Delaware Docket

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


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.


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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Ravenswood Inv. Co., L.P. v. Winmill & Co. Inc., C.A. No. 7048-VCN (Del. Ch. May 30, 2014)

By David Bernstein and Elise Gabriel

In Ravenswood Investment Co., Vice Chancellor Noble of the Delaware Chancery Court considered the novel issue of whether, under Delaware law, a corporation may condition a stockholder’s right to inspect the corporation’s books and records on an agreement not to trade in the corporation’s stock for a period of time.  Here, the defendant Winmill & Co. Incorporated (“Winmill”), a Delaware holding company, had refused to allow plaintiff stockholder Ravenswood Investment Company, L.P. (“Ravenswood”) to inspect its nonpublic financial statements absent Ravenswood’s agreement not to trade in Winmill’s stock for up to a year.  Winmill was apparently concerned that Ravenswood would use the material, non-public information to trade in Winmill’s stock, thus threatening “tipper” liability under federal securities law. 

Vice Chancellor Noble concluded that a trading restriction imposed on a stockholder’s right to inspection under Delaware General Corporation Law § 220 is contrary to Delaware law.  He found that Ravenswood had requested inspection for the proper purpose of valuing its stock, and any purported secondary purpose or ulterior motive was irrelevant.  Vice Chancellor Noble was unwilling to incorporate an “inequitable” notion into Delaware’s § 220 jurisprudence that would frustrate a stockholder’s fundamental right to value its stock.  In a footnote, he further stated that the Court did not address whether the requested financial statements should be deemed confidential, but if the parties could not agree on a confidentiality agreement, the Court would be available to address that issue.  Vice Chancellor Noble refused, however, to require Winmill to pay Ravenswood’s attorneys’ fees, finding that Ravenswood had not produced requisite evidence of Winmill’s bad faith.

Ravenswood v. Winmill

Gassis v. Corkery, C.A. No. 8868-VCG (Del. Ch. May 28, 2014)

By Joanna Diakos and Mark Hammes

In Gassis v. Corkery, Civil Action No. 8868, Bishop Macram Max Gassis challenged his removal as Chairman of the Board and as a director of the Bishop Gassis Sudan Relief Fund, Inc., a Delaware charitable nonstock corporation (the “Fund”) dedicated to helping the people of southern Sudan. The Bishop also challenged the previous removal of two directors from the Fund’s board and the elections of two directors who replaced them.

Bishop Gassis’ removal at a 2013 board meeting came after years of friction with other board members, who contended that the Bishop was difficult to work with, negatively interacted with the Fund’s beneficiaries in Sudan, spent extravagantly on travels, invested in suspicious projects, and acted as though he had a personal interest in the Fund’s assets. These board members further argued that a provision of the Fund’s bylaws providing that the Bishop “shall serve [as Chairman of the Board] until his retirement or resignation” required him to be removed from the board upon his retirement as a Catholic Bishop, which was to occur on his seventy-fifth birthday on September 21, 2013.

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Oracle Partners, L.P. v. Biolase, Inc., C.A. No. 9438-VCN (Del. Ch. May 21, 2014), aff’d, C.A. No. 270, 2014 (Del. June 12, 2014)

By Jamie Bruce and Ryan Drzemiecki

In his May 21, 2014 opinion in Oracle Partners, L.P. v. Biolase, Inc., C.A. No. 9438-VCN (Del. Ch. May 21, 2014), Vice Chancellor Noble addressed the issue of what was said, and the legal effect of the statements made, during a telephonic meeting (the “Meeting”) of the board of directors of Biolase, Inc. (“Biolase”) on Friday, February 28, 2014.

Prior to the Meeting, Biolase had six directors.  On the Monday following the meeting, Biolase issued a press release stating that two of the directors — Alexander Arrow, M.D. (“Arrow”) and Samuel Low, D.D.S. (“Low”) — had resigned from the board and two new directors — Paul Clark (“Clark”) and Jeffrey Nugent (“Nugent”) — had been appointed in their place.  In a contradictory Form 8-K filing with the Securities and Exchange Commission (“SEC”) three days later, which included the press release as an exhibit, the Company disclosed only that Clark and Nugent had been appointed to the board, which had apparently increased to eight members.

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