Delaware Court of Chancery Practice Blog - Corporate and Commercial Practice in the Delaware Court of Chancery

In the case of Israel Discount Bank of New York v. First State Depository Company LLC, C.A. No. 7237-VCP (Del. Ch. March 19, 2012), the Court examined the issue of whether the defendants should be held in contempt for violating a preliminary injunction order.

The Court looked to Court of Chancery Rule 70(b), which governs the standard for contempt.  Rule 70(b) provides as follows:

(b)        Contempt and other remedies for disobedience of Court order. -- For failure to obey a restraining or injunctive order, or to obey or to perform any order, an attachment may be ordered by the Court upon the filing in the cause of an affidavit showing service on the defendant, or that the defendant has knowledge of the order and setting forth the facts constituting the disobedience. At the hearing of the attachment, the examination of the defendant and also of witnesses shall be oral before the Court, unless it be otherwise ordered by the Court.

In other proceedings taken in the name of the State to punish contempt, the attachment may be ordered upon the filing of an affidavit setting forth the facts constituting the contempt and thereupon the proceedings shall be as set forth in the preceding paragraph of this rule.

Court of Chancery Rule 70(b).

In this matter, defendants expressly violated the terms of a stipulated preliminary injunction which followed the earlier imposition of a temporary restraining order.  Specifically, defendants failed to provide a report regarding the property used as collateral, and failed to allow plaintiff to inspect and appraise such collateral.

The Court further awarded Plaintiff attorneys’ fees, based upon its determination that Defendant never intended to comply with the terms of the preliminary injunction, and thus the violation was in bad faith.  The Court further fined the defendants $5,000 for every day that they failed to comply with the order subsequent to the Court’s order holding defendants in contempt.

In the case of Wagamon v. Dolan, C.A. No. 5594-VCG (Del. Ch. Apr. 20, 2012), the Court of Chancery reviewed Defendant William Krieg’s motion for summary judgment pursuant to Court of Chancery Rule 56.  This dispute involves the winding up of a joint venture, Internet Working Technologies, Inc. (“INT”) owned by Allan Wagamon and David B. Dolan.  Initially, Wagamon sought dissolution of INT under 8 Del. C. § 273.  In a separate action, since consolidated, Dolan alleged that Wagamon looted INT to Dolan’s detriment.  Specifically, Dolan alleged that Wagamon diverted assets belonging to INT to his solely-owned business, Wagamon Technology Group LLC (“WTG”). 

Background

Krieg is a CPA and an employee of Orth and Kowalick P.A. (“O & K”).  O & K was hired to provide accounting services to INT.  According to Dolan’s Complaint, Krieg is the accountant who provided those services on behalf of O & K.  Krieg initially moved to dismiss the complaint, which was granted in part and denied in part. 

The allegations of the Complaint that survived Krieg’s Motion to Dismiss are: (i) that Wagamon breached duties to Dolan in not allowing him to participate in the business of INT and in not providing his share of corporate distributions; (ii) that Wagamon and Krieg improperly valued INT to further Wagamon’s attempt to purchase it from Dolan; and (iii) that Wagamon and Krieg converted assets of INT to WTG and encumbered INT with debt to reduce its value.  Through the motion for summary judgment, Krieg alleged that Dolan failed to plead a cause of action against him and that no evidence of record, viewed in the light most favorable to Dolan, can establish the liability of Krieg to Dolan.

Analysis

The Court found that Krieg’s motion for summary judgment simply reiterated the perceived deficiencies of the Complaint as detailed in his motion to dismiss, without demonstrating the absence of genuine issues of material fact.  Moreover, Krieg failed to supplement his motion with an affidavit demonstrating the lack of such issues.  Further, given that discovery was ongoing and no scheduling order had been entered, the Court deferred ruling on the Motion for Summary Judgment until discovery is complete.

This case is significant by demonstrating that a movant seeking summary judgment should not merely recount the standard under Court of Chancery Rule 56, and should make an effort to supplement such motion with appropriate affidavit(s).  Otherwise, the Court will likely hold that the movant failed to meet his, her or its burden of demonstrating the absence of genuine issues of material fact required to support the granting of summary judgment.

In Solow v. Aspect Resources, LLC, Del. Supr., No. 484, 2011 (Mar. 19, 2012), the Delaware Supreme Court ruled that the Court of Chancery has discretion to dismiss a case for lack of adequate prosecution by the plaintiff.  In this case, no activity had occurred for approximately two years after the plaintiff originally conducted discovery.  The Court issued a notice under Court of Chancery Rule 41(e) stating that it would dismiss the case without further notice absent good cause shown for lack of prosecution.

Plaintiff asserted that he could not find another lawyer during this period of time, and that he was involved in meaningful settlement discussions with defendant during this time, which defendant refuted.  In light of the significant period of time that had elapsed in the matter, the Court did not find justification for the prolonged delay in prosecuting the case, and dismissed the matter. 

This case is important in that it enforces the notion that the Court of Chancery has discretion to dismiss matters which have not been adequately prosecuted, and will do so in the event of a prolonged period of inactivity in a case, absent good cause to the contrary.

The Delaware Court of Chancery in Matthew v. Laudamiel, C.A. No. 5957-VCN, (Del. Ch. Feb. 21, 2012) addressed, among other things, the issue of whether the dissolution and cancellation of a limited liability company transforms derivative claims into direct claims held proportionately by the LLC’s members.  The Court held that such is not the case.  Rather, the Court held that after the filing of the certificate of cancellation, such claims must be brought in the name of  the LLC or derivatively by its members after reviving the LLC by obtaining revocation of its certificate of cancellation. 

In so ruling, the Court outlined the dissolution process for an LLC as set forth in 6 Del. C. §§ 18-801—18-806. 

“After an act of dissolution occurs, an LLC is to be wound up and its assets distributed as provided by 6 Del. C. § 18-804. The persons winding up an LLC’s affairs may prosecute and defend suits on the LLC’s behalf until the filing of the certificate of cancellation.  After the certificate of cancellation has been filed, suits generally may not be brought by or against an LLC.  But, under 6 Del. C. § 18-805, at any time after the filing of a certificate of cancellation, the Court of Chancery may, on application, appoint one or more managers or other persons to act as trustees or receivers to take charge of the [LLC’s] property, and to collect the debts and property due and belonging to the [LLC], with the power to prosecute and defend, in the name of the LLC, suits as may be necessary or proper for the purposes aforesaid.  The trustee or receiver may also be given the broad power to do all other acts which might be done by the [LLC], if in being, that may be necessary for the final settlement of unfinished business of the [LLC].”  

Importantly, while emphasizing the freedom of contract afforded to LLC’s, the Court noted that it was merely addressing the default rule “governing the disposition of such claims in the absence of some other contractually agreed-upon process that might possibly be capable of displacing the background rule.”  In other words, parties to an LLC agreement may include a provision that details an alternate method for pursuing the claims of a cancelled LLC.

In summary, as prescribed in 6 Del. C. § 18-805, members of an LLC have an avenue to pursue claims in the name of the LLC even after the filing of a certificate of cancellation.  Hence, a person who harmed an LLC would not be cleared of any related liability simply by filing a certificate of cancellation.  Section 18-805 makes clear that undistributed claims of the cancelled LLC may not be asserted directly by the LLC’s former members.   Instead, the means by which such claims would be brought would be in the name of the LLC, as direct claims of the LLC or derivative claims of its members, after successfully nullifying the certificate of cancellation.

This case presents a clear roadmap on how a member of an LLC that has been dissolved and cancelled can, after the filing of a certificate of cancellation, bring an action to address wrongdoing perpetrated by another member upon the LLC. 

In the case of Auriga Capital Corporation v. Gatz Properties, LLC, C.A. No. 4390-CS (Del. Ch. Jan. 27, 2012), the Court of Chancery reinforced the notion that a majority and managing member of a limited liability company can be held liable for breach of fiduciary duty in connection with the member’s management and eventual purchase of the company.

This opinion demonstrates that that the Court interprets the Delaware Limited Liability Company Act, 6 Del. C. § 18-101, et seq. (the “DLLC Act”) to impose default fiduciary obligations similar to those in the corporate context, in the absence of a clear expression otherwise in the LLC agreement.

Specifically in this case, Chancellor Strine rejected the assertion that traditional fiduciary duties of loyalty and care do not apply in the context of alternative entities, holding that the DLLC Act specifically states that the rules of equity shall govern unless displaced by statute or contract, and “[i]t seems obvious that . . . a manager of an LLC would qualify as a fiduciary of that LLC and its members.” Moreover, though an LLC can contractually eliminate certain fiduciary duties through its operating agreement pursuant to § 18-1101(c) of the DLLC Act (except the implied contractual covenant of good faith and fair dealing), the elimination of those duties must be clear.  Without explicit and unequivocal language, Delaware courts will apply default fiduciary duties.

Auriga makes clear that the Court of Chancery will consider LLC managers as fiduciaries in the same vein as corporate directors absent clear contractual language to the contrary. Additionally, it serves as a reminder that controlling shareholders must proceed cautiously when considering a buyout of their minority investors, because the Court will analyze the course of conduct leading to the sale in order to determine whether the price paid was entirely fair.