the cancellation of her 22% interest through the reverse split.

The Court did not decide whether the plaintiff no longer had standing to sue derivatively because she was  no longer a stockholder when she commenced the suit, because the defendant acknowledged that if Ice Systems would have been entitled to recover sums if the plaintiff had been able to sue derivatively, the corporation’s right to recover those sums would increase the amount to which the plaintiff is entitled because of the cancellation of her stock interest, and therefore, the outcome of her suit would be the same whether or not she was permitted to sue derivatively.

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In re Jenzabar, Inc. Derivative Litig., Civil Action No. 4521-VCG (July 30, 2014) (Vice Chancellor Glasscock)

By David Bernstein and Priya Chadha

In In re Jenzabar, Inc. Derivative Litig., Vice Chancellor Sam Glasscock III held that a terminated trust that has not yet distributed to its beneficiaries shares of a corporation, cannot bring a derivative suit on behalf of the corporation. It “can take only those actions related to preserving its assets for purposes of distribution and wind-up, together with those actions for which the trust instrument specifies.”

The Gregory M. Raiff 2000 Trust (the “Trust”) was established in 2000.  The terms of the Trust Instrument held that it was to terminate in 2002 and distribute all of its assets to another trust.  However, the Trust assets, which included shares of Jenzabar, were never actually distributed after the Trust terminated in 2002.  After the trustee filed this derivative action on behalf of the Trust in 2013, Jenzabar filed a motion to dismiss the derivative suit, arguing that the Trust lacked the capacity to sue because it had terminated.  The Plaintiff countered that because the Trust had never distributed its assets, it still had the capacity to bring a derivative suit due to the fact that it still held Jenzabar stock.

Vice Chancellor Glasscock rejected this argument.  He said that Massachusetts law, which governed the Trust, restricted the powers of a trustee of a terminated trust to what’s necessary to “preserve the trust property while winding up the trust and delivering any trust property to the beneficiary.”  He said that post termination, the only litigation in which the Trust could engage was defensive action necessary to preserve its assets, pursuing litigation was not encompassed within the Trust’s limited powers and thus, it lacked the capacity to pursue the derivative action.

InReJenzabar

Kostyszyn v. Martuscelli, et al., C.A. No. 8828-MA (July 14, 2014)

By Annette Becker and Lauren Garraux

On July 14, 2014, Master in Chancery Kim E. Ayvazian issued her draft report in Kostyszn v. Martuscelli, a dispute between the purchasers (“Plaintiffs”) and sellers (“Defendants”) of Paciugo Gelato and Café (the “Business”), an ongoing business which Plaintiffs purchased in December 2011 for a purchase price of $272,500.00.  According to Plaintiffs, their decision to purchase the Business and the purchase price were based on sales information provided to them by Defendants, as well as subsequent statements made by Defendants regarding, among other things, business earnings, on-site sales, catering sales and profits.

In August 2013, Plaintiffs commenced a lawsuit against Defendants in the Delaware Chancery Court alleging that this information and Defendants’ statements were false and misleading, and directly resulted in Plaintiffs both calculating a purchase price that was more than they otherwise would have been willing to pay for the Business and entering into a long-term lease exposing the assets of the Business to risk and the Plaintiffs to personal liability if the Business ultimately failed.  In their amended complaint (the “Amended Complaint”), Plaintiffs asserted claims against Defendants for breach of contract, breach of warranty, indemnification, equitable fraud, fraud, negligent misrepresentation, intentional misrepresentation and breach of the covenant of good faith and fair dealing, and sought indemnification and monetary damages from Defendants, as well as cancellation of the agreement to purchase the Business.  Defendants moved to dismiss the Amended Complaint on grounds that the Chancery Court lacked subject matter jurisdiction over Plaintiffs’ claims.  In her draft report, Master Ayvazian recommended that the Court dismiss Plaintiffs’ equitable claim (for equitable fraud) with prejudice, decline to apply the “clean up” doctrine to address Plaintiffs’ remaining legal claims and to allow Plaintiffs to transfer those remaining legal claims to a court of law.

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Capano v. Capano, C.A. No. 8721-VCN (June 30, 2014)

By Eric Feldman and Sophia Lee Shin

Capano, et al. v. Capano, et al. is a consolidated case involving three brothers that came before the Delaware Court of Chancery, in which Joseph and Gerry Capano each filed a complaint against Louis Capano.

Facts

Louis, Joseph and their father, Louis Sr., were equal partners in a Delaware partnership, Capano Investments. Upon Louis Sr.’s death, the partnership structure changed such that Louis and his son controlled 48.5% of the partnership, Joseph and his son controlled 48.5%, and Gerry (as the beneficiary with voting control of CI Trust) controlled 3%. In 2000, the partnership was subsequently converted into a Delaware limited liability company, Capano Investments, LLC (“CI-LLC”), with the same membership and respective ownership interests as those of the partnership

In 2000, Louis and Gerry executed two documents that purportedly granted Louis an interest in CI Trust: (1) Gerry granted Louis the “Power to Direct”, an irrevocable proxy to direct CI Trust’s trustee (at the time, Daniel McCollom) to vote its interest in CI-LLC; and (2) Gerry granted Louis the “Option” to purchase Gerry’s interest in CI Trust, but only with the consent of CI Trust’s trustee, and at a purchase price of $100,000 and the forgiveness of a $100,000 advance. Both the Power to Direct and the Option were signed by Louis and Gerry and had “(SEAL)” printed next their signatures.

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Lucas v. Hanson, C.A. No. 9424-ML (July 1, 2014)

By Eric Feldman and Claire White

Lucas v. Hanson involves two procedural questions – standing and personal jurisdiction – with respect to the plaintiff’s claims for declaratory and injunction relief against the forced distribution of assets of a limited partnership, Covenant Investment Fund LP (“Covenant”), to its limited partners. Prosapia Capital Management LLC (“Prosapia Capital”) is the general partner and limited partner of Covenant, and a wholly owned subsidiary of Prosapia Financial LLC (“Prosapia Financial”). The plaintiff, Alan Lucas, is a member of Prosapia Financial and the manager of both Prosapia Capital and Prosapia Financial. The defendants are limited partners of Covenant, none of whom are residents of Delaware or involved in the management of Covenant. Following Mr. Lucas’ criminal conviction in Iowa for theft involving expenditures and the liquidation of Covenant’s funds and assets, the Iowa courts declared that the cash held in Covenant’s accounts was the property of its limited partners and should have been distributed to the defendants.

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Branin v. Stein Roe Investment Counsel, LLC, et. al, C.A. No 8481 (June 30, 2014) (Noble, V.C.)

By Eric Taylor and Jamie Bruce

This is a case dealing primarily with two issues: 1) when does an employee’s claim for indemnification from a Delaware LLC irrevocably accrue?; and 2) if a party has a viable claim for indemnification but is on notice that the agreement providing for indemnification may be modified, could a later amendment to such agreement defeat the claim? The Court held that it must look to the operating agreement in place when the events giving rise to the employee’s claim for indemnification accrued or when the lawsuit involving the claim was filed and that if such employee was entitled to indemnification under that agreement, the employee’s claim is vested. The Court further held that, once vested, the contractual right to indemnification could not be eliminated by a subsequent amendment to the agreement.

The plaintiff in this case, Francis Branin, Jr. (“Branin”), was a principal/owner and the CEO of an investment management firm that was sold in October 2000 to a larger investment management firm, Bessemer Trust, N.A. (“Bessemer”), at which time Branin became an employee of Bessemer. Branin later began meeting with Stein Roe Investment Counsel, LLC (“SRIC”) to discuss possible employment. During those discussions, Branin explained to SRIC that the sale of his prior investment firm was governed by an implied covenant in New York restricting the seller of a business from approaching former customers to regain their patronage after he has purported to transfer their “goodwill” to the purchaser. Under this “Mohawk doctrine”, Branin could not solicit his former clients, but he would be entitled to accept the business of his former clients if they approached him. With that knowledge, SRIC decided to hire Branin in July 2002. Branin claims that he did not solicit his former clients, but less than a year after he joined SRIC he was managing 30 client accounts that he had previously managed. Branin was sued by Bessemer alleging improper solicitation of clients. After nearly ten years of litigation, Bessemer unconditionally dismissed its suit and all claims against Branin. Branin is seeking indemnification from SRIC for more than $3 million in legal fees incurred in the litigation.

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In re: El Paso Pipeline Partners L.P. Derivative Litigation, C.A. No. 7141-VCL (June 12, 2014)

By Eric Feldman and Porter Sesnon

In In re: El Paso Pipeline Partners L.P. Derivative Litigation, the Delaware Court of Chancery granted summary judgment in favor of the defendants on claims for breach of contract and breach of the implied contractual covenant of good faith and fair dealing in connection with a conflicted transaction.

In March 2010, El Paso Pipeline Partners, L.P., a Delaware limited partnership that operates as a publicly traded master limited partnership (the “MLP”), purchased a 51% interest in two entities that owned certain liquid natural gas (“LNG”) assets (the “Drop-down”) from its parent corporation that “sponsored” the MLP, El Paso Corporation (the “Parent”). Parent also indirectly owned the general partner of the MLP, El Paso Pipeline GP, L.L.C. (the “General Partner”), giving it control over and an economic interest in the MLP. As a result, the proposed Drop-down created a conflict of interest for the General Partner.

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David Raul v. Astoria Financial Corporation, C.A. No. 9169-VCG (June 20, 2014) (Glasscock, V.C.)

By Masha Trainor and Dotun Obadina

Raul v. Astoria Financial Corporation involves the question of whether, under the corporate benefit doctrine adopted by Delaware courts, a stockholder can recover, from a corporation, attorneys’ fees incurred as a result of the stockholder’s attorney investigating the corporation’s activities.  In this case, David Raul (“Raul”), as custodian of Malka Raul Utma, NY, a common stockholder of Astoria Financial Corporation (“Astoria”), filed a complaint against Astoria, seeking an equitable assessment of attorneys’ fees incurred in connection with the investigation of potential violations of “say-on-pay” disclosure requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Say-On-Pay Disclosure Requirements”).

The corporate benefit doctrine provides for an award of attorneys’ fees to a stockholder if (1) the stockholder presents a claim to the corporation such that, at the time the claim was presented, a suit based on the actions underlying the claim would have survived a motion to dismiss and (2) a material corporate benefit results.

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In re TriQuint Semiconductor, Inc. Stockholders Litigation, C.A. No. 9415-VCN (Del. Ch. June 13, 2014)

By William Axtman and Joshua Haft

In In re TriQuint Semiconductor, Inc. Stockholders Litigation, plaintiff stockholders of TriQuint Semiconductor, Inc. (“TriQuint”) moved to expedite their breach of fiduciary duties claims against TriQuint’s board of directors for approving a merger of equals with RF Micro Devices, Inc. (“RFMD”) in which the shares of each company would be exchanged for 50% of the shares of a newly formed entity, Rocky Holding, Inc. (“Rocky Holding”). In this letter opinion, the Delaware Court of Chancery ruled on plaintiffs’ motion for expedited proceedings with regard to plaintiffs’ claims that the TriQuint board (i) engaged in defensive entrenchment tactics, (ii) agreed to preclusive deal protection devices, and (iii) failed to provide all material information to the stockholders in advance of the stockholder vote.

In order to show good cause for expedited proceedings under Delaware law, plaintiffs must articulate “a sufficiently colorable claim” and show “a sufficient possibility” of irreparable injury so as to justify imposing the costs of an expedited preliminary injunction proceeding on the defendants and the public.

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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.

Eurofins Panlabs, Inc. v. Ricerca Biosciences, LLC, et al., C.A. No. 8431-VCN (May 30, 2014) (Noble, V.C.)

By David Bernstein and Marisa DiLemme

The decision in Eurofins Panlabs, Inc. v. Ricerca Biosciences, LLC concerns a Stock and Asset Purchase Agreement (the “SAPA”) entered into in September 2012 by plaintiff, Eurofins Panlabs, Inc. (“Eurofins”), a Delaware corporation, and defendants, Ricerca Biosciences, LLC (“Ricerca”), a Delaware limited liability company, and Ricerca Holdings, Inc., a Delaware corporation.  Ronald Ian Lennox (“Lennox”), Chairman and CEO of Ricerca, is also a defendant in the case.

Most of the opinion focuses on Eurofins’ claims against Ricerca related to specific provisions of the SAPA, whether Ricerca breached these provisions, and whether the breaches of contract were also fraudulent.  The Court dismissed many of Eurofins’ claims against Ricerca.  All claims against Lennox, aside from those based on the relationship with AstraZeneca PLC (“AZ”), were also dismissed.

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