DELAWARE LAW - law.com · PDF file30.01.2018 · This book is updated to include...

By Scott FlahertyThe American Lawyer

A bitter legal dispute between Grant & Eisenhofer and a lawyer who left the firm in 2015 has prompted scrutiny in Delaware of firm co-founder Stuart Grant, who was accused of sexually harassing fe-male associates at his firm in court papers filed as part of the dispute.

Wilmington-based newspaper The News Journal reported on April 9 that a high-ranking state senator has urged Delaware’s governor to consider with-drawing Grant’s name from re-appoint-ment to a position on the University of Delaware’s board of trustees. Grant has sat on the university’s board since 2011 and has served as a financial benefactor for the school. Recently, he reportedly pledged $10 million to the school over a five-year period.

The News Journal reported that David McBride, a Delaware-based Democrat

who serves as the president pro tempore of the Delaware state Senate and chair-man of the body’s Executive Committee, said he won’t have his committee con-sider Grant’s re-appointment to the university trustee board “until there is more clarity” on the sexual harass-ment claim. The state Senate Executive Committee oversees appointments made by the governor, including those to the university’s board of trustees.

McBride and two members of his legislative staff did not immediately respond to requests for comment.

A spokesman for Grant & Eisenhofer, Allan Ripp, said on April 10 that the claim of harassment is “unsubstanti-ated” and stressed that it emerged dur-ing a high-stakes court dispute over millions of dollars in legal fees, pitting the firm against a former lawyer there. The allegation of harassment was not made by any purported victim and there

has never been a report of harassment against Grant by any woman at the firm, the spokesman added.

“The original source material for this is from a throwaway, one-line answer by a former member of the firm who was in the midst of a very large fee dispute involving tens of millions of dollars,” Ripp said. “This very loaded innuendo became the basis of reporting that proved to go nowhere and was unsubstantiated.”

Ripp also confirmed that Grant intends to retire from his firm midway through this year, but said that has “zero connec-tion” to the underlying fee dispute or the harassment accusation that stems from that fee battle. Grant has been planning his retirement for well over a year, he said.

The former lawyer embroiled in the dispute with Grant & Eisenhofer is whis-tleblower attorney Reuben Guttman, a former Grant & Eisenhofer director—the

By Tom McParlandDelaware Business Court Insider

The latest federal class action to hit Facebook Inc. on April 10 accused the so-cial media giant of violating privacy laws in allowing Cambridge Analytica to access personal information of 87 million users.

The complaint, filed in the U.S. District Court for the District of Delaware, joined a series of cases across the country that stem from the unfolding Cambridge Analytica debacle, and it came just hours before Facebook CEO Mark Zuckerberg began to testify before two Senate committees about online data privacy and other issues.

According to the Delaware lawsuit, Facebook knew about problems with its

platform in 2011, but failed to close a “back door” that allowed outside app develop-ers to obtain “wide-scale, unauthorized

access” to the names, addresses, telephone numbers and locations of tens of millions of Facebook users.

“Facebook has made billions of dollars selling advertisements targeted to its cus-tomers, and in this instance made mil-lions selling advertisements to political campaigns that developed those very ads on the back of their customers’ own stolen personal information,” Richard W. Fields, one of the attorneys for the plaintiffs, said in a statement. “That’s unacceptable, and they must be held accountable.”

The lawsuit also names Cambridge Analytica, a New York-based political

APRIL 18, 2018 • VOLUME 21 • NUMBER 16 www.DelawareLawWeekly.com

DELAWARE LAW WEEKLY

AN PUBLICATION • $10.00

Facebook, Cambridge Analytica Hit With Class Action in Delaware Over Privacy

Facebook continues on page 4

Harassment continues on page 5

Grant & Eisenhofer Fee Spat Puts Spotlight on Harassment Claim

IN THIS ISSUE

Young Conaway Partner Scheduled to Speak in CLE ................................2

Movie Theater Chain Investors Seek Appraisal in $3.6B Merger .......................3

Digests ...................................................................7

While Mark Zuckerberg has publicly apologized for Face-book’s role in the scandal, the company’s lawyers have argued in court papers that ‘Facebook broke no laws and violated no legal duties.’

2 • Delaware Law Weekly April 18, 2018

Young Conaway Partner Scheduled to Speak in CLE

Norman M. Powell of Young Conaway Stargatt & Taylor is set to speak at the “Advanced Commercial Finance: Critical Issues Below the Surface” ALI CLE course on May 11.

He is scheduled to present “Who Is the Debtor?” with professor Neil B. Cohen and Teresa Wilton Harmon in New York City and via video webcast. The session will consider naming conventions and other matters regarding trusts, business trusts, LLPs and series LLCs with respect to the debtor on security agreements and financing state-ments, according to Young Conaway.

Powell is a partner in the Delaware law firm of Young Conaway where his prac-tice includes formation of and service as Delaware counsel to corporations, limited liability companies, and statutory trusts, and the delivery of legal opinions relat-ing to such entities, security interests and other matters of Delaware law.

He is an American Bar Association adviser to the permanent editorial board on the UCC. He is admitted to practice in Delaware, New Jersey, New York and Pennsylvania.

International Bar Association Panel Set to Host Del. Lawyer

Ellisa Habbart is scheduled to speak at the International Bar Association’s M&A conference in Cape Town, South Africa, on Thursday and Friday.

Her panel is set to discuss investment markets, sectors and profitability as well as the food industry in Africa.

Ross Aronstam Partner Talks Del. Law Progression at Tulane

Ross Aronstam & Moritz partner David E. Ross participated in a panel discussion titled “Delaware Developments” at the 30th annual Tulane University Law School’s Corporate Law Institute.

According to the firm, the panel discussed important decisions from the past year, as well as their implications for practitioners. Drawing upon his ex-perience as lead counsel for Facebook Inc. in its reclassification litigation, Ross’ comments focused on issues relating to multiclass share structures.

Ross, a fellow of the American College of Trial Lawyers, has litigated numerous high-profile corporate and commercial cases, trade secret misappropriation dis-putes and trust contests. He has first-chair experience litigating claims for injunctive relief and expedited trials on the merits, as well as other corporate and complex commercial disputes, in the Delaware Court of Chancery, the Delaware Supreme Court, and other courts across the country, as well as in both American Arbitration Association and JAMS arbitrations.

NEWS IN BRIEFHabbart is a founding partner of The

Delaware Counsel Group and exclusively represents Delaware corporations and alternative entities in national and international business transactions.

She has experience advising lawyers globally on the Delaware law aspects of complex transactions and governance issues with a Delaware connection.

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Movie Theater Chain Investors Seek Appraisal in $3.6B MergerBy Tom McParlandDelaware Business Court Insider

Former investors in the movie theater chain Regal Entertainment Group on April 10 filed a petition in the Delaware Court of Chancery seeking appraisal of their shares in connection with the movie theater chain’s $3.6 billion merger with U.K.-based Cineworld Group.

In the filing, hedge fund manager Blue Mountain Credit Alternatives Master Fund and its affiliates asked the court to deter-mine the fair value of more than 6.5 million shares it said it held when the deal closed in late February. The investors had with-held their support from the merger, which created the world’s second-largest the-ater operator and better positioned the combined company to compete with industry-leader AMC Entertainment Inc.

Regal’s acquisition by the London-based Cinemark valued the company at $23 per share.

Regal, a Delaware corporation headquartered in Knoxville, Tennessee, announced the deal in early December with the support of its controller,

billionaire Philip F. Anschutz, who owned about 67 percent of the company. Structured as a reverse merger, the deal required no further approval from Regal stockholders.

Cinemark investors voted overwhelm-ingly to approve the merger in February.

Under the terms of the deal, Regal survived the merger as a wholly owned

subsidiary of Cinemark, which is owned by Israel’s wealthy Greidinger family. Amy Miles, Regal’s CEO, said at the time that the deal represented a “meaningful pre-mium” and “compelling value” for Regal stockholders.

“We believe this partnership with Cineworld will enhance Regal’s ability to deliver a premium moviegoing experience for customers and further build upon our

strategy of introducing innovative concepts and premium amenities designed to enhance the value of our theater assets,” Miles said in a press release.

Blue Mountain investors notified Regal of their appraisal demand on Feb. 19, and the sides have been able to agree on the fair value of the petitioner’s shares, according to the April 10 court filing.

According to regulatory filings, Regal operates 7,315 screens in 561 theaters in the United States, with a primary focus on midsize metropolitan markets and sub-urban growth areas. Cineworld, which is incorporated in England and Wales, had 2,227 screens at 232 sites in Europe and Israel, as of last November.

The combined company operates more than 9,500 screens in 10 countries.

The petitioners will likely seek additional compensation by arguing that the deal price undervalued their shares. However, they may face an uphill climb, after recent Delaware Supreme Court decisions indicated a clear preference for deal price as the best indicator of fair

Merger continues on page 5

Regal’s acquisition by the London-based Cinemark valued the company at $23 per share.


consulting firm with ties to President Donald Trump’s 2016 campaign, as well as other companies that supposedly played a role in the breach.

Facebook did not respond April 10 to an email seeking comment on the lawsuit. An automated response from Cambridge Analytica’s press of-fice directed reporters to the firm’s of-ficial Twitter feed. The company did not provide a comment on April 10.

According to the 42-page complaint, a 2011 investigation by the Federal Trade Commission revealed that Facebook’s privacy settings were inef-fective in stopping third parties from accessing users’ personal information either directly or through a Facebook friend who authorized a platform app, like an online personality quiz, in violation of its privacy policy.

“Despite this knowledge and its obligations to its users, Facebook took no affirmative action, and, thereby, refused or otherwise failed to fix, change or otherwise remedy this known defect in its existing developer tools,” the complaint said.

The oversight allowed Aleksandr Kogan, a professor at Cambridge University, in 2014 to obtain user data through the online personality-test app thisisyourdigitallife, and then improperly share it with Cambridge Analytica, which had been hired by the Trump campaign, according to the filing.

At the time, Steve Bannon, a former high-level adviser to Trump, was serv-ing as a “top executive of Cambridge Analytica” and “was deeply involved in the company’s strategy,” according to media reports cited in the complaint.

Bannon is not a named defendant in the case. But the complaint did name Kogan and his company, Global Science Research as defendants. Another firm, SCL Elections, was accused of improperly licensing the information to Cambridge Analytica.

In the document, the plaintiffs said that Facebook learned about the breach in December 2015, but did not take action until the following October, when media reports began to surface.

While Zuckerberg has publicly apologized for Facebook’s role in the scandal, the company’s lawyers have argued in court papers that “Facebook broke no laws and violated no legal duties.”

Cambridge Analytica said in a series of tweets on April 10 that it never used the data on the Trump campaign and that it deleted all of the information it obtained from Global Science Research once Facebook said that its terms of service had been broken.

The U.S. Judicial Panel on Multidistrict Litigation is currently con-sidering whether to coordinate about 20 consumer cases against Facebook and Cambridge Analytica in an MDL in California federal court.

The plaintiffs in the Delaware case are seven Facebook users in the United States and England who said their personal information had been compro-mised. They are represented by Fields of Fields PLLC in Washington; Robert F. Ruyak, Korula T. Cherian, Richard Ripley and Rebecca Anzidei of Ruyak Cherian, also in Washington; Christopher P. Simon and David Holmes of Cross & Simon in Wilmington; and Matthew Jury of McCue & Partners in London.

The case is captioned Redmond v. Facebook.

Tom McParland can be contacted at 215-557-2485 or at [email protected]. Follow him on Twitter @TMcParlandTLI.

FacebookContinued from page 1

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firm’s equivalent of a profit-sharing partner. He left Grant & Eisenhofer in 2015 and later formed the Washington, D.C., whistleblower firm Guttman, Buschner & Brooks. Grant & Eisenhofer has accused Guttman of conspiring to lure away a lucrative False Claims Act case against pharmaceutical company Celgene Corp. on his way out of the firm.

The harassment accusation, which DLW affiliate The American Lawyer noted in an October article, came amid a dispute over legal fees in the false claims suit. Much, but not all, of the fee dispute has since been dismissed by a federal judge in Los Angeles. In March, a federal judge in Los Angeles allowed the client in the false claims suit, former Celgene saleswoman Beverly Brown, to collect a more than $78 million award for serving as the whistleblower in that

case. A portion of that award is headed to Brown’s lawyers; Guttman and Grant & Eisenhofer are battling over who gets what in terms of fees in the Celgene case.

In his early response to a Grant & Eisenhofer lawsuit accusing Guttman of poaching the Celgene case, Guttman filed a motion to dismiss that, among other arguments, took aim at allegations that he berated Grant & Eisenhofer staff mem-bers via email before leaving the firm. Instead, Guttman’s lawyers argued, he left the firm after becoming fed up with what he believed was unethical behavior on the part of the firm’s leaders—Grant and Jay Eisenhofer.

Guttman alleged that Grant had sexually harassed female associates at the firm. To support that argument, Guttman attached an email exchange from April 2015 in which he expressed concerns to Grant & Eisenhofer securities law-yer Daniel Berger about a “hostile work environment for women.”

In light of Guttman’s motion to dismiss, Grant & Eisenhofer issued a statement in October that described his claims as wholly false.

“The claims alleged by Reuben Guttman in his motion are wildly untrue. It’s especially sad that he would peddle this fiction as a cover for trying to evade the terms of a contractual agreement to share substantial fees owed to our firm stemming from our years-long work on the Celgene whistleblower case,” the firm’s October statement said. “We will continue to advance our right to secure the portion of Ms. Brown’s bounty and related costs that she contracted to share with us, regardless of the tall tales that Mr. Guttman tries to tell.”

Guttman did not immediately respond to a phone message left at his current firm.

Scott Flaherty can be contacted at [email protected].

value in cases that involve a robust and competitive sale process.

They are also seeking statutory interest and costs associated with litigating the appraisal action, including an award of fees for expert witnesses and attorneys.

The petition listed Samuel T. Hirzel and Elizabeth A. DeFelice of Heyman Enerio Gattuso & Hirzel in Wilmington as attorneys in the case. The petitioners are also represented by Lawrence M. Rolnick, Steven M. Hecht and Jonathan M. Kass of Lowenstein Sandler in New York.

Hirzel did not return a call April 11 seeking comment on the filing.

An online docket-tracking service did not list counsel for Regal.

The case is captioned Blue Mountain Credit Alternatives Master Fund v. Regal Entertainment Group.

Tom McParland can be contacted at 215-557-2485 or at [email protected]. Follow him on Twitter @TMcParlandTLI.

HarassmentContinued from page 1

MergerContinued from page 3

DELAWARE BUSINESS COURT INSIDERNews and analysis on the most important developments in the Delaware Business Courts

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Delaware Supreme Court » Federal court opinions on Delaware corporate law » Case summaries » Coverage of new statutes and regulations, Q&A’s with leading attorneys and judges

Anyone who needs to keep up with the activities of the Delaware business courts needs to read the Delaware Business Court Insider.

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U.S. DISTRICT COURT OF DELAWARE

CIVIL RIGHTS

Inmate • Immunity • Respondeat Superior • Mental Health Needs • Excessive Force •

Frivolous

Restrepo v. Phelps, DEFAX Case No. D68115 (D.Del. April 6, 2018), Sleet, J. (17 pages).

An inmate was not entitled to release from confinement as a remedy in a civil rights proceeding, and state actors were im-mune from liability. Complaint dismissed with leave to amend certain claims.

Plaintiff, an inmate, filed this lawsuit under 42 U.S.C. §1983. The complaint stated that plaintiff was diagnosed as severely mentally ill, and that he re-quired placement in a residential setting. According to plaintiff, his lack of mental health treatment for an extended period of time violated his constitutional rights, ne-cessitating his release from confinement. In addition to his release, plaintiff sought compensatory damages, declaratory relief, injunctive relief and punitive damages.

The court liberally construed plaintiff’s pleading because he was proceeding pro se. Even under a less stringent pleading standard, the court concluded that dis-missal of the complaint was required.

The named defendants included the state and various state agencies, all of which were immune from suit. Delaware had not waived its immunity from suit in federal court, therefore, the court dismissed all claims as to the state actors.

Plaintiff also named two individuals as defendants, based on their supervisory positions. Case law indicated that claims based solely on the theory of respondeat superior or supervisory liability were fa-tally deficient, because a defendant in a civil rights action had to have personal involvement in the alleged wrongdoing. The complaint did not contain specific allegations of personal involvement by the individuals named as parties, so the court dismissed the complaint as to those individuals.

Disagreement as to proper medical treatment was not sufficient by itself to state a constitutional violation. Prior cases held that an inmate’s claims against mem-bers of a prison medical department were

not viable under §1983 where the inmate received continuing care, but believed more should have been done in terms of diagnosis and treatment. In the instant case, the court found that plaintiff failed to state an actionable constitutional claim against defendants for deliberate indif-ference involving a serious medical need. Most of his claims referred to plaintiff’s dissatisfaction with the treatment pro-vided. Although the court concluded most of the allegations were frivolous, it found that some of the allegations could po-tentially state a claim, but did not allege the individual who committed the wrong-ful act. The court dismissed these claims, but allowed plaintiff the opportunity to amend because it appeared plausible he could articulate a claim against alternate defendants.

Plaintiff’s excessive force and right to privacy claims were also deficient as al-leged. The court dismissed those claims, but also permitted plaintiff the right to amend, because it appeared possible he could state claims for use of exces-sive force and privacy violations against alternate defendants.

A §1983 complaint was not a proper vehicle for release from confinement. Rather, the proper remedy was a habeas corpus proceeding. The court dismissed the complaint as to all current defendants, but gave plaintiff leave to amend to state claims against specific individuals with respect to his privacy, excessive force, and medical treatment claims.

PATENT LITIGATION

Preliminary Injunction • Non-Infringement • Motion to Strike Declaration

Bayer Intellectual Prop, GMBH v. Cap IM Supply, Inc., DEFAX Case No. D68102 (D.Del. March 28, 2018), Andrews, U.S.D.J. (25 pages).

Counsel: Jack Blumenfeld, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, DE; Gary H. Levin, Stephanie M. Papastephanou, Timothy J. Doyle, and Samuel A. McMahon, Baker Hostetler LLP, Philadelphia, PA; Irene H. Hudson, Baker Hostetler LLP, New York, NY, attorneys for plaintiffs; John W. Shaw, Karen E. Keller, and David M. Fry, Shaw Keller LLP, Wilmington, DE, attorneys for defendant.

Infringement claim under doctrine of equivalents not precluded where patent claim was “comprising” and did not ex-clude compositions not explicitly claimed in the specification.

Plaintiffs moved for a preliminary injunction, while defendant cross-moved for summary judgment of non-infringe-ment and to strike plaintiff’s expert’s opin-ion and plaintiff’s reply brief in support of their preliminary injunction motion. Plaintiffs’ complaint alleged that defen-dant’s products infringed upon plaintiffs’ ‘011 patent, which was directed to spot-on solutions for controlling insects on animals. Defendant’s accused products contained the same active ingredients as plaintiffs’ products.

Defendant provided plaintiffs with descriptions of their accused prod-ucts’ formulations. Plaintiffs initially stated they could not assess infringe-ment until defendant’s products received marketing approval. Defendants replied that approval was unnecessary to ascer-tain infringement, and denied that their products infringed upon the ‘011 patent. Following market launch, plaintiffs pur-chased defendant’s product for third-party testing. After receiving the final results, plaintiffs filed the present complaint.

In support of its cross-motion for summary judgment of non-infringement, defendant argued that plaintiffs did not assert literal infringement, and were pre-cluded as a matter of law from asserting infringement under the doctrine of equiv-alents because plaintiffs only claimed N-methylpyrrolidone as a solvent, could not cover equivalent solvents to NMP, and forfeited the doctrine of equivalents by relying on unexpected results to overcome a prior art objection during their patent prosecution.

The court rejected defendant’s assertion that plaintiffs forfeited the ability to claim equivalence of other solvents. The court found that the patent language allowed for use of other substances, including other solvents, not explicitly recited in the claims. The court also found that the patent did not distinguish the claimed formulation from prior art based on the particular solvent used. The court further rejected defendant’s claim differentiation argument, again not-ing that the claim in the ‘011 patent was a “comprising” claim such that it permitted, but did not require, a cosolvent. Lastly,

DIGESTS OF RECENT OPINIONS


the court rejected defendant’s unexpected results argument, finding that the declara-tions cited by defendant merely affirmed the efficacy of the claimed solvents, but did not draw any conclusions, positive or nega-tive, beyond the scope of those solvents. The court held that the statements did not constitute a disclaimer of all solvents other than NMP.

In support of their motion for a preliminary injunction, plaintiffs argued that they were likely to prevail on the mer-its because they could assert infringement under the doctrine of equivalents and because the function-way-result test and insubstantial differences test would result in a finding that defendant’s product in-fringemed upon the ‘011 patent. However, the court found plaintiffs’ analysis of the function-way-result and insubstantial dif-ferences tests insufficient to warrant entry of a preliminary injunction. The court found that plaintiffs’ evidence failed to demonstrate that the claimed NMP sol-vent and defendant’s NMP solvent mix-ture functioned in the same way, or were insubstantially different as it was evidence defendant attempted to invent around rather than copy plaintiffs’ invention. Finally, the court concluded that plaintiffs had failed to prove irreparable harm, since other competition and a declining market could also be responsible for the decline in plaintiffs’ sales.

Accordingly, the court denied the parties’ motions.

U.S. BANKRUPTCY COURT OF DELAWARE

BANKRUPTCY

Avoidance of Funds Transfers • Creditor-Debtor Relationship • Payments

Made in Ordinary Course

In re: Deb Stores Holding LLC, DEFAX Case No. D68104 (Del.Bankr. March 28, 2018), Gross, U.S.B.J. (10 pages).

Discovery in avoidance of transfer action necessary to determine whether creditor-debtor relationship existed, and thus whether there was an antecedent debt or payment made in the ordinary course of business.

Celebrity Pink moved for partial sum-mary judgment against Deb Shops SDFMC LLC, the debtor in possession, in debt-or’s complaint to avoid transfers of funds. Debtor filed a voluntary Chapter 11 bank-ruptcy petition. Celebrity Pink, a clothing designer and manufacturers, sold merchan-dise to debtor’s entities prior to the petition

date. Three of Celebrity Pink’s purchase orders were made prior to the transfers and thus were not subject to avoidance under the Bankruptcy Code. The remaining 18 purchase orders were placed during the preference period. Celebrity Pink agreed to fulfill those purchase orders, but under different payment terms than used for prior purchase orders.

In support of its motion, Celebrity Pink argued that debtor could not show a debtor-creditor relationship for the action to proceed under §547 of the Bankruptcy Code. Celebrity Pink further argued that the bulk of the payment was not made on account of an antecedent debt and that the remaining payments were made in the ordinary course, making those payments unavoidable under §547. In the alterna-tive, Celebrity Pink sought to engage in discovery on those payments.

In response, debtor argued that discovery was needed to determine the parties’ relationship. Although debt-or’s statement of financial affairs listed Celebrity Pink as a creditor, some of the debtor entities’ SOFA did not list Celebrity Pink. Thus, debtor argued that there may have been an established creditor-debtor relationship between debtor as the debtor in possession and Celebrity Pink.

The court agreed that further discovery was necessary, as resolution of Celebrity Pink’s motion was predicated on whether there was an established creditor-debtor relationship. The court noted that if there was no relationship, the transfers would be unavoidable, but if there was a rela-tionship the court would have to look for evidence of an antecedent debt or ordinary course of business. The court noted that there was indication Celebrity Pink had relevant facts in its possession that debtor did not have, since Celebrity Pink apparently understood that payment would come from debtor even though the purchase orders were placed by debtor’s operating entities.

Preferential Transfers • Executory Contracts • Assumption • Ambiguity • Disallowance

Pirinate Consulting Group, LLC v. ERCO Worldwide, DEFAX Case No. D68114 (Del. Bank. April 3, 2018), Gross, B.J. (26 pages).

In this adversary proceeding, the bankruptcy court determined that a contract which expired by its terms prior to the plan of reorganization was not subject to assump-tion, but a second agreement was executory and was assumed under the plan.

Debtors manufactured coated paper and operated paper mills in six states. The paper production process required certain chemicals to affix the coatings to the paper. NewPage Corp., one of debtors’ affiliates, purchased chemical supplies from ERCO Worldwide.

In 2011, debtors filed their bankruptcy petition. The court entered an order on December 21, 2012, confirming the plan of reorganization. In October 2013, the litigation trustee filed a complaint against ERCO, alleging that payments of approxi-mately $9.9 million were recoverable as preferential transfers, and that all of ERCO’s claims against debtors should be disallowed.

ERCO filed a motion for partial summary judgment, in which it argued that the bulk of the alleged transfers were on account of pre-existing ongoing contracts between the parties, which rendered them unavoidable as a matter of law. The litigation trustee filed a cross-motion for summary judgment which challenged the validity of the al-leged contracts. According to the litigation trustee, there were no executory contracts that were capable of being assumed on the effective date of the plan.

Because the parties advanced competing interpretations of the con-tracts, the court first considered whether any ambiguity existed. After reviewing the contracts, the court found no ambiguity. The express terms of the first agreement clearly provided that the termination pro-visions were never amended. Therefore, that contract expired and was not in existence as of the effective date of the reorganization plan, so the right to assume that contract was extinguished.

The litigation trustee argued that the second contract was unsigned and never became a valid contract. ERCO re-sponded that exceptions to the statute of frauds rendered the unsigned offer letter a binding agreement. After analyzing which state’s law applied, the court concluded that NewPage’s silence regarding the sec-ond contract satisfied a state law excep-tion to the statute of frauds. The language of this agreement indicated it was an “evergreen contract” which renewed itself from one term to the next in the absence of contrary notice by one of the parties. It was undisputed that neither party gave the required notice of termination, so the second contract continued through both the petition date and the confirmation date. Therefore, the court held that under the language of the confirmed plan re-garding executory contracts, the second


contract was assumed as of the effective date of the plan.

Due to the expiration of the first contract, the court held that ERCO was not entitled to a defense to the preferential transfers under that contract, but it was entitled to a defense for transfers attrib-utable to the second contract. The court awarded the trustee a preference in an amount agreed upon by the parties.

DELAWARE COURT OF CHANCERY

CORPORATE GOVERNANCE

Repurchase of Warrant • Breach of Fiduciary Duty • Controlling Stockholder’s

Conflict of Interest

Carr v. New Enter. Assocs., Inc., DEFAX Case No. D68103 (Del.Ch. March 26, 2018), Bouchard, C. (62 pages).

Counsel: T. Brad Davey and Matthew A. Golden, Potter Anderson & Corroon LLP, Wilmington, DE; Barry S. Pollack and Joshua L. Solomon, Pollack Solomon Duffy LLP, Boston, MA, attorneys for plaintiff; Herbert W. Mondros and Krista R. Samis, Margolis Edelstein, Wilmington, DE; Michael f. Bonkowski and Nicholas J. Brannic, Cole Schotz P.C., Wilmington, DE; Roger A. Lane, Courtney Worcester, and Jasmine D. Coo, Foley & Lardner LLP, Boston, MA; Angelica Boutwell, Foley & Lardner LLP, Miami, FL, attorneys for defendants.

Breach of fiduciary duty claims dismissed against parties not part of con-trolling stockholder’s control group, but maintained where demand excused by director conflicts that called transaction fairness into question.

Defendants, New Enterprise Associates, Inc. and its principals, moved to dismiss the complaint filed by plaintiff Kenneth Carr, a co-founder of Advanced Cardiac Therapeutics, Inc. ACT was a pre-commercial medical device company. NEA was a large venture capital firm and had investments in numerous com-panies. NEA became ACT’s controlling stockholder via the sale of preferred stock. Several months later, ACT sold a $25 million warrant to Abbott Laboratories, giving Abbot a 30-month option to pur-chase ACT for up to $185 million. ACT ultimately repurchased the warrant from Abbott for $25 million in cash and a note.

The warrant transaction was initially conditioned on Abbott acquiring an-other company, Topera, in which NEA was also the largest institutional investor.

NEA was also the largest investor in VytronUS, another company for which Abbott provided funding contempora-neous to the warrant transaction. In his complaint, plaintiff alleged that the pre-ferred stock offering that allowed NEA to become ACT’s controlling stockholder was approved by a conflicted board and severely undervalued act. Plaintiff fur-ther alleged that NEA orchestrated the potential sale of ACT to Abbott at an undervalued price as part of a strategy to optimize the value of NEA’s portfo-lio by inducing Abbott to acquire and invest in companies in which NEA was the controlling stockholder. Plaintiff ’s complaint asserted, derivatively and on behalf of a putative class of stockholders, claims breach of fiduciary duty and/or aiding and abetting.

The court denied defendants’ motion in large part, although granted dismissal of certain claims and parties due to plead-ing deficiencies. The court first declined plaintiff’s invitation to view the preferred stock offering and warrant transaction as part of a unitary plan. The court noted that there was no contractual tie between the transactions, each was motivated by separate business rationale, and that plaintiff had failed to present evidence the two transactions were intended from the outset to be part of one plan to achieve a single ultimate result. However, the court also rejected defendants’ argument that plaintiff’s claims concerning the warrant transaction were moot because Abbott never exercised the warrant. The court held that any challenge to the warrant transaction would accrue when the war-rant was issued rather than when it would be exercised.

The court further ruled that the preferred stock transaction was a deriv-ative claim, while plaintiff could bring his challenge to the warrant transaction directly as a breach of fiduciary duty claim. The court further dismissed cer-tain parties, as allegations they were part of a control group within NEA were not well-plead. The court further dismissed certain claims against NEA, because it was not a controller during the preferred stock offering but was during the warrant transaction. However, the court declined to dismiss the remaining claims, find-ing the remaining preferred stock and warrant transactions and breach of fidu-ciary duty claims viable because demand was excused due to director conflicts, which further called the fairness of the transaction into question.

DELAWARE SUPERIOR COURT

ADMINISTRATIVE LAW

Unemployment Benefits • “For Cause” • Substantial Evidence • Legal Error

Zavala v. Port to Port Int’l Corp., DEFAX Case No. D68117 (Del. Super. April 4, 2018), Butler, J. (6 pages).

Counsel: Lauren E.M. Russell for Port to Port Int’l Corp.; Carla Jarosz for Unemployment Ins. Appeal Bd.

Substantial evidence existed to support agency’s determination that the claimant was terminated from her employment for cause and was not entitled to receive un-employment benefits. Affirmed.

Suendy Zavala began working for Port to Port Int’l Corp. in January 2014. Port to Port’s business involved transporting automobiles on and off ships. Zavala was hired to work in the towing depart-ment. Other employees in the towing department found it difficult to work with Zavala, and she clashed with her supervi-sor. The record also indicated that Zavala had direct contact with clients in various Central American countries, and many of these clients reported having disagreeable interactions with her.

After various interventions failed to alter Zavala’s conduct at work, Port to Port suspended her for a short time, and then re-assigned her to the operations depart-ment for a fresh start. After a few weeks, it became obvious that Zavala was not per-forming well in her new assignment. Port to Port terminated Zavala in April 2017.

Following her termination, Zavala applied for unemployment compensation benefits. A hearing took place, and the ref-eree ruled that Zavala was precluded from receiving benefits because she was termi-nated for just cause. Zavala then appealed to the Unemployment Insurance Appeal Board. The board took additional testi-mony, both for and against Zavala. The board concluded that Zavala’s termination was for just cause, and it sustained the denial of benefits. Zavala then appealed to the court.

The court found that the record was clear that the board understood the rele-vant standard of proof. The board decision was supported by substantial evidence and was free from legal error. Zavala’s argument was essentially an effort to re-litigate her disputes with her supervisor and to show that the supervisor attempted to make things difficult for her. However, the record also contained admissions by


Zavala that she was rude at times and that she did speak harshly with customers. Despite Zavala’s attempt to explain the var-ious reasons for these incidents, the court found that the record contained ample evidence from which the board was able to find Zavala was terminated for cause. The issue here was not whether Zavala was as rude as the employer claimed, but rather, whether the hearings below were decided in an open and fair proceeding that prop-erly applied the law. The court found noth-ing in the record which suggested that the board failed in its essential undertaking, so it refused to reverse the board’s findings.

CRIMINAL LAW

Motion to Suppress • Pedestrian Stop • Handgun Seizure • Probable Cause •

Objective Facts

State of Delaware v. Andre Murray, DEFAX Case No. D68116 (Del. Super. March 29, 2018), Butler, J. (8 pages).

Counsel: Erika R. Flaschner for the state; Ross A. Flockerzie for defendant.

Law enforcement officer was unable to articulate an objective reason for stopping a pedestrian whom the officer believed was carrying a gun. Motion to suppress granted.

While on patrol in an unmarked ve-hicle, a police officer spotted two men walking toward the vehicle. The officer testified that one of the two men was swinging his left arm naturally, but was holding his right arm close to his body. According to the officer, this behavior was indicative of an armed gunman. As the men got closer to the police vehicle, defen-dant slowed and appeared to move slightly behind the other man. Defendant was at all times plainly visible to the officer, but he turned his body somewhat, which the officer described in his testimony as “blad-ing,” another behavior the officer believed was characteristic of an armed gunman. The officer then drew his gun. Defendant was taken to the ground, and when he was rolled over, a firearm was recovered from his right side.

Defendant filed a motion to suppress. He argued the officer did not have prob-able cause to believe a crime was being committed. The state argued that defer-ence was owed to the skills and training of the officer. According to the state, no fur-tive movement, flight, informant’s tip, or other evidence was needed, because the officer in question was trained in “armed gunman” profiling.

In considering whether the officer acted reasonably, the court stated that due weight was to be given only to specific rea-sonable inferences which the officer was entitled to draw from the facts in light of his experience. Hunches or unparticularized suspicions were not sufficient. The court was not required to simply trust the train-ing and experience of the officer. Rather, the court had to make findings regarding the proper balance between individual liberties and legitimate law enforcement. In this case, the court concluded that the logical conclusion of the state’s argument effectively vitiated judicial oversight of law enforcement’s behavior toward citizens.

The court stated that the officer had to point to specific objective facts which, taken together with reasonable inferences, justified government intrusion into the citizen’s right to move about freely. The problem in the instant case was that the officer never fully explained the basis of his belief regarding the identifying charac-teristics of an armed gunman, or any sci-entific support for his approach. Although the officer’s hunch turned out to be correct here, the court granted the motion to sup-press evidence of the handgun seized from defendant, because the government failed to articulate a clear and objective basis justifying its intrusion.

INSURANCE LAW

Forum Non Conveniens • Novel Question of State Law • Dispositive Weight •

Overwhelming Hardship

Lincoln Benefit Life Co. v. Wilmington Trust, N.A., DEFAX Case No. D68113 (Del. Super. April 5, 2018), Rocanelli, J. (12 pages).

Counsel: Joseph C. Schoell, Jason P. Gosselin, Katherine L. Villaneuva and Christopher F. Petrillo for plaintiff; Steven L. Caponi for defendant.

Defendant failed to establish overwhelm-ing hardship or other justification for de-priving plaintiff of its chosen forum in this insurance matter. Motion to dismiss denied.

Plaintiff was an insurance company which issued a $17.7 million life insur-ance policy on the life of Adele Frankel to a trust. The trust was located in Mississippi. Plaintiff was incorporated in Nebraska and had its principal place of business there. Defendant was a national banking company with its principal place of business in Delaware.

The life insurance policy changed own-ership several times. Defendant eventually

became the owner and beneficiary under the policy. Frankel allegedly died in August 2016. Plaintiff claimed that it was unable to confirm Frankel’s death, and plaintiff be-came concerned that the policy was fraud-ulently procured. In August 2017, plaintiff filed a declaratory judgment action against defendant, seeking a declaration that the policy was void under Mississippi law.

In September 2017, defendant initi-ated a federal district court proceeding in Mississippi, wherein defendant al-leged that plaintiff engaged in breach of contract, bad faith and fraud in refus-ing to honor the terms of the insurance policy. Then in October 2017, defendant filed a motion to dismiss this Delaware state court proceeding, arguing that the Delaware action should be dismissed in favor of the Mississippi case. According to defendant, dismissal on the grounds of forum non conveniens was appropriate, because this matter raised an issue of first impression under Mississippi law, which a court in that state should be allowed to decide.

A motion to dismiss for forum non con-veniens is addressed to the sound discre-tion of the court. Martinez v. E.I. DuPont de Nemours and Co., Inc., 86 A.3d 1102. Defendant maintained that the Martinez case gave dispositive weight the factor in-volving an uncertain question of law from another jurisdiction, requiring a court to dismiss so the other state could decide an issue of first impress under its own laws. The court rejected defendant’s argument, and held that this was only one factor in the dismissal analysis. Martinez involved a complex issue of first impression in a foreign country, and the applicable law was in another language. The instant case did not present the same extent of difficulty. Furthermore, Delaware courts were regu-larly asked to interpret and apply the law of other jurisdictions. Defendant did not demonstrate that the existence of a novel question of Mississippi law caused it to suffer overwhelming hardship.

The Mississippi action was pending in federal court, not another state court, which also cut against dismissal, because a federal court did not actually have an in-terest in interpreting Mississippi state law. Defendant acknowledged that out-of-state discovery was necessary regardless of the forum. Finally, the Delaware action was filed first, and defendant failed to dem-onstrate that this was a rare case which warranted disrupting plaintiff’s choice of forum in favor of defendant’s subsequently filed action.


Pennsylvania Commercial Litigation is an important resource for the general practitioner that addresses procedural and substantive issues encountered in commercial litigation. This book gives a concise overview of commercial litigation, providing detailed research and analysis, and is intended to guide the reader through every stage of a commercial dispute.

Pennsylvania Commercial Litigation Fourth EditionHarry F. Kunselman - Strassburger McKenna Gutnick & Gefsky

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DELAWARE LAW - law.com · PDF file30.01.2018 · This book is updated to include...

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