Delaware Superior Court Addresses Competing Arbitration Clauses

On November 9, 2018, Judge Carpenter of the Delaware Superior Court issued the Court’s opinion denying Toll Brothers, Inc.’s motion to dismiss homeowners Frederick and Connie Wang’s complaint, thus allowing all six counts of the Wang’s claims against their builder to move forward.

As some background, the Wangs filed suit against Toll Brothers in March of 2015, alleging that their home had suffered significant water intrusion related damage as a result of Toll Brothers’ failure to properly install the windows and stucco exterior during construction.  Toll Brothers filed a motion to dismiss on the grounds that the contract of sale, drafted by Toll Brothers, contained a binding arbitration clause which governed any disputes between the Wangs and Toll Brothers.  Attorneys for the Wangs, Blake Bennett and Christopher Lee of Cooch and Taylor, P.A., argued that the motion should be denied because an arbitration clause found in the later executed warranty agreement controlled, and that arbitration clause explicity stated that the Wangs had the right to “pursue remedies other than conciliation and binding arbitration.”  Alternatively, Mr. Bennett and Mr. Lee argued that the arbitration provision in the contract was unconscionable, which is an issue of fact for a jury.

During a hearing on that motion to dismiss in August of 2015, Judge Carpenter declined to dismiss the complaint but rather stayed the cased pending the outcome of court-ordered arbitration.  At no time did the Court opine that such arbitration would be binding arbitration.  The Court later wrote that it ordered the arbitration because it recognized “that expensive continual litigation would not be helpful to getting Plaintiffs’ house fixed nor in the best interest of Toll Brothers, who had an excellent reputation in the building community.”

The parties moved forward with arbitration in May of 2017, and although the arbitrator ruled in the Wangs’ favor, the Wangs were dissatisfied with the damages awarded and decided to continue to litigate the matter in the Superior Court.  Shortly thereafter, Toll Brothers filed another motion to dismiss on the grounds that binding arbitration had occurred.  The Wangs opposed that motion on the grounds, once again, that the arbitration was not binding arbitration as the arbitration provision in the warranty controlled.  Toll Brothers concurrently filed a complaint to affirm the arbitration award in Chancery Court.

After oral argument before Judge Carpenter, the Court issued its opinion that a) it did not order the parties to binding arbitration in August of 2015, and b) that the arbitration clause in the warranty superseded the arbitration clause in the contract because, consistent with the Delaware Court of Chancery’s decision in Country Life Homes, Inc. v. Shaffer, the warranty was executed at a later date than the contract.  As the Court noted, “when a later-in-time contract addressed the same issues (here, the means of dispute resolution and the rights to be asserted), it will prevail in the absence of evidence to the contrary.”

In its opinion, the Court stated the following regarding its ruling after the August of 2015 oral argument:

The Court was clear that it was hesitant to enforce the contractual arbitration provision as there was a conflict between the Contract and Warranty arbitration clauses.  This hesitation makes it more than obvious that the Court’s suggestion that the parties first go to arbitration – clearly meant non-binding arbitration.  In hindsight, this good faith effort by the Court to hopefully get the parties to come to a reasonable, common sense resolution of this dispute merely provided the parties more grounds to advance legal arguments instead of addressing the real issues of this litigation.  This is clearly unfortunate, as is so often the case, the parties are now only making litigation decisions and not good business ones.

As a result of the Court’s ruling, it retained jurisdiction over all counts of the complaint and the arbitration award will not be entered as a judgment in any court nor may it “be cited as evidence or precedent, with any preclusive effect, in any court, arbitration, or other proceeding.”

The Court’s ruling is likely to be heavily relied upon in Delaware residential construction litigation matters as there are often competing and contradictory arbitration provisions in the contracts and warranty agreements executed by the parties.

Chris Lee

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Equitable Counterclaims in Courts of Law

In the early stages of the American legal system, most state judiciaries were separated into two types of courts – courts of law and courts of equity.  An action at law is an action typically for money damages such as a tort or breach of contract. An action in equity seeks a remedy when there is no available remedy at law, such as, when money damages will not suffice. Over time, this distinction in the American legal system has largely eroded and many courts now hear legal and equitable claims together.  No so in Delaware.  Delaware’s Court of Chancery retains exclusive jurisdiction over claims and counterclaims rooted in equity and fairness.  The Court of Chancery may, under the Clean-Up Doctrine, hear and decide ancillary legal matters to the main equitable claim.  There is, however, no analogous doctrine in the Superior Court.

One can imagine a scenario where a party finds itself defending a case in a court of law, yet wishes to assert equitable counterclaims.  That is exactly what happened in SARN Energy LLC, v. Tatra Defence Vehicle AS, C.A. No. N17C-06-355 EMD CCLD, November 5, 2018.

The parties entered into an agreement where SARN was to use its best efforts to help Tatra sell Pandur military vehicles to the Czech Ministry of Defense. SARN accomplished this goal and Tatra was able to sell 20 Pandurs for approximately $80 million. Tatra failed to fully compensate SARN under the contract and SARN brought suit for breach of contract.  Before filing suit, but after SARN realized that Tatra would not perform under the contract, counsel for SARN sent allegedly false and disparaging letters to Tatra’s parent company, CSG, and the Czech National Security Office concerning alleged illegal actions taken by CSG.  These letters were written on SARN SD3 LLC letter head.

Tatra counterclaimed for, inter alia, bad faith and defamation.  SARN moved to dismiss because SD3, not SARN sent the allegedly disparaging and false letters. Tatra argued that SARN may be responsible under an alter-ego theory of liability.  The Court held that at the motion to dismiss stage, there was at least enough pled to allow discovery on the alter-ego theory of liability, however, the Court of Chancery, not the Superior Court, was the correct court to bring these claims.   The Court dismissed the defamation and bad faith claims but stayed dismissal for 20 days to allow Tatra to transfer the counterclaims to the Court of Chancery.  The Court noted that Tatra could have sought to have the Superior Court judge designated to preside in Chancery over the Counterclaims.  To accomplish this, Tatra should have written to the Chancellor explaining why the designation is appropriate.  The Chancellor would then write to the Chief Justice, and the Chief Justice would ultimately determine if such designation is appropriate. Tatra, however, did not seek designation and was limited to attempt the transfer to avoid dismissal.

Read the full opinion here.

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Delaware Gun Restrictions Held Unconstitutional

In Delaware State Sportsmen’s Association and the Bridgeville Rifle and Pistol Club v. Delaware Department of Natural Resources and Environmental Control and Delaware Department of Agriculture, C.A. K18C-05-047-JJC (Del. Super. Oct. 11, 2018), Plaintiffs challenged new regulations issued in light of the Delaware Supreme Court’s holding in Bridgeville Rifle and Pistol Club, Ltd. v. Small, 176 A.3d 632 (Del. 2017) (“Bridgeville I”), which struck down regulations prohibiting firearms in state parks.  In the case at bar, Plaintiffs challenged the regulations as a violation of their right to keep and bear arms and to be free from unreasonable searches and seizures. The new regulations prohibited firearms in camping areas of state parks and state forests where people sleep overnight with their families and permitted officers to perform background checks on people carrying firearms and to demand permits from concealed carry holders.

The Court’s inquiry began with the burden of proof.  The Court noted that when the constitutionality of a regulation is challenged, the Agencies hold the burden in establishing their constitutionality and the regulations are subject to intermediate scrutiny. The Court held that the Agencies’ designation of camping areas as “sensitive,” did not survive intermediate scrutiny, and fashioned a three-part test for determining if an area’s designation as “sensitive” satisfies intermediate scrutiny: (1) whether there is a controlled entry point; (2) whether visitors are screened by security; and (3) whether the area is supervised by law enforcement personnel or easily accessible to law enforcement and emergency responders.  The regulations failed the test and were struck down.

Additionally, Plaintiffs challenged a portion of the regulations that permitted law enforcement officers to ask an individual for identification to conduct a background check. The Court held “[t]hese regulations give unfettered discretion to law enforcement to stop visitors, question them and require identification without requiring a scintilla of evidence of criminal activity.” The regulations pertaining to the request for identification were held to be facially unconstitutional, where the regulations would be invalid under any possible set of circumstances.  The Court struck this portion of the regulations as unconstitutional under both the Fourth Amendment and Article I, Section 6 of the Delaware Constitution.

The Court also struck down a provision of the regulations where the Agencies overstepped their authority and attempted to recognize out-of-state concealed carry permits for visitors of state parks and state forests. The Delaware Attorney General has the sole authority to issue concealed carry permits and the Court held this portion of the regulations was preempted on statutory grounds.

Read the full opinion here.

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Requests for Admissions – What Must You Admit?

In In Re: Asbestos Litigation (Stewart), the sole remaining Defendant in the case filed Requests for Admission (“RFA”) directed to the Plaintiff.   All 22 RFAs sought admissions related to Drillings Specialties Company (“DSC”), which allegedly sold asbestos containing products that the Plaintiff was exposed to. DSC’s successor in interest was previously a co-defendant in the case but reached a settlement with Plaintiff and was dismissed.

Plaintiff objected to 19 RFAs based on a lack of personal knowledge and 3 RFAs because they sought an admission about an ultimate fact at issue.  Thereafter, the Defendant filed a Motion to Compel claiming that the RFAs were drawn from statements Plaintiff made in her Opposition to DSC’s Motion for Summary Judgment and the proper subject of admissions.

The Special Master noted that pursuant to Superior Court Civil Rule 36, a party cannot object to an RFA because he or she does not personally have the information requested.  Instead, the party must make a “reasonable inquiry and [state] that the information known or readily obtainable by the party is insufficient to enable the party to admit or deny…”

The Special Master ruled that any objections based on lack of personal knowledge were insufficient because “while Plaintiff may not have had personal knowledge of the fact that [DSC’s product] contained asbestos, her counsel knew that fact and represented it to the Court, such that upon reasonable inquiry she or her counsel should have admitted such fact in her answers to this RFA.” Further, the objections did not indicate that Plaintiff made a reasonable inquiry and deemed the RFAs objected to on that basis admitted since the RFAs related to basic facts that were drawn from Plaintiff’s own representations.

Conversely, RFAs are not the appropriate mechanism to establish the ultimate facts at issue. The Court denied Defendant’s Motion as it related to the three RFAs that sought to establish an “ultimate fact at issue” because RFAs are a means to eliminate facts about which there is no controversy, not establish a legal conclusion or an ultimate fact at issue that generally requires expert testimony.

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Demand Futility and the Newark Country Club

In Jennifer L. Stritzinger v. Dennis Barba et al., Stritzinger, a non-dues-paying member of nominal defendant Newark Country Club (the “Club”) brought derivative claims against the twelve members of the Club’s board of directors (the “Board”) for breach of fiduciary duty and the appointment of a receiver related to certain decisions the Board elected to take in light of the Club’s financial difficulties.

The Club operated at a deficit for a number of years preceding the litigation at issue.  Although operating at a loss, the Club rebuked numerous offers to purchase and develop the Club’s land.  Without sufficient cash flow, the Board considered several options to raise financing for club operations.  The Club’s members discussed four options at a “town hall meeting.”  The options were (i) merging with another club; (ii) selling the Club to a land broker but allowing the Club to continue its operations for ten years; (iii) working with the city of Newark for it to purchase the development rights of the property; and (iv) forming Newark Country Club Mortgage Company, LLC to make a loan to the Club.  The Club decided to form the LLC to make a loan to the Club. The loan was secured by the Club’s land with an interest rate of 5.75% and was to be used to repay certain of the Club’s short-term obligations but would not be used to address the issues surrounding the Club’s long-term financial stability.

Five of the twelve Board members invested in the LLC.  These five members recused themselves from the vote authorizing the loan.  After Stritzinger’s Motion to Expedite was denied and two amendments to the Complaint, Defendants moved to dismiss for failure to make a pre-suit demand on the Board and for failure to state a claim.

The Court agreed with Defendants and dismissed Plaintiff’s claims. The Court’s inquiry started with demand requirements in derivative cases.  The Court noted that Stritzinger failed to make a demand or allege demand futility. Under the Aronson test, to show demand futility, Stritzinger was required to plead “particularized factual allegations that raise a reasonable doubt that (1) [a majority of] the directors are disinterested and independent [or] (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.”

Stritzinger alleged that the remaining seven members of the Board were not disinterested because they acted in bad faith when they approved the loan transaction and thus faced a substantial threat of personal liability for taking the action. Although the Court questioned whether a substantial threat of personal liability applied to the first or second prong of Aronson, regardless of what prong that factor applied to, Stritzinger did not allege demand futility.  The Court found that Stritzinger’s complaints boiled down to “a disagreement with the substance of the decision the Board made to approve the transaction.”

As to the receiver count, the Court stated that without a statutory basis for the appointment of a receiver, the Court could only appoint a receiver in cases of, “fraud, gross mismanagement, positive misconduct by corporate officers, breach of trust, or extreme circumstances showing imminent danger of great loss which cannot otherwise be prevented.”  The Court found that none of the allegations in Plaintiff’s Second Amended Complaint reached anywhere near the level necessary to appoint a receiver and dismissed the Complaint.

Read the full opinion here.

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Calculating the Appropriate TRO Bond Amount

In Applied Energetics, Inc. v. George Farley and AnneMarieCo., LLC, CA No. 2018-0489-TMR, the Vice Chancellor addressed the appropriate bond the Plaintiff must post in connection with a preliminary injunction.  Court of Chancery Rule 65(c) requires that any applicant seeking a restraining order or injunction post sufficient security for the payment of costs and damages suffered by a party that is improperly enjoined. The bond represents that maximum amount that the enjoined party may recover.

Courts “err on the high side in setting a bond” because actual damages are difficult if not impossible to calculate. The party seeking a bond must show a credible basis for the amount of claimed damages, however the bond need not be calculated with mathematical certainty.

The Defendants sought a bond of $1,750,000 –  representing 50% of the value of their 25,000,000 shares on July 5, 2018 with per-share damages of $0.07.

Plaintiff sought a nominal bond because of the strength of Plaintiff’s claims.  Even if the Court were to award more than a nominal bond, Plaintiff contended that Defendants’ damages were speculative and exaggerated because the Defendants cannot legally or practically sell all their 25,000,000 shares.

The Court held that the appropriate measure of damages for the shares “is the difference between (1) the price of Applied Energetics stock on the date Defendants could have and would have sold their shares at a higher price but for the injunction … and (2) the as-yet-unknown price of Applied Energetics stock on the date Defendants sell the shares.”  To calculate the unknown price, the Court analyzed the historical prices of Applied Energetics stock since the date the injunction was issued to find an average intraday low price of $0.111 per share. The per-share damages estimate was the difference between $0.14 (the share price when Defendants could have sold their shares) and $0.111, or $0.029.

The Court agreed, in part, with Plaintiff and found that AMC could not sell more than 1,911,949 of its 20,000,000 shares per quarter.  The Court found AMC’s estimated damages to be $55,446.52 –  1,911,949 shares multiplied by $0.029.  No trading restrictions applied to Farley’s 5,000,000 shares and thus the bond as applied to Farley’s shares was $145,000.  The Court set a bond of $200,446.52 – the total damages of AMC’s and Farley’s nearly 7,000,000 shares to be posted within five days of the Order.

The Court’s opinion is available here.

 

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The Delaware Keno Lottery Goes Awry

In Brookings, et al. v. Kirk, et al., three Plaintiffs brought claims against the Director of the Delaware Lottery, the Delaware Lottery, and the State of Delaware alleging that Defendants refused to honor Plaintiffs’ seven Keno Lottery tickets, each worth $1,000,000.00.  Defendants filed a Motion for Summary Judgment arguing that the tickets are invalid because an anomaly occurred with the Keno Computer on December 17, 2015 that caused five consecutive Keno Lottery tickets to generate a combination of the same twenty winning lottery numbers.  As a result, they alleged that the lottery was illegal because it did not possess the legally required element of chance.

When the State learned of the anomaly, it instructed Scientific Games International, the operator of the Keno Computer system, to place a hold on all claims related to the tickets in question. Over $23,000.00 was disbursed to ticket holders who purchased tickets during the anomaly.

The Court concluded that a legal lottery requires three elements: prize, consideration, and chance.  During the time of the anomaly, the Keno Computer caused the same twenty numbers to repeat themselves.  This continued until an individual manually restarted the Keno Computer.  Until the Keno Computer was restarted, there was a 100% chance that the same twenty numbers would win.

Plaintiffs argued that chance was present from their perspective because (1) they did not know the numbers were repeating, and (2) even if they did know the numbers were repeating, they did not know how long the numbers would continue to repeat.  The Court found the Plaintiffs’ subjective knowledge did not create chance where it otherwise did not exist and granted the Defendants’ Motion for Summary Judgment.

Read the full opinion here.

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Contracting Away the Corporate Opportunities Doctrine

The Delaware Court of Chancery in a recent opinion explained how companies may contract away the duty of loyalty and the corporate opportunities doctrine and how those provisions limit the Court’s power in finding or remedying a breach.  In Alarm.com Holdings, Inc. v. ABS Capital Partners, C.A. No. 2017-0583-JTL (Del. Ch. June 15, 2018), Alarm brought suit against ABS, who acquired a controlling stake in Alarm through a subsidiary, for breach of DUSTA in connection with ABS partners serving on the boards of Alarm and related competing companies.  The Court found Plaintiff failed to state a claim under DUSTA and dismissed the complaint.

Background Facts:

Plaintiff alleged that an ABS partner who served on the Alarm board communicated confidential information he gleaned through various Alarm meetings to ABS.  ABS then communicated that information to a different ABS partner who then began to serve on the board of a competing company of Alarm and used Alarm’s confidential information to Alarm’s detriment.

Key Statements of Law:

To survive a 12(b)(6) motion to dismiss a DUSTA complaint, plaintiff must plead:

(i) A trade secret exists;

(ii) The plaintiff communicated the trade secret to the defendant;

(iii) The communication was made pursuant to an express or implied understanding that the defendant would maintain the secrecy of the information; and

(iv) The trade secret has been misappropriated within the meaning of that term as defined in DUTSA.

Holding:

Although the Court assumed that, for purposes of the opinion, Alarm met the first three elements, the Court found Plaintiff failed to plead the misappropriation of a trade secret and dismissed the complaint.   The Court acknowledged that misappropriation is rarely proven by direct evidence, but through inferences drawn from circumstantial evidence.  The complaint failed even this relaxed standard.

The Court relied on prior contract language between the parties concerning Alarm’s confidential information to find that both Alarm and ABS understood that ABS would invest in companies that competed with Alarm and such investments would not raise to the level of a violation of DUSTA.

Under Article 8 of the Amended Charter, ABS, Terkowitz, and the other ABS representatives on the Alarm board had “no duty (contractual or otherwise) not to, directly or indirectly, engage in the same or similar business activities or lines of business as the Corporation.” This provision waived “any claim for breach of the duty of loyalty against ABS, Terkowitz, or the other ABS director representatives based on either usurpation of a corporate opportunity or anticompetitive activity.”

The Court also dismissed Count Two of the complaint, which asserted a claim for common law misappropriation, as preempted by DUSTA.

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Court of Chancery Addresses Availability of Appraisal Rights

City of North Miami Beach General Employees’ Retirement Plan Et al. v. Dr. Pepper Snapple Group, Inc. Et al.

Dr. Pepper’s stockholders initiated this litigation due to their purported inability to exercise appraisal rights pursuant to Section 262 of the DGCL in connection with a merger.

A merger subsidiary of Dr. Pepper Snapple Group and the parent of Keurig Green Mountain entered into a reverse triangular merger to combine their businesses to create a more diversified beverage company.  Keurig was to become an indirect wholly-owned subsidiary of Dr. Pepper.  The Dr. Pepper stockholders would receive a substantial dividend and retain their shares while the indirect owners of Keurig would receive shares of stock in Dr. Pepper.

Dr. Pepper issued a Preliminary Proxy that informed its stockholders that they would not have appraisal rights under the merger.  This led Dr. Pepper stockholders to initiate the instant litigation seeking to enjoin the merger until they are provided appraisal rights under section 262.  Section 262(b) affords appraisal rights for the shares of stock of a “constituent corporation” in a merger.  Additionally, section 262(b) contemplates that the stockholder will forfeit their shares of stock as a result of the merger.

The Court found that the term “constituent corporation” means “an entity actually being merged or combined and not the parent of such an entity.” Because Dr. Pepper is the parent of one of two merging corporations, their stockholders do not have appraisal rights.

The Court also found, alternatively, that since the Dr. Pepper stockholders retained their shares of stock throughout the transaction, they were not entitled to appraisal rights.  Summary Judgment was granted in favor of Defendants.

 

Read the full opinion here.

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Forum Non Conveniens Denial Does Not Warrant Interlocutory Appeal

In Lincoln Benefit v. Wilmington Trust, the Superior Court determined that the denial of a Motion to Dismiss based on forum non conveniens did not warrant an interlocutory appeal.

Lincoln filed a declaratory judgment action against Wilmington Trust seeking to declare a life insurance policy void ab initio under Mississippi law.  Wilmington Trust subsequently filed a breach of contract action in the Mississippi District Court and filed a Motion to Dismiss the Delaware action based on forum non conveniens.  The Superior Court denied the Motion to Dismiss and an Application for Certification of Interlocutory Appeal followed.  The Superior Court refused to certify the interlocutory appeal because the appeal did not meet the strict standards outlined by Supreme Court Rule 42.

To certify an interlocutory appeal, the trial court must have “decid[ed] a substantial issue of material importance that merits appellate review before a final judgment.”  Even if a substantial issue is decided, the court is not required to grant the interlocutory appeal.  Interlocutory appeals are exceptional and should be granted sparingly so as to preserve party and judicial resources.  Several factors outlined in Rule 42 guide the Court’s analysis.

The Court found that although Its denial of Wilmington Trust’s Motion to Dismiss decided a substantial issue, on balance, the factors in Rule 42 did not warrant an interlocutory appeal.  Only one factor, whether the appeal could terminate the litigation, weighed in favor of certification.

The Delaware Supreme Court subsequently refused the application for interlocutory review.

Read the Superior Court’s opinion here.

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