Delaware Corporate Law Update

Updates on Delaware Corporate Law by Evan O. Williford, Esq., Delaware Corporate Litigation Attorney.

Supreme Court Reverses Denial of Contractual Fee-Shifting

In Washington v. Preferred Communication Systems, Inc., (opinion available here), decided February 27, the Delaware Supreme Court reversed the Court of Chancery and awarded attorneys’ fees pursuant to a promissory note fee-shifting provision.

In 2006, appellants bought promissory notes issued by appellee Preferred Communication Systems, Inc. (“PCSI”). When the notes came due in 2007, PCSI was unable to pay. PCSI agreed in an offer letter to provide noteholders with stock warrants as compensation for delay until it could pay.

In 2013, after PCSI received a significant cash payment, noteholders sued PCSI in Texas. The parties ultimately settled the noteholders’ claims for outstanding principal and interest but agreed to litigate their claims for warrants in Delaware. The Court of Chancery granted summary judgment in favor of the noteholders, holding, “The contract at issue consists of the Notes as modified by the Offer Letter” and that PCSI had breached the contract by not issuing the warrants.

The successful noteholders then sought attorneys’ fees pursuant to a fee-shifting provision in the promissory notes. The provision shifted fees if “any indebtedness” evidenced by the notes was collected in a court proceeding; or if the notes were “placed in the hands of attorneys for collection after default”. The Court of Chancery denied the motion, holding that “fee-shifting rights extend only to collection efforts.”

On appeal, the noteholders argued that “indebtedness” was a broad term that included warrants as well as principal and interest; and that PCSI had defaulted by not issuing the warrants. The Supreme Court agreed with the noteholders that the plain language of the notes shifted fees, emphasizing the Court of Chancery’s summary judgment ruling that the offer letter had modified the notes (which contained the fee-shifting provision) to promise warrants. The Supreme Court also held that even if the promissory notes had been ambiguous, they would have been construed against drafter PCSI under the contra proferentem doctrine. Thus, the Court reversed and remanded to the Court of Chancery to award attorneys’ fees.

The Williford Firm LLC served as Delaware counsel for appellants-noteholders in this action.

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Filed under: Attorneys' Fees, Delaware Supreme Court

Chancery Court Denies “Litigation Financier” Attorneys’ Fees

In Judy v. Preferred Communication Systems, Inc., (opinion available here), decided September 20, the Court rejected a motion by intervenor Preferred Spectrum Investments, LLC (“PSI”) for attorneys’ fees.  Judy rules that litigation financiers do not have standing to seek attorneys’ fees for corporate benefits created by the funded lawsuit.  It is also a useful review of many of the reasons a fee petition might be rejected.

Preferred Communication Systems, Inc. (“PCSI”) was formed by individuals with criminal records, including Pendleton Waugh, to buy licenses issued by the Federal Communications Commission (the “FCC”) and solicit money from investors.  Later Waugh was ousted from control of PCS; then he along with new ally Carole Downs formed PSI as a vehicle to regain control of PCSI and to solicit additional investor funds.  They told investors they would use those funds to loan money to PCSI in return for equity.  When PCSI refused to agree to this, Downs and Waugh instead used PSI money to fund another associate, Michael Judy, to litigate a series of lawsuits in the Delaware Court of Chancery (as consolidated, the “Judy Action”).  Ultimately the Court in the Judy Action temporarily appointed a court receiver, made changes to PCSI’s capitalization, and ordered an annual meeting.

At a January 2013 annual meeting, a PSI-backed slate of directors including Downs and Judy (Waugh having passed away) was elected.  In June 2014, a transaction closed in which (in essence) PCSI sold many of its licenses to Sprint for $60M.  Later Judy and Downs had a falling out and persons closely associated with PSI including Downs were removed as PCSI directors.

PSI then intervened in the Judy Action to seek attorneys’ fees, albeit without the cooperation of plaintiff and former ally Judy.  PSI claimed that the Judy Action had saved PCSI and its licenses, sold and unsold.  It claimed tens of millions of dollars as its appropriate share of the value of those licenses under a corporate or common benefit theory.  Alternatively, PSI sought recovery of over $8M in alleged charges associated with the Judy Action under a quantum meruit theory.

The Preferred Investors Association (the “PIA”), an association of PCSI stockholders, took the lead in opposing the petition.  The Court wholly rejected the petition.

PSI lacked standing because it was not plaintiff, only “a source of financing”.  The Court followed past precedent which has refused to broaden the common benefit doctrine into a “generalized mechanism for achieving redistributive justice.”  The Court noted that PSI could have formed a contract with Judy to be repaid by a court-ordered fee award but chose not to.  Therefore, the Court rejected PSI’s argument: “Litigation financiers do not need the common benefit doctrine to give them an incentive to finance litigation.”

The Court also rejected the petition on the basis of precedent that the Court will not award fees if the litigation was filed in support of a takeover effort.

The Court also rejected PSI’s request for a percentage award upon concluding that PSI did not cause the benefit.  Even under PSI’s version of events, the Judy Action was only one of many reasons the licenses were monetized.  This led the Court to liken PSI’s argument to the story about the “horseshoe nail that lost the kingdom”.  In fact, the Court found, PSI had affirmatively jeopardized the licenses.

Finally, the Court separately rejected PSI’s quantum meruit theory for a number of reasons.  PSI had made previous representations to PCSI stockholders that they would not bear expenses associated with the Judy Action.  The Court also found a host of factual issues with the various claimed costs (for example, some were not associated with the litigation, while others paid for arguments not in PCSI’s interests).

The Williford Firm LLC served as counsel for the PIA in this action.

Filed under: Attorneys' Fees, Court of Chancery

Xoom: Chancery Awards Fee For Modest Disclosures Without Release

On August 4, in In re Xoom Corp. Stockholder Litigation, Vice Chancellor Glasscock signaled a limitation on the Court of Chancery’s recent caselaw critical of attorneys’ fee awards for additional merger disclosures.  The Court awarded $50,000 even though it held that the disclosures had only modest value because there was no release; plaintiffs’ claims had therefore been mooted, not settled.

A little background: in September 2015, Vice Chancellor Glasscock approved a merger settlement awarding fees which exchanged supplemental disclosures for a broad release of claims, but he criticized such settlements and warned against future Court approval (Riverbed).  In January 2016, Chancellor Bouchard rejected a disclosure-only settlement that did not address a “plainly material misrepresentation or omission” (Trulia); in August, Judge Richard Posner of the U.S. Court of Appeals for the Seventh Circuit did the same (Walgreens).

In Xoom, plaintiffs sought fees for supplemental disclosures made in connection with the merger of Xoom Corporation into PayPal Holdings, Inc.  The Court ruled, however, that the mootness context supported a different analysis than recent prior cases.  This case, to the contrary, did not involve a broad release of claims.  Thus, plaintiffs had provided a benefit to the class without giving anything up.  While the disclosures worked only a modest benefit, the Court nonetheless awarded some of the fees requested “to encourage wholesome levels of litigation.”

Filed under: Attorneys' Fees, Court of Chancery

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Disclaimer

Delaware Corporate Law Update solely reflect the views of Evan Williford of The Williford Firm, LLP. Its purpose is to provide general information concerning Delaware law; no representation is made about the accuracy of any information contained herein, and it may or may not be updated to reflect subsequent relevant events. This website is not intended to provide legal advice. It does not form any attorney-client relationship and it is not a substitute for one.