Chancery Awards $3.2 million in Attorneys' Fees in Contract Dispute

Chancery Awards $3.2 million in Attorneys' Fees in Contract Dispute

ASB Allegiance Real Estate Fund v. Scion Breckenridge Managing Member LLC, C.A. No. 5843-VCL (Del. Ch. July 9, 2012).  In this opinion the Court of Chancery awarded attorneys' fees, based on a fee-shifting provision of the LLC agreement, of more than $3.2 million. The recent Chancery decision on the merits of this case, on which the award of fees is based, was highlighted on these pages here.

Issue Addressed

Whether the fee-shifting provisions of an LLC Agreement justified an award of fees to the prevailing party for litigation conducted simultaneously in four different courts.

Short Answer: Yes.

Brief Background

The background details of this case were highlighted in a May 2012 decision by the Court of Chancery linked above, which addressed the merits of a dispute involving the interpretation of several related LLC Agreements, and the decision of the Court to reform the related LLC Agreements based on a scrivener's error.

One key issue in this case was whether the four separate litigations in four separate courts could be combined for purposes of awarding fees to the prevailing party.

In describing the procedural genesis of this case, the Court said that: "logic and efficiency cried out for a single forum, preferably with a decision-maker knowledgeable about Delaware law.  Scion eschewed the efficient course."  Instead of agreeing to litigate all the issues in Delaware, the defendant filed three separate additional actions in three separate federal courts in Illinois, Wisconsin and Florida.  Motions to stay were filed, briefed and decided in each of the federal cases.  Motions to dismiss were filed, briefed and decided in all four cases.  Motions for summary judgment were filed, briefed and decided in all four cases.  Multiple courts heard motions on discovery in pretrial issues.  At least two emergency applications were made to the Court of Chancery for an expedited decision to help avoid a "multi-jurisdictional train wreck."

The prevailing parties sought $3.2 million in fees and costs for the successful effort in the Court of Chancery, as well as in the three separate federal cases.  After the Court of Chancery decision in May of 2012, the parties dismissed the three federal cases by stipulation.  [By comparison, a separate decision from the Court of Chancery also within the last few days, awarded fees based on the bad faith exception to the American Rule, under different factual circumstances, as summarized here.]

Analysis

When parties by agreement have consented to a shifting of fees that requires a non-prevailing party to reimburse the prevailing party for reasonable fees and costs in connection with enforcement of an agreement, the focus of the Court is:  "principally on enforcing the parties' agreement to make the prevailing party whole."  Prior decisions of the Court of Chancery have generally upheld such a provision entitling the prevailing party to fees, and the Court has found that such a provision:  "will usually be applied in an all-or-nothing manner."

Explanation of the Difference between "Good Faith" and "Fair Dealing" as Components of Fiduciary Duty, as Compared to the Implied Covenant of Good Faith and Fair Dealing  

In the course of explaining why it would award attorneys' fees under the fee-shifting provision of the LLC Agreements, the Court was called upon to discuss the basis of a claim for a breach of the implied covenant of good faith and fair dealing-and to compare the "good faith component" of that covenant, and the "fair dealing component" of such a claim, with the fair dealing concept under the fiduciary duty law of Delaware, and the good faith aspect of the fiduciary duty law of Delaware, and how those concepts differ.  See Slip op. at 5-7.

The Court emphasized that fair dealing for purposes of the good faith and fair dealing covenant imposed on every contract in Delaware as an implied covenant is, unlike its fiduciary duty namesake under the entire fairness doctrine, a commitment to deal consistently with the terms of the agreement of the parties and the agreement's purpose.

Likewise, the good faith component of the covenant of good faith and fair dealing does not envision loyalty to the other party to the contract, but rather:  "Faithfulness to the scope, purpose, and terms of the parties' contract.  Both necessarily turn on the contract itself and what the parties would have agreed upon had the issue arisen when they were bargaining originally."

In connection with its analysis, the Court also reviewed basic contract principles including Delaware's recognition of "efficient breach" of contract and that the:  "traditional goal of the law of contract remedies has not been compulsion of the promissor to perform as promised but compensation of the promissee for the loss resulting from the breach.  'Willful' breaches have not been distinguished from other breaches . . ."  See footnote 6.  Moreover, the Court emphasized that proving a breach of contract claim does not depend on the breaching party's mental state.

The Court also emphasized that proof of fraud violates the implied covenant not because breach of the implied covenant requires fraud, but because "no fraud" is an implied contractual term.  That is, the law implies that the parties never would have agreed to fraud as a term of an agreement.

The Court also recited the four situations when an at-will employee can claim a violation of the implied covenant.  See footnote 8.

In discussing the way that the concept of fraud interfaces with a claim for breach of the implied covenant, the Court explained that proving fraud is simply one way of establishing a breach of the implied covenant of good faith and fair dealing, but not the only way.  This is so, because proving fraud represents a specific application of the general implied covenant test; that is:  "What would the parties have agreed to when bargaining initially?"  Specifically, they would have agreed that fraud would not be allowed.  The Court explained that the implied covenant of good faith and fair dealing is, in essence, a contract claim and not a tort claim.

The Court also cited to other decisions to support the view that even when separate actions and separate lawsuits were pending in different jurisdictions, if they were related to one essential dispute, then a fee award would be entirely proper that included those separate actions which were deemed to be one continuous piece of litigation, and the net result of all the actions resulted in the settlement of the differences of the parties.

Reasonableness of the Fee Award

The Court described the standards that would be used to determine the reasonableness of fee awards based in part on Rule 1.5(a) of the Delaware Lawyers' Rules of Professional Conduct. As applied to the facts of this case, the Court reasoned that simply because the rates that one firm charges are higher does not make them unreasonable.  In addition, the fact that an attorney for one party spent more than twice as many hours for the same task does not make that number of hours unreasonable.  For example, the Court referred to the attorney for the prevailing party spending 67 hours to prepare for an expert deposition, and that at trial the prevailing attorney "destroyed" the credibility of the opposing party's expert.  The losing party, by contrast, was unshaken on cross examination and that party's attorney spent less than half the number of hours (31) preparing for the expert deposition.

Practical Perspective

One of the many lessons that can be learned from this opinion, is that Delaware courts do not often second guess the amount of fees charged by attorneys in situations where the fees are awarded based on a fee shifting provision in an agreement, such as this case, or when they were awarded pursuant to the bad faith exception to the American Rule.  See, e.g., Auriga case highlighted here, and the very recent Coughlin case, highlighted here.

Read more Delaware business litigation case summaries and commentary on Delaware Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X. Pileggi, of Eckert Seamans.

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