Summary
granting in part the defendants' motion to recover attorneys' fees
Summary of this case from VGS, Inc. v. CastielOpinion
Civil Action No. 17995
Submitted: July 31, 2001
Decided: September 25, 2001
Thomas R. Hunt, Jr., Esquire, MORRIS, NICHOLS, ARSHT TUNNELL, Wilmington, Delaware; William H. Jeffress, Jr., Esquire, R. Stan Mortenson, Esquire, Jody Manier Kris, Esquire, Kelli C. Mctaggart, Esquire, BAKER BOTTS, L.L.P., Washington, D.C., Attorneys for Defendant-Counterclaim Plaintiffs David Castiel, Virtual Geosatellite Holdings, Inc. and Ellipso, Inc., and Counterclaim Plaintiff-Intervenor Virtual Geosatellite LLC.
Brian A. Sullivan, Esquire, Duane D. Werb, Esquire, WERB SULLIVAN, Wilmington, Delaware; John W. Bickel II, Esquire, James S. Renard, Esquire, Scott J. Bornstein, Esquire, BICKEL BREWER, Dallas, Texas, Attorneys for Counterclaim Defendants Peter D. Sahagen and Sagan Satellite Technology Group, LLC.
MEMORANDUM OPINION
In August 2000, this court issued a post-trial decision invalidating the purported April 14, 2000 merger of Virtual Geosatellite LLC, a Delaware limited liability company, into VGS, Inc., a Delaware corporation. In the order implementing its decision, the court deferred considering a request for attorneys' fees and expenses made by the prevailing parties. All parties have now submitted additional briefs and affidavits on that request, and it is ripe for decision.
The fee shifting request raises two issues. First, whether the conduct that led to the litigation was so unusually egregious or deplorable as to justify an award of all fees and expenses incurred by the prevailing parties. Second, if not, whether the costs of the litigation that must be borne by the winning parties were unduly increased by bad faith conduct in the litigation itself, in which case the winning parties would be entitled to an award equal to the incremental amount of fees and expenses caused by such improper behavior.
I conclude that the prevailing parties are not entitled to recover their entire fees because the prelitigation conduct of the opposing parties simply was not so egregious as to meet the stringent standard applied by this court in such cases. I am satisfied, however, that the prevailing parties should recover that portion of the fees incurred by them that can reasonably be said to have been caused by improper and oppressive behavior in the conduct of the litigation.
I.
Normally, under the so-called American Rule, parties to litigation bear their own attorneys fees and expenses. A possibility of fee shifting is recognized where the conduct giving rise to the litigation is so egregious in nature as to justify an award of fees as an element of damages. As Chancellor Allen explained in Barrows v. Bowen, however, this is a narrow exception, rarely to be encountered:
Brice v. State of Delaware, Del. Supr., 704 A.2d 1176, 1178 (1998) (citing Goodrich v. E.F. Hutton Group, Inc., Del. Supr., 681 A.2d 1039, 1043-44 (1996)).
Arbitrium (Cayman Islands) Handel, AG v. Johnston, Del. Ch., 705 A.2d 225, 233 (1997), aff'd, Del. Supr. 720 542 (1998).
While this court can imagine situations which may be so egregious as to warrant an award of attorney's fees on the basis of fraud, the American Rule would be eviscerated if every decision holding defendants liable for fraud or the like also awarded attorney's fees. Even more harmful would be to extend this narrow exception to situations involving less than unusually deplorable behavior. See Weinberger v. U.O.P., Inc., Del. Ch., 517 A.2d at 656 (holding that the defendant's behavior was not sufficiently grave as to warrant attorney's fees even though the defendant had treated minority shareholders unfairly and therefore breached its fiduciary duty in a manner which could not be characterized as "minor or technical").
Del. Ch., C.A. No. 1454-S, 1994 WL 514868, Allen, C., mem. op. at 3-4 (Sept. 7, 1994).
In his August 31, 2000 decision, then-Vice Chancellor Steele found that Peter Sahagen and Tom Quinn, two of the three managers of the LLC, breached their duty of loyalty when they secretly executed a written consent to the merger of the LLC with and into VGS, Inc., for the purpose of eliminating the majority control over the enterprise of the third manager, David Castiel. Before the merger, Castiel-controlled entities owned 63.4% of the equity of the LLC, but after they owned only 37.5% of the surviving entity, VGS, Inc.
VGS, Inc. v. Castiel, Del. Ch., C.A. No. 17995, Steele, V.C., mem. op. at 11 (Aug. 31, 2000), aff'd __ A.2d __ (2001).
In the course of its opinion, the court first concluded that the process followed by Sahagen and Quinn complied with the legal requirements of both the limited liability company act and the LLC's enabling documents. Specifically, that act and the LLC's governing documents both permitted the non-unanimous written consent to a merger without the need to call a meeting of the Board of Managers and without a separate vote of the members.
Ironically, the opinion notes that the operating agreement specifically required Sahagen's consent to any merger. Plainly, Castiel thought such protective provisions were unnecessary to protect his interests since he controlled the appointment of two-thirds of the Board of Managers. Notably, it was the failure of the operating agreement to provide Castiel appropriate protection that created the opportunity for Sahagen and Quinn's mischief.
Nevertheless, the court went on to conclude that the written consent executed by Sahagen and Quinn was invalid because it resulted from a breach of the duty Sahagen and Quinn owed to inform Castiel of their plans. This was so because Castiel had the power, under the LLC operating agreement to remove Quinn as a manager and would have done so to protect his majority position had he known of the threatened merger. It is for this reason that the opinion observes that "[c]landestime operations were . . . essential to the success of [the] plan," and refers to Sahagen and Quinn's actions as "shallow, too clever by half, [and] manipulative."
VGS, INC., C.A. No. 17995, mem. op. at 7.
The opinion does not reflect any conclusion that Sahagen and Quinn were not motivated by an honestly held view that Castiel's continued control threatened the interests of the LLC. On the contrary, the opinion notes that a number of "LLC employees and even some of Castiel's lieutenants testified that they believed it to be in the LLC "s best interest to take control from Castiel."
Id. at 6.
Of course, merely being adjudicated a wrongdoer under our corporate law is not enough to justify fee shifting. Not even a finding of breach of fiduciary duty, without more, will justify an award of fees. Were it otherwise, the American Rule would be substantially undermined in practice before this court. Here I cannot conclude that Sahagen and Quinn acted in bad faith so as to justify shifting all of the prevailing parties' fees to them.
Boyer v. Wilmington Materials, Inc., Del. Ch., C.A. No. 12549, mem. op. at 12, Lamb, V.C. (May 17, 1999).
Id.
There are also cases in which courts have shifted fees on a finding that the losing party had no good faith basis to defend or prosecute the claim. See, e.g., Arbitrium, Del. Ch., 705 A.2d at 235-38. I do not understand those cases to provide a separate basis on which the prevailing parties in this case could obtain a fee shifting order, since it is clear that the Sahagen parties had substantial defenses and prevailed on at least some of them.
II.
In the Arbitrium case, this court awarded attorneys' fees based on the bad faith conduct during the litigation. The Castiel parties rely on that decision to support a claim that the Sahagen parties' bad faith conduct during discovery, at trial and after the entry of a permanent injunction justify an award of that portion of the attorneys' fees and costs incurred by them as a result of such bad faith conduct. The Castiel parties point to four circumstances that, they say, evidence the Sahagen parties' bad faith, as follows:
* in order to delay or avoid a scheduled preliminary injunction motion, the Sahagen parties made a bad faith filing of a petition for bankruptcy in federal court and a later motion to remand the case to the bankruptcy court, which further disrupted proceedings in this court;
* the Sahagen parties unilateral and unjustified cancellation of discovery — including, on three separate occasions, Sahagen's own deposition;
* principal witnesses for the Sahagen parties, including Quinn and Neel Howard (the President of VGS), testified at trial in ways that materially conflicted with their deposition testimony; and
* after entry of a final injunction against the Sahagen parties from exercising any control over the assets of the LLC, the Sahagen parties continued to instruct Riggs Bank, the custodian of the LLC's bank accounts, not to honor the instructions of the LLC's Board of Managers.
The first and last of these issues concern filings in other courts. From my review of the record on this motion, I am unable to ascertain whether the Sahagen parties' filing in those courts were made in bad faith. Certainly the timing of the bankruptcy filing (on the eve of the preliminary injunction hearing) suggests that it was made for tactical reasons, but I cannot make a judgment about the good faith of that filing with a sufficient degree of confidence to justify sanctions. Similarly, I am unable to reach any conclusion about the good faith in which the Virginia action was pursued.
The third point raised — relating to the trial testimony of certain Sahagen party witnesses — is difficult to assess at this time. Specifically, there are no findings in the post-trial opinion regarding the credibility of witnesses. Moreover, the Castiel parties had every opportunity to deal with allegations of changing or shifting testimony in the context of the trial, both through cross-examination and by motions for sanctions. Then, not now, was the time to address these concerns.
The remaining point of argument — relating to the repeated unilateral cancellation of Peter Sahagen's deposition — stands on different ground. Under Rule 37(d) of the Court of Chancery Rules, it is specifically sanctionable for a party to fail to attend at his own deposition. The court may impose one or more of the sanctions described in Rule 37(b)(2) and, in lieu thereof or in addition thereto, "the Court shall require the party failing to act or the attorney advising that party or both to pay the reasonable expenses, including attorney's fees, caused by that failure, unless the Court finds that the failure was substantially justified or that other circumstances make an award of expenses unjust." From my review of the record before me on this motion, I find that Sahagen's failure to appear on each of the three occasions was not "substantially justified." Moreover, I find that the circumstances of Sahagen's repeated failure to appear for his deposition do not militate against making such an award. On the contrary, it is clear that Sahagen ought to have appeared and that his failures to appear were undertaken to disrupt the orderly procession of the case. Thus, I will allow an award of fees and expenses in an amount to be established by the Castiel parties by affidavit setting forth the fees and expenses caused by those failures to appear.
III.
For all the foregoing reasons, the Castiel parties' motion for fees is GRANTED IN PART AND DENIED IN PART in accordance with the foregoing. The Castiel parties are to prepare a form of order, accompanied by an affidavit of counsel stating the amount of fees and expenses subject to payment pursuant to the terms of this opinion, and submit the same to the court, on notice to opposing counsel, within ten (10) days of the date of this opinion.