Superior Court Decides Insurance Coverage Dispute Concerning Dole Stockholder Settlement

The Delaware Superior Court recently decided Arch Insurance Company v. Murdock, Del. Super. C.A.N16C-01-104 EMD CCLD.

Six Directors and Officers Liability excess insurers (“Insurers), sought a declaration that they did not have to fund an underlying settlement due to Defendants’ alleged fraud. Alternatively, the Insurers moved to be allowed to subrogate against their insured pursuant to an exclusion provision contained in the relevant policies.

In the underlying action in the Court of Chancery, stockholders alleged Defendants engaged in a lengthy process that manipulated the stock price so that Mr. Murdock could acquire the stock at a lower price. Vice Chancellor Laster, in his Memorandum Opinion (the “Memorandum Opinion”), repeatedly cited to “fraud” and “fraudulent activity.” Vice Chancellor Laster found breaches of the duty of loyalty, and assessed liability against Mr. Murdock, Mr. Carter, and DFC in the amount of $148,190,590.18. Consequently, Dole signed a term sheet settling the underlying action. The underlying parties signed a formal Stipulation and Agreement of Settlement (the “Settlement”) In lieu of an appeal, the parties settled for 100% plus interest. Murdock agreed to pay the settlement on the Defendants’ behalf. Vice Chancellor Laster approved the settlement on February 10, 2016 (the “Order and Final Judgment”).

Defendants, the insureds, argued that there was no controversy between (i) the Insurers and Mr. Carter and Dole regarding Count I, or (ii) the Insurers and Mr. Murdock and Mr. Carter regarding Count II. First, Defendants contended Vice Chancellor Laster approved the Settlement, which obligated only Mr. Murdock to fund the settlement. As such, Mr. Carter and Dole were not seeking coverage from the Insurers. Additionally, as the case settled, Defendants claimed there were no defense costs to seek from the Insurers because the other lower-tiered insurers advanced all defense costs. Defendants also contended that the Insurers may not subrogate against an individual insured as a matter of law. Defendants argue that the Insurers refused to fund any amount of the settlement under the policy’s profit/financial gain exclusion. If the Insurers’ argument prevails, therefore, there is nothing to pay. If the Insurers’ argument fails, and the exclusion does not apply, then the policy clearly and expressly precludes subrogation. Defendants rely on Primary Policy Section VIII. H, which provides that the Insurers will not exercise their right of subrogation “against an Insured Individual unless Exclusion IV.6 applies to such Insured Individual.

The Insurers also contended they had a right to consent to the Settlement. The relevant policies provide:

  • The Insureds shall not admit any liability, settle, offer to settle, stipulate to any judgment or otherwise assume any contractual obligation with regard to any Claim or Insured Inquiry without the Insurer’s prior written consent, which shall not be unreasonably withheld.

The Insurers alleged that Defendants failed to get consent prior to settling.

The Court disposed of the lack of controversy argument quickly and found that the Insurers had met all four necessary conditions to state a claim for declaratory relief. Moving to the subrogation issue, the Court noted that the parties disagreed on whether Exclusion IV.A.6 applied to the facts here. If it applied, then the Insurers would not have to fund the settlement, and if it did not apply then subrogation is not available to the Insurers. In the Endorsement No. 3 to the Primary Policy, Exclusion IV.A.6 was replaced – Section V.6. As replaced, Exclusion IV.A.6 reads as follows:

  • The Insurer shall not be liable for Loss on account of any Claim: . . . based upon, arising out of or attributable to:Any profit, remuneration or financial advantage to which the Insured was not legally entitled; or

    Any willful violation of any statute or regulation or any deliberately criminal or fraudulent act, error or omission by the Insured; if established by a final and non-appealable adjudication adverse to such Insured in the underlying action.

The Court found that the language of Exclusion IV.A.6 in this situation was not ambiguous.

(“The language is not complicated. If a deliberate act of fraud by an insured is determined through a final and non-appealable adjudication, the Insurer will not be responsible for any claim made by that insured relating to the adjudicated fraudulent act.”) The Memorandum Opinion, without more (i.e., a Chancery Rule 54(b) entry of judgment or a Chancery Rule 58 order), was not a final and non-appealable adjudication adverse to the defendants in the underlying action. The only final and non-appealable adjudication in the Chancery Court action was the Order and Final Judgment. Accordingly, Exclusion IV.A.6 did not apply to the facts of this case.

The Court found that there was no conflict between California law, under which an insurer cannot bring a subrogation action against its own insured and Delaware law under which no right of subrogation exists for the insurer against the insured, co-insured, or the wrongdoer if they are an insured under the policy. Section VIII. H of the policy provided that the Insurers will not exercise their right of subrogation against an “Insured Individual” unless Exclusion IV.A.6 applies. As discussed above, the Court decide that Exclusion IV.A.6 did not apply.

The lack of consent defense of the Insurers, while mentioned, was not decided for reasons unexplained in the opinion.

James Semple

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Charging Liens: The Type of Fee Agreement Matters

On appeal from the Court of Chancery, the Delaware Supreme Court addressed whether and to what extent a charging lien may be imposed on a judgment to recover unpaid attorney’s fees.

In the case at bar, Katten Muchin Rosenman LLP (“KMR”) was retained by Martha Sutherland, a minority member of a closely held corporation, who was ousted from her director position.  KMR and Sutherland entered into an hourly fee agreement and filed a derivative and double derivate lawsuit against the remaining directors.  Upon this filing, a new director was added to the company’s BOD for impartiality purposes and determined the suit was without merit; however, two of the directors’ employment agreements were modified as a result of the litigation efforts.

Litigation dragged on and by 2011, Sutherland, while paying some of the attorney fees, had amassed over $750,000 in unpaid fees.  KMR withdrew as counsel, yet litigation continued until its conclusion in 2012 without any further compensation to Sutherland.  At this juncture, Sutherland sought an award of attorney’s fees for her efforts in the sum of $1.4 million. To support her request, Sutherland used KMR’s invoices and argued that the fees were “fair and reasonable.”

The Court of Chancery awarded Sutherland $275,000 for the minor benefits she obtained on behalf of the company.  At this time, KMR intervened and attached a petition for a charging lien on the entire fee award. In denying the petition, the Court of Chancery cited Doroshow, a case involving a contingent fee agreement, for the proposition that “[s]eeking a charging lien for work which produced no benefit when the law firm has already been paid for the work which produced the benefit … is inconsistent with the theoretical underpinnings of the attorney’s charging lien.”  KMR appealed.

On appeal, the Supreme Court reversed and remanded.  The Court, in an Opinion authored by Chief Justice Strine, distinguished between contingent and hourly fee agreements finding, unlike a contingent fee, the total amount a client is required to pay her attorney pursuant to an hourly fee agreement is not based on the client’s recovery.  If an attorney who entered into an hourly fee agreement has reasonable and necessary unpaid fees that are greater than the client’s recovery, the attorney is entitled to a charging lien on the entire recovery. Because the firm’s fees were reasonable and necessary, a charging lien on the entire recovery was warranted.

Read the full opinion of Katten Muchin Rosenman LLP v. Sutherland here.

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Superior Court Judge Rocanelli Grants New Trial Because of Faulty Jury Instruction

981In Lisowski, et al. v. Bayhealth Medical Center, Judge Rocanelli granted the Plaintiffs’ Motion for a New Trial in a medical negligence action.  After an eight day trial, the jury found that Bayhealth had committed medical negligence but that the negligence did not proximately cause the death at issue.

The trial judge granted the new trial, finding that the jury instruction regarding proximate causation was confusing, inaccurate, and appeared to have undermined the jury’s ability to reach a verdict.  The parties agreed on including the following language regarding proximate causation:

  • A party’s negligence, by itself, is not enough to impose legal responsibility on that party Something more is needed: the party’s negligence must be shown by a preponderance of the evidence to be a proximate cause of the injury.
  • Proximate cause is a cause that directly produces the harm, and but for which the harm would not have occurred.  A proximate cause brings about, or helps to bring about, the injury, and it must have been necessary to the result.

Bayhealth, however, asked the Court to further instruct the jury that: “An action is not the proximate cause of an event or condition if that event or condition would have resulted without the negligence.”  Based upon Bayhealth’s representations that this language was included in the Court’s pattern jury instructions, and over Plaintiffs’ objections, the Court eventually did instruct the jury as Bayhealth requested.  It appears, however, that Bayhealth’s proposed addition is not, in fact, in the pattern jury instructions.

During their deliberations, the jury sent a note expressing their confusion regarding proximate causation and asked the Court to “specify or expand” upon the language Bayhealth had convinced the Court to include.  The trial judge explained to the judge that it could not “expand” upon the language and could only reread it.  The jury, thereafter, found that Bayhealth was negligent but that its negligence was not the proximate cause of the death at issue.

Upon Plaintiffs’ motion, the Court has Ordered a new trial due to the inclusion of Bayhealth’s proposed language.  The trial judge concluded that the jury instruction incorrectly referred to an “event” and a “condition” instead of an “injury” or “harm.”  Her Honor distinguished this case from prior cases where the trial judge granted a new trial on a mere “gut feeling” that the instruction confused the jury.  Here, the note from the jury demonstrated conclusively that they were confused.

Accordingly, the trial judge exercised her “sound discretion in the interest of preventing a miscarriage of justice.”

The Court’s Order is available here.

Blake A. Bennett

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DELAWARE’S WAGE PAYMENT AND COLLECTION ACT AND LIMITED LIABILITY COMPANIES: NO PERSONAL LIABILITY FOR MEMBERS

sealx_2010In a case defended by Cooch and Taylor, the Delaware Superior Court recently ruled on the question of a Limited Liability Company (“LLC”) member’s individual liability for alleged LLC wage debts under Delaware’s Wage Payment and Collection Act (“Act”), 19 Del. C. §§ 1101-1115.  Pursuant to Section 1101(b) of the Act, “the officers of a corporation and any agents having the management thereof who knowingly permit the corporation to violate this chapter shall be deemed to be the employers of the employees of the corporation.”  In effect, the Act allows for a piercing of the corporate form to secure liability for wage debts (and associated penalties, damages, costs and attorney’s fees) against corporate officers and agents who knowingly allow the corporation to violate the Act.

In 2010 the Delaware Court of Common Pleas held that the Act did not allow for individual liability of members, even managing members, of an LLC.  Department of Labor ex rel. Chasanov v. Brady, C.A. No. CPU4-09-8966.  In a detailed opinion, Chief Judge Alex J. Smalls held that Section 1101(b) was unambiguous, and does not refer to LLC’s, which are legally distinguishable from corporations.  Accordingly, the LLC’s debts and obligations are not that of members or managers.

It is interesting to note that the Chasanov case was brought on the plaintiff’s behalf by the Delaware Department of Labor, the state agency tasked with enforcement of the Act (Section 1111).  Despite this adverse ruling, no effort was made to address the issue with the Delaware General Assembly to seek to amend the Act to include LLCs (or any other type of non-corporate entity) within the scope of Section 1101(b).

The Court of Common Pleas decision had limited precedential weight; therefore employment attorneys have been in a quandary as to how the Superior Court, or the Delaware Supreme Court, would rule on this issue.  While the latter question as to the State’s highest court remains unresolved, a recent decision by the Superior Court resolves the initial inquiry.  In Giroux v. Downing Partners, LLC, et al., C.A. No. N15C-11-183 MMJ, the Court was asked to address a situation virtually identical to Chasanov.  Finding the lower Court’s ruling persuasive, the Superior Court ruled that the individual member of the defendant LLCs could not be named as a party under Section 1101(b) and dismissed him as a party to that action.

This decision currently remains subject to possible appeal, and the Delaware Supreme Court has yet to address this issue.  Additionally, it remains to be seen what action, if any, the Delaware General Assembly will take to address this issue.  For the time being, however, members of LLCs cannot be held individually liable for alleged wage debts under the Act.

G. Kevin Fasic, Esquire and Katherine Randolph Witherspoon, Esquire

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In the Age of Internet and Personal Jurisdiction

superior court sealJudge LeGrow of the Delaware Superior Court recently addressed an issue facing courts across the nation: Does one submit themselves to personal jurisdiction within a state based simply on statements made over the World Wide Web?

In the case at bar, UBO Trading v. Terrapinn, Plaintiffs brought a defamation lawsuit against the author of a web-article, the author’s employer, and the website’s “host” for the following post:

Because Jef Rotblut’s trading firm once lost $40 million in about 20 minutes, he highlighted the essential roles of mitigating risk through the software development and testing process.

Being a trading firm, the company’s ability to raise new capital was stifled after the article was released. The author was, at all relevant times, in Illinois and is currently a citizen of Washington DC. The employer is a Delaware corporation and the host is incorporated under the laws of the United Kingdom with its principal place of business in London, England. The author and host moved for dismissal pursuant to Del. Super. Ct. Civ. R. 12(b)(2) based on a lack of personal jurisdiction.    

When a non-resident defendant brings a challenge to personal jurisdiction the court conducts a two-step analysis.  First, the court must consider whether Delaware’s long-arm statute, 10 Del. C. § 3104(c), confers jurisdiction.  If so, the court must then assure that Due Process safeguards are met.

Delaware’s long-arm statute allows for both general and specific jurisdiction over non-resident defendants.  Subsection 3 provides for specific jurisdiction when a person causes injury in the state by an act or omission in the state, while subsection 4 provides for general jurisdiction where the person regularly conducts business within the state.

The question of Due Process was not reached by the Court as Judge Legrow dismissed the author and website host from the litigation without prejudice based on Plaintiffs’ failure to show that personal jurisdiction was proper under Delaware’s long-arm statute.  Under 3104(c)(3), specific jurisdiction failed because the Plaintiffs did not show that the injury was caused by an act within Delaware.  Similarly, under (c)(4), general jurisdiction failed because Plaintiffs did not produce evidence that either the author or the website host regularly conducted business in Delaware.  There was no showing that Defendants sought out Delaware as their market any more than they did the United States as a whole.  Actions such as these are insufficient to establish “regularly conducted business” in the state.

Judge LeGrow was sympathetic to Plaintiffs’ argument that this holding will require them to litigate in different jurisdictions with the possibility of inconsistent results and assuredly higher costs; however, such an argument cannot overcome constitutional requirements in establishing personal jurisdiction.

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Court of Chancery Denies Stockholder Books and Records Request

chancerysealIn a Memorandum Opinion issued August 31, 2016, Judge LeGrow, sitting as a Vice Chancellor by designation pursuant to Del. Const. art. IV, § 13(2), denied a shareholder demand for the inspection of books and records related to $69 million in overseas revenue that Pfizer did not report as part of its Repatriation Tax.

Pursuant to Section 220 of the Delaware General Corporation Law (“DGCL”), a stockholder may inspect a corporation’s books and records if the demand meets form and manner requirements and inspection is made for a “proper purpose.”  Presently, the issue turned on whether Plaintiff identified a proper purpose for the demand. A proper purpose is “reasonably related to such person’s interest as a stockholder.”

Plaintiff’s two stated purposes are investigating mismanagement and valuing shares, undoubtedly proper purposes for inspection under DGCL.  Plaintiff’s intent behind the demand was to investigate whether Pfizer’s Board (the “BOD”) failed to assure compliance with generally accepted accounting principles (“GAAP”) by failing to report Pfizer’s deferred Repatriation Tax liability, a task it said was “not practicable.”  The not practicable standard excuses a corporation from reporting its deferred Repatriation Tax liability, notwithstanding its failure to indefinitely reinvest the money overseas.

The BOD’s Alleged Mismanagement

Under Plaintiff’s claim, generally referred to as a Caremark claim, Plaintiff must establish “a sustained and systematic failure of the board to exercise oversight…” such as a failure to implement a reporting system or the failure to respond to red flags. A credible basis to infer that management was engaged in wrongdoing it not enough – some evidence that the BOD failed to implement a reporting system or ignored red flags is necessary.

Here, Plaintiff’s claim failed.  The Court found that Plaintiff did not address the reporting system, any red flags, or that the BOD was aware or should have been aware of any problems.  Instead, Plaintiff erroneously focused on whether or not the accounting was practicable.  Additionally Plaintiff did not address the BOD’s reliance on the system or KPMG, Pfizer’s outside accounting firm, whom stated its belief that Pfizer’s financial statements were consistent with GAAP.  Therefore, Plaintiff did not articulate any credible basis to support a finding of the BOD’s sustained and systematic failure to exercise oversight.

Valuation Concerns

In order to make a books and records demand for the purposes of valuing shares, the proponent of the demand must show a present need for valuation and why documents available to the public are insufficient to satisfy the demand’s stated purpose.

The Court noted that Plaintiff failed to show how deferred Repatriation Tax liability would affect the price of Pfizer’s shares, the only non-public information Plaintiff sought.  Thus the information was not necessary to value Pfizer’s shares.

Judge LeGrow found that “Section 220 strikes the appropriate balance between the right of a stockholder to obtain information and the rights of directors to manage the business of the corporation without undue interference from stockholders” and denied Plaintiff’s demand.

Read the full opinion here.

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Cooch and Taylor Gains Membership in ACA International — the Association of Credit and Collection Professionals

aca-tm-member-colorCooch and Taylor is pleased to announce that it has become a member of ACA International — the Association of Credit and Collection Professionals.  Founded in 1939, ACA brings together third-party collection agencies, law firms, asset buying companies, creditors and vendor affiliates, representing more than 230,000 industry employees.  ACA establishes ethical standards, produces a wide variety of products, services and publications, and articulates the value of the credit and collection industry to businesses, policymakers and consumers.  For more information about ACA International, visit: www.acainternational.org

Cooch and Taylor believes its ACA membership will further strengthen its practice in regularly defending commercial entities against claims brought under the Fair Debt Collection Practices Act (FDCPA) and the Fair Credit Reporting Act (FCRA).

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Chancellor Bouchard sanctions party for “unusually deplorable behavior”

AndyBouchardIn a fifty-eight page Opinion issued today, Chancellor Bouchard analyzed and ultimately granted a motion to shift attorneys’ fees due to a party’s bad faith litigation tactics.  Given the demanding standard of establishing “clear evidence” that a party acted in bad faith, the Chancellor discussed at length the extensive evidence that proved to His Honor that the accused party had in fact “acted in bad faith vexatiously during the course of this litigation.”

The Chancellor found clear evidence that the party acted in bad faith in the following, troubling ways: “(1) by intentionally attempting to destroy information on his laptop computer after the Court had entered an order requiring him to provide the laptop for forensic discovery, (2) by, at a minimum, recklessly failing to safeguard evidence on his phone, which he regularly used to exchange text messages with employees and which was an important source for discovery, and (3) by repeatedly lying under oath to conceal aspects of his secret extraction of information from Elting’s hard drive and the deletion of information from his laptop.”

To remedy these egregious violations, the Chancellor shifted a significant portion of the abused party’s attorneys’ fees.  The Court shifted 100% of her fees’ incurred in prosecuting the sanctions motion, including the likely extensive fees paid to a forensic computer expert.  The Court also shifted 33% of all of her fees incurred from the date of the first instance of the bad faith litigation.  Given that this matter went to trial and given the extensive record created regarding the sanctions motion, the amount of fees to be shifted is likely to be substantial.

The Chancellor’s full Opinion in the matter of In re: Shawe & Elting LLC, et al. is available here.

Blake A. Bennett

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Vice Chancellor Cites Homer Simpson and Moe Szyslak

vlcsnap-2013-01-31-04h56m50s146In a typically colorful and engaging written decision from Vice Chancellor Glasscock, His Honor cited two of the most famous residents of the fictional town of Springfield: Moe Szyslak and Homer Simpson.  The Memorandum Opinion in Walker, et al. v. Williams (9667-VCG) decides a dispute between neighbors regarding one’s construction and use of what the Vice Chancellor refers to as an “auto tinkerer’s Taj Majal.”  The plaintiffs argued that the building at issue and the defendant’s use of the building violated County codes and constituted a nuisance.

The first step in resolving the dispute required the Vice Chancellor to decide how to refer to the building in question.  The plaintiffs referred to it as “the garage,” which the Vice Chancellor believed was likely done to equate it to a commercial garage.  The defendant, however, referred to the building as his “man-cave.”  This nomenclature dispute led to footnote 6 of the Vice Chancellor’s opinion:

Perhaps Williams, like Moe Szyslak, finds “garage” effete and Frenchfied:

Moe: The “garage”? Hey fellas, the “garage”! Well, ooh la di da, Mr. French Man.
Homer: Well what do you call it?
Moe: A car hole!

See The Simpsons, The Springfield Connection (Fox television broadcast May 7, 1995).

Legal scholars interested in confirming the accuracy of that citation can revisit that scene courtesy of Youtube: here.

In the end, the Vice Chancellor concluded that the “Shop” did not constitute a nuisance but did find that the defendant and his guests had been overburdening an easement across plaintiffs’ property.

The Court’s Opinion is available: here.

Blake A. Bennett

 

 

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DELAWARE SUPREME COURT OPINES ON INSURANCE COMPANY BAD FAITH

Here’s the key takeaway from the Delaware Supreme Court’s opinion affirming the Superior Court’s grant of summary judgment in Enrique v. State Farm:

“[Plaintiff] would have us invoke a hindsight presumption that the failure to offer policy limits or seek remittitur after a verdict in excess of those limits constitutes bad faith. No such presumption exists. Further, such a presumption would ignore the reality of valuing personal injury claims: putting a dollar value on general damages and pain and suffering is inherently subjective.”

Plaintiff was involved in a car accident and exhausted PIP benefits.  She sought UM benefits in excess of her policy limits (huh?) and negotiation ensued.  A number of people…adjusters, attorneys, managers…had a difficult time agreeing on the value of her claim due to pre-existing injuries.  Plaintiff rejected all settlement offers and went to trial and got an above policy limit verdict.  State Farm paid policy limits and Plaintiff proceeded with her bad faith claim (which had been stayed) and the Superior Court granted State Farm’s motion for summary judgment.

As the Court summarized:

“Without more, rational differences in claim valuations do not lead to an inference of bad faith. Here, the record shows that State Farm and Enrique had different views of the value of the claim; State Farm sought advice from two attorneys, attempted to reach a settlement with Enrique, and failed. State Farm had bases for its claim valuations, and there is no evidence that creates an inference that those reasons were pretextual. State Farm thus was not “clearly without any reasonable justification” for its valuations.”

Insurance companies are not charities and like any business, must make smart business decisions.  Read the full opinion here.

Chris Lee

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