Editor

Byeongsook Seo is a member of Snell & Wilmer L.L.P.’s commercial litigation practice. He represents clients in handling complex and, often, heated disputes related to failed business ventures and disputes among business partners, executives, owners, and directors. Byeongsook is a member and Vice-Chair of the Business Divorce Subcommittee of the ABA Business Law Section Committee on Business and Corporate Litigation. His honors include Colorado Super Lawyers, Litigation Counsel of America Fellow, and The Best Lawyers in America. Byeongsook graduated from the United States Air Force Academy and obtained his law degree from the University of Denver, Sturm College of Law.

Contributors

Melissa Donimirski

Melissa N. Donimirski is counsel with Stevens & Lee in Wilmington, Delaware. She concentrates her practice in the area of corporate and commercial litigation in the Delaware Court of Chancery and has been involved with many of the leading business divorce cases in that Court. Melissa is a Co-Vice-Chair of the Business Divorce Subcommittee of the ABA Business Law Section, Business and Corporate Litigation Committee. She received her undergraduate degree from Bryn Mawr College and her law degree from the Delaware Law School of Widener University. Melissa has also co-edited and co-authored a treatise on business divorce, Litigating the Business Divorce, which is published by Bloomberg BNA.

Janel M. Dressen

Janel Dressen has over twenty-three years of experience as a business trial lawyer and is the CEO of her business litigation boutique law firm in Minneapolis, Minnesota. Ms. Dressen’s clients, co-workers, colleagues and competitors remark that she is a tenacious business litigator who will advocate tirelessly and creatively to resolve her client’s business disputes. She has been named as one of the “Top 50 Women Minnesota Super Lawyers” since 2019. Janel has an impressive list of significant victories for her clients, both plaintiffs and defendants. While she represents business owners and businesses in all types of complex business disputes, her “sweet spot” involves shareholder, ownership, fiduciary duty, owner/executive employment and business valuation disputes, i.e., “business divorces” for closely-held and private businesses, business owners and executives.

Jennifer Hadley Catero

Jennifer Hadley Catero is based in Snell & Wilmer’s Phoenix office where she serves as Co-Chair of the firm’s Corporate Governance Litigation Group. Jennifer handles complex commercial litigation with an emphasis on corporate governance litigation, banking, consumer financial services and securities litigation, shareholder derivative litigation, D&O litigation, class actions and internal investigations. Jennifer also advises clients on compliance issues regarding consumer financial products and services. Jennifer has been named one of the top 100 Lawyers in Arizona and repeatedly named to The Best Lawyers in America for Commercial Litigation.

John Levitske

John Levitske, CPA/ABV/CFF/CGMA, ASA, CFA, MCFLC, CIRA, MBA, JD, is a Partner in the Forensic Accounting and Commercial Damages practice of HKA and he provides business valuation, forensic accounting, and economic damages expert services. He is a Co-Chair of the Investigation, Enforcement & White-Collar Subcommittee of the ABA Business Law Section, a Member at Large of the Membership Board of the Business Law Section; and past Chair of the Dispute Resolution Committee of the Business Law Section. In addition, John served as a Member at Large of the Standing Committee on Audit of the American Bar Association entity.

Tyson Prisbrey

Tyson Prisbrey is based in Snell & Wilmer L.L.P.’s Salt Lake City, Utah office and is a member of the firm’s commercial litigation practice group. He focuses his practice in complex commercial and corporate litigation, including litigation in corporate governance and general contractual disputes. He has experience advising public and private companies in disputes stemming from mergers and acquisitions, corporate financing, corporate control, and alternative entity dissolutions. Prior to joining Snell & Wilmer, Tyson gained significant experience in representing clients in the Delaware Court of Chancery litigating commercial and corporate governance matters.

§ 3.1. Introduction

The term “business divorce” includes disputes that cause business partners/investors to end their partnership, situations that require owners to separate, or circumstances where a business partner/investor wishes to change the composition of management. This chapter provides summaries of developments related to such business divorce matters that arose from October 1, 2022, to September 30, 2023, from mostly eight states.

Contributors to this chapter used their best judgment in selecting business divorce cases to summarize. We then organized the summaries, first, by subject matter, then, by jurisdiction. This chapter, however, is not meant to be comprehensive.

The reader should be mindful of how any case in this chapter is cited. Some jurisdictions prohibit courts and parties from citing or relying on opinions not certified for publication or ordered published. To the extent unpublished cases are summarized, the reader should always consult local rules and authority to ensure the unpublished cases can serve as relevant and permissible precedent. The reader should also be mindful that this chapter provides a “snapshot” of developments within a single year. Any development in a particular year covered by this chapter may be altered by legislation or cases in subsequent years.

We hope this chapter assists the reader in understanding recent developments in business divorces.

§ 3.2. Access to Books and Records

§ 3.2.1. California

Farnum v. Iris Biotechnologies Inc., 86 Cal. App.5th 602 (2022). The court affirmed a trial court’s refusal to award plaintiff his reasonable expenses related to his demand for the inspection of defendant company’s records.

The plaintiff was a member of the company’s board of directors and owned approximately 8 percent of the company’s stock. Plaintiff requested an inspection of records related to the company’s acquisition of a subsidiary and financial documents following the acquisition. A month later, plaintiff, in his capacity as a member of the board and shareholder, petitioned for a writ of mandate directing the company to permit him to inspect and copy all corporate records. Before the hearing on the petition, the plaintiff was voted off the company’s board. The trial court denied the petition because plaintiff no longer had standing to inspect records due to his ejection from the board and because the records request was overly board and lacked a statement of purpose reasonably related to his interests as a shareholder. A few weeks later, plaintiff served a set of 31 inspection requests on the company, seeking to inspect a wide range of documents from both that company and its subsidiary. The company responded, indicating that certain documents, such as shareholder and board minutes, were not maintained and could not be produced and that audited financial statements from 2012 to 2014 had already been provided to plaintiff. The company indicated that the remaining requests were not permitted under California law and therefore no responsive documents would be produced. Plaintiff filed another petition for writ of mandate seeking to compel inspection and copying of corporate records in his capacity as a shareholder. The trial court denied both the petition and the associated request for an award of attorney fees. On appeal the court reversed part of the denial related to eight of plaintiff’s 31 document requests. As to those eight categories, plaintiff only had a right to inspect the records for four categories but only for the year 2014. For two categories relating to two separate corporate lawsuits plaintiff’s inspection rights were subject to the company’s right to withhold attorney-client privileged documents. In relation to the final two requests, the court gave plaintiff the right to inspect all “accounting records regarding the costs and professional fees incurred by [company] in creating [its subsidiary].” The court ruled that the trial court may award an amount to reimburse plaintiff on remand for his expenses incurred before the trial court and appeal. On remand, the trail court determined that “in light of all the relevant circumstances of this case, the court cannot say there is a showing that on the whole, [the company] acted without justification in refusing [plaintiff’s] inspection demands,” and denied plaintiff’s request for expenses. Plaintiff timely appealed.

Corporate Code § 1604 allows courts to award reasonable expenses to plaintiffs who successfully enforce shareholder inspection rights if a corporation’s failure to comply was without justification. “Without justification” was not defined in section 1604. The court ruled that if there was “substantial justification” to refuse to produce documents, which means that “a justification … is well grounded in both law and fact,” a court need not award expenses to successful plaintiffs. Because the prior appeal established that a majority of plaintiff’s records requests lacked merit, the court determined the trial court did not abuse its discretion in rejecting plaintiff’s expense request and affirmed the trial court’s decision.

§ 3.3. Business Judgment Rule

§ 3.3.1. Minnesota

Schneider v. Schmidt, No. A22-1305, 2023 WL 4861787 (Minn. Ct. App. July 31, 2023), review denied (Nov. 14, 2023). Appellant, minority owner of an LLC, brought suit in her individual capacity against the LLC and its majority owner following the LLC’s liquidation. The district court determined that all of appellant’s claims, other than a claim for failure to comply with notice requirements, were derivative claims. Appellant subsequently made a demand on the LLC pursuant to the derivative claims, and the LLC appointed a special litigation committee (SLC). The SLC declined to pursue the derivative claims because it determined that doing so was not in the LLC’s best interest. The district court granted summary judgment in appellant’s favor as to the failure to comply with notice requirements, finding that appellant had not been given proper notice regarding dissenter’s rights prior to the sale of the LLC’s assets. Damages were later determined at trial.

On appeal, the LLC argued that the district court should not have awarded damages, but instead deferred to the SLC’s determination of how the LLC should treat its own debts and obligations under the business judgment rule. The Minnesota Court of Appeals affirmed. The Court held that “Courts only defer to an SLC’s decision, under the business judgment rule, on a derivative claim,” and that an SLC must analyze each specific claim to earn deference under the rule. Because appellant’s claim as to failure to comply with notice requirements was a direct claim, and the SLC did not investigate or analyze that claim, there was no deference owed to the SLC under the business judgment rule.

For further discussion of Schneider v. Schmidt, see also sections herein regarding jurisdiction, venue, and standing.

§ 3.3.2. New Jersey

Care One, LLC v. Straus, No. A-1215-20, 2022 WL 17072371 (N.J. Super. Ct. App. Div. Nov. 18, 2022), cert. denied, 255 N.J. 379, 301 A.3d 1281 (2023), and cert. denied, 255 N.J. 387, 301 A.3d 1287 (2023), and cert. denied, 255 N.J. 394, 301 A.3d 1290 (2023). The Court held that proposed third-party claims for aiding and abetting an alleged breach of fiduciary duty could not be brought under New Jersey law. Because the fiduciary duties arose under an LLC Agreement governed by Delaware law, New Jersey law was not proper choice of law to apply in determining whether that claim was time-barred. Civil conspiracy claims were similarly barred because civil conspiracy is not an independent claim and must instead be attached to the underlying wrong. Here, the underlying wrong was associated with the Delaware LLC Agreement. Therefore, both claims were barred as being governed by the Agreement’s choice of Delaware law, rather than New Jersey law.

§ 3.4. Dissolution

§ 3.4.1. Utah

Ellis v. La Val Enterprises Ltd., 523 P.3d 208 (Utah App. Dec. 8, 2022). The court of appeals found that that selling the partnership’s property—a family farm—was not effectively a dissolution because a stated purpose of the partnership was buying and selling real property. The partnership was formed for the management of a family farm with the parents as the general partners and the children as the limited partners. When the father died, and with the mother’s health declining, one of the children, who was a limited partner, entered into an agreement to purchase the partnership’s property. The other siblings sued, claiming that the mother, as general partner, did not have the authority to sell the property without the consent of all limited partners because selling the farm was effectively dissolving the partnership, and the partnership agreement prevents the general partner from undertaking any act which would make it impossible to carry on the ordinary business of the partnership. The court disagreed, finding that the stated purpose of the partnership expressly included buying, holding, and selling real property. If the property was sold, the proceeds would go to the partnership, and it would be no different than buying and selling different assets. Selling the farm was not an act that dissolved or liquidated the partnership because of the express purpose of the partnership.

§ 3.5. Jurisdiction, Venue, and Standing

§ 3.5.1. California

Kandter v. Reed, Cal. App.5^th 191 (2023). Shareholders brought derivative action against board of directors and officers of California corporation, and against corporation as nominal defendant, relating to leak from corporation’s underground natural gas storage facility, and alleging that directors and officers breached their fiduciary duties by acting recklessly or with gross negligence in failing to take steps for adequate inspection, documentation, monitoring, and risk management. Corporations Code § 800(b)(2) requires a shareholder bringing a derivative action to allege “with particularity” the “efforts [made] to secure from the board such action as [the shareholder] desires, or the reasons for not making such effort ….” Plaintiffs did not serve a demand on the board prior to filing suit. Instead, they alleged that it would be futile to do so. The trial court sustained defendants’ demurrer with leave to amend, finding that plaintiffs failed to sufficiently allege that serving a demand on the board would have been futile. Plaintiffs amended the complaint, but the trial court again determined plaintiffs failed to sufficiently allege demand futility. At a subsequent hearing, plaintiffs indicated they would not seek leave to amend. The trial court issued a dismissal from which plaintiffs timely appealed.

In reviewing the allegations to support demand futility, courts must be able to determine on a director-by-director basis whether each possesses independence or disinterest such that he or she may fairly evaluate the challenged transaction. “Where ‘the board that would be considering the demand did not make a business decision which is being challenged in the derivative suit’ (Rales v. Blasband (Del. 1993) 634 A.2d 927, 933–934), the Rales test asks whether ‘the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand. If the derivative plaintiff satisfies this burden, then demand will be excused as futile’.” (Citation omitted.) As alleged, and contrary to plaintiffs’ allegations that there was no reporting mechanism in place for safety issues regarding gas storage, the board formed a committee that provided regular reports to the board, and whose purpose included, among other things, monitoring storage infrastructure for safety. The board received annual risk management reports. As such, this board did not make a business decision that is challenged by plaintiffs and the Rales test applied. Here, plaintiffs were found not to have alleged particularized facts supporting their theory of liability, and thus have failed to plead demand futility as required under section 800(b)(2). The dismissal was affirmed.

§ 3.5.2. Colorado

Electro-Mechanical Products, Inc. v. Alan Lupton Ass’s., Inc., 663 F. Supp.3d 1227 (D. Colo. 2023). Closely held corporation and shareholders filed suit against one minority shareholder and the consulting company for which he was principal shareholder, officer, and director, claiming breach of fiduciary duty and breach of the duty of loyalty by failing to renegotiate a contract, in which consulting company agreed to provide its best efforts to promote closely-held corporation’s sales of its services and products, and by failing to vote in favor of sale of closely held corporation to potential buyer. The potential buyer conditioned the sale on the termination of the consulting agreement. Minority shareholder moved to dismiss for failure to state claim and for lack of standing.

Minority shareholder argued that plaintiffs’ claims against him should be dismissed because he did not owe fiduciary duties to the closely held corporation or its other shareholders because he was only an 8.9 percent shareholder of a closely held corporation. No Colorado case has directly addressed whether minority shareholders in a closely held corporation owe fiduciary duties. The court predicted that the Colorado Supreme Court would not find that a minority shareholder who did not exercise control over the corporation and who is alleged to have acted in his own contractual interests to the detriment of other shareholders owed fiduciary duties to other shareholders. Here, the complaint did not allege that the minority shareholder had the ability to control the closely held corporation. It only alleged that the minority shareholder was able to prevent the sale to potential buyer because of a condition imposed by the potential buyer, not due to any control the minority shareholder may have had. Moreover, the fact that minority shareholder was the principal stockholder, officer, and director of the consulting company did not create a fiduciary duty, or a conflict of interest, requiring him to renegotiate the terms of the consulting contract or vote in favor of the sale. The minority shareholder had no fiduciary duty to act against his economic self-interest given that there are no allegations that he controlled the board of directors or controlled the other shareholders such that he could direct the business of the corporation. The Court granted the motion to dismiss.

Li v. Colo. Reg. Cntr. I, LLC, 2022 WL 5320135 (D. Colo. Oct. 7, 2022). Two sets of foreign investors asserted several actions against a Colorado LLLP, its general partner and others related to the partnership investments. The Colorado LLLP served as an EB-5 Regional Center, an entity approved by the federal government to promote economic growth by encouraging investments by foreign persons in exchange for permanent resident cards (green cards). As described in Liu v. SEC, 140 S. Ct. 1936, 1941 (2020), “[t]he EB-5 Program, administered by the U.S. Citizenship and Immigration Services, permits noncitizens to apply for permanent residence in the United States by investing in approved commercial enterprises that are based on proposals for promoting economic growth.” Although the lawsuits involved federal and state securities and common law claims, the focus of this summary relates to the breach of fiduciary duty claims against the general partner.

The first set of foreign investors brought a derivative-breach-of-fiduciary-duty claim against the general partner. They alleged that the general partner failed to adequately ensure that a loan the partnership issued was sufficiently collateralized and that the general partner failed to demand complete repayment of the loan and by providing misleading information about it. The second set of foreign investors separately brought both direct and derivative breach-of-fiduciary-duty claims against the general partner, alleging that the general partner provided them with misleading marketing materials and took advantage of the investors lack of English proficiency to convince them to invest in the limited partnership. These claims were dismissed under Colorado’s economic loss rule and the contemporaneous ownership rule, under Federal Rule of Civil Procedure 23.1(b). Under the economic loss rule, if a plaintiff alleges only economic loss from the breach of an express or implied contractual duty, the plaintiff may not assert a tort claim for such a breach absent an independent duty of care under tort law. The contemporaneous ownership rule provides that a plaintiff bringing a derivative action must allege that he or she “was a shareholder or member at the time of the transaction complained of.” Fed. R. Civ. P. 23.1(b). Under Colorado’s limited partnership statue, “member” means a general partner or a limited partner. The complaint was deemed not subject to the economic loss rule because it alleged that the fiduciary relationship arose from contract; so, the court determined that they were contract claims and not subject to the economic loss rule. But to the extent their claims were based on pre-investment misrepresentations, they were dismissed because the alleged malfeasance occurred before the investors became “members” of the partnership in violation of the contemporaneous ownership rule. The second set of investors, however, failed to allege a contractual breach of fiduciary duty claim without establishing an independent source of fiduciary duty and was subject to the economic loss rule.

Weinreis Ethanol, LLC v. Kramer, 2022 WL 17986754 (D. Colo. Dec. 29, 2022). Plaintiffs, certain members and investors of an LLC that produced ethanol and distilled wet grain (Company), sued two of the four managers of the Company’s board of managers (Kramer and Bornhoft) and who also founded and owned a separate LLC that managed the Company (Management Company) pursuant a management agreement with the Company along with the general manager of the Company along with the Management Company. The crux of this suit is that Kramer and Bornhoft, individually and through the Management Company, improperly diverted Company profits that otherwise would have been distributed to plaintiffs. Kramer, in collaboration with Bornhoft, were alleged to have taken Company funds for Kramer’s “own use and/or used such funds to pay for or reimburse dues, fees, marketing and advertising, and sponsorship expenses for … personal race car teams.” Defendants allegedly caused the Company to pay “inflated, over-market prices” for enzymes and other products to produce ethanol from various suppliers who sponsored one of Kramer’s personal racing teams. Plaintiffs asserted: breach of operating agreement (against Kramer and Bornhoft); intentional interference with existing and prospective business relations (against the Management Company); breach of fiduciary duties (against Kramer and Bornhoft); aiding and abetting breach of fiduciary duties (against Bornhoft and the Management Company); civil theft (against Kramer and Bornhoft); and a claim for access to books and records. Kramer, Bornhoft, and Management Company moved to dismiss all but the records claim. Among other arguments, defendants argue that plaintiffs had no standing to pursue damages because the alleged harms were suffered by Company and must be brought as a derivative action.

The court rejected this dismissal argument. Colorado precedent (Tisch v. Tisch, 439 P.3d 89 (Colo. App. 2019)) addressing a similar standing issue with a corporation was applied here. Tisch concluded that the minority shareholders had “a distinct, proprietary interest in their share of … undeclared distributions that allowed them to bring an individual claim against [a majority shareholder] for civil theft.” In this case, by alleging that defendants have diverted profits that should have been distributions, plaintiffs have standing to proceed on their direct claims for damages.

§ 3.5.3. Delaware

Central Am. Mezzanine Infrastructure Fund L.P. v. Lopez, C.A. No. 2022-0408-KSJM (Del. Ch. Dec. 14, 2022) (ORDER). The Court of Chancery refused to dismiss or stay an action brought to determine the proper managing members of a LLC based on forum non conveniens grounds, even where two other first-filed lawsuits were being litigated over substantially similar issues in both Belgium and Mexico. The Court held that, although the other lawsuits unquestionably were first-filed and related to the same subject matter as the subject lawsuit, a stay or dismissal was inappropriate because the Belgian court was looking to the Delaware court to decide the question of the proper management of the company and the Court of Chancery is the proper arbiter of the fate of Delaware entities.

In re P3 Health Group Holdings, LLC, 285 A.3d 143 (Del. Ch. 2022). The Court of Chancery held that it could properly exercise personal jurisdiction over a defendant as a de facto manager of the subject company, even though defendant was not a formal manager and held no official role with the company. The Court, however, held that it could properly exercise jurisdiction over defendant where he made decisions on behalf of the company, directed management to take certain actions, instructed the company’s advisors to perform work without authorization from management, berated the company’s outside counsel for not running documents by him before sending them out, and enjoyed access to information that even formal managers of the company did not have.

§ 3.5.4. Minnesota

Schneider v. Schmidt, No. A22-1305, 2023 WL 4861787 (Minn. Ct. App. July 31, 2023), review denied (Nov. 14, 2023). Appellant, the minority owner of an LLC, brought suit in her individual capacity against the LLC and its majority owner after the LLC’s liquidation. The appellant alleged unfairly prejudicial conduct, breach of fiduciary duty, failure to comply with notice requirements, and breach of both the operating agreement and the member-control agreement. The district court found that the claims for unfairly prejudicial conduct, breach of fiduciary duty, and breach of the member-control agreement were derivative claims and granted summary judgment in favor of the majority owner-respondent.

On appeal, the Minnesota Court of Appeals found that the claims for unfairly prejudicial conduct and breach of fiduciary duty were direct claims because appellant alleged direct and personal harm because the majority owner-respondent made unauthorized payments with the proceeds of the LLC’s asset sale, using those proceeds to pay a promissory note and loan agreement that the respondent was personally liable for. As to the breach of the member-control agreement, the Court of Appeals found that this was also a direct claim because the member-control agreement was an agreement between the LLC’s members. Because the LLC was not a party to the member-control agreement, it was not harmed by the breaches of the agreement. Appellant was personally harmed because the member-control agreement specified the rights and obligations of members thereunder, including provisions as to liquidation of the LLC and the distribution of proceeds from that liquidation. The harm under these three claims accrued directly to the appellant, rather than the LLC, thus making them appropriate direct claims.

For further discussion of Schneider v. Schmidt, see also sections herein regarding the business judgment rule.

§ 3.5.5. Texas

Bay Area RV Parks, L.L.C. v. WGB RV Parks, LLC, 2023 WL 2248738 (Tex. Ct. App. Feb. 28, 2023). In a dispute between business partners, the Court of Appeals drew a distinction between allocations and distributions in interpreting an LLC’s operating agreement, finding that that a member was not entitled to preferential distributions upon the sale of the company’s assets. The business, which operated three RV parks, brought in plaintiff as a new member, who purchased 25 percent of the membership interest for $500,000. The membership then executed a new operating agreement, which included a provision whereby upon the sale of the business’s property, the profits of the sale “shall be allocated first to return the unreturned capital contribution of a member.” The company sold its real property, and the 25 percent interest holder demanded preferential distribution to repay its $500,000 capital contribution. The court of appeals disagreed with the trial court, finding that the provision at issue was concerning allocation, not distribution. Allocation refers to how profits and losses are divided among the company’s members, typically for tax purposes, while distributions refer to a member’s receipt of money from the company. The court found that the 25 percent interest holder was not entitled to the first $500,000 of the profits from the sale; rather, it was entitled to 25 percent of whatever distributions were made by the company during the winding up.

§ 3.6. Claims and Issues in Business Divorce Cases

§ 3.6.1. Alternative Entities

§ 3.6.1.1. Delaware

Central Am. Mezzanine Infrastructure Fund L.P. v. Lopez, C.A. No. 2022-0408-KSJM (Del. Ch. Dec. 14, 2022) (ORDER). The Court of Chancery determined that an LLC Agreement that provided for the removal of the LLC’s managing member at any time for any reason by Plaintiff was unambiguous. The Court accordingly determined that Plaintiff’s removal of Defendant under the LLC Agreement was effective. The members of the LLC, an investment fund and an operator of port terminals, began to do business together whereby the investment fund provided financing to port terminals that were in severe financial distress in exchange for a membership interest and provisions in the LLC Agreement permitting the investment fund to remove defendant as managing member at any time for any reason, as well as a call option providing the right to purchase 90–95 percent of the subject company’s equity for $10,000.

Defendant understood those rights to be extant only to the extent that Plaintiff’s loans were outstanding. Once the payment of the loans was complete, however, Plaintiff removed Defendant as managing member and invoked the call option. The Court of Chancery determined that, because the LLC Agreement did not make the removal right or the call option contingent on any occurrence, including the payment of the loans, such rights were absolute.

§ 3.6.1.2. Texas

Bay Area RV Parks, L.L.C. v. WGB RV Parks, LLC, 2023 WL 2248738 (Tex. Ct. App. Feb. 28, 2023). In a dispute between business partners, the Court of Appeals drew a distinction between allocations and distributions in interpreting an LLC’s operating agreement, finding that that a member was not entitled to preferential distributions upon the sale of the company’s assets. The business, which operated three RV parks, brought in plaintiff as a new member, who purchased 25 percent of the membership interest for $500,000. The membership then executed a new operating agreement, which included a provision whereby upon the sale of the business’s property, the profits of the sale “shall be allocated first to return the unreturned capital contribution of a member.” The company sold its real property, and the 25 percent interest holder demanded preferential distribution to repay its $500,000 capital contribution. The court of appeals disagreed with the trial court, finding that the provision at issue was concerning allocation, not distribution. Allocation refers to how profits and losses are divided among the company’s members, typically for tax purposes, while distributions refer to a member’s receipt of money from the company. The court found that the 25 percent interest holder was not entitled to the first $500,000 of the profits from the sale; rather, it was entitled to 25 percent of whatever distributions were made by the company during the winding up.

§ 3.6.2. Breach of Fiduciary Duty

§ 3.6.2.1. Colorado

Li v. Colo. Reg. Cntr. I, LLC, 2022 WL 5320135 (D. Colo. Oct. 7, 2022). Two sets of foreign investors asserted several actions against a Colorado LLLP, its general partner and others related to the partnership investments. The Colorado LLLP served as an EB-5 Regional Center, an entity approved by the federal government to promote economic growth by encouraging investments by foreign persons in exchange for permanent resident cards (green cards). As described in Liu v. SEC, 140 S. Ct. 1936, 1941 (2020), “[t]he EB-5 Program, administered by the U.S. Citizenship and Immigration Services, permits noncitizens to apply for permanent residence in the United States by investing in approved commercial enterprises that are based on proposals for promoting economic growth.” Although the lawsuits involved federal and state securities and common law claims, the focus of this summary relates to the breach of fiduciary duty claims against the general partner.

The first set of foreign investors brought a derivative-breach-of-fiduciary-duty claim against the general partner. They alleged that the general partner failed to adequately ensure that a loan the partnership issued was sufficiently collateralized and that the general partner failed to demand complete repayment of the loan and by providing misleading information about it. The second set of foreign investors separately brought both direct and derivative breach-of-fiduciary-duty claims against the general partner, alleging that the general partner provided them with misleading marketing materials and took advantage of the investors lack of English proficiency to convince them to invest in the limited partnership. These claims were dismissed under Colorado’s economic loss rule and the contemporaneous ownership rule, under Federal Rule of Civil Procedure 23.1(b). Under the economic loss rule, if a plaintiff alleges only economic loss from the breach of an express or implied contractual duty, the plaintiff may not assert a tort claim for such a breach absent an independent duty of care under tort law. The contemporaneous ownership rule provides that a plaintiff bringing a derivative action must allege that he or she “was a shareholder or member at the time of the transaction complained of.” Fed. R. Civ. P. 23.1(b). Under Colorado’s limited partnership statue, “member” means a general partner or a limited partner. The complaint was deemed not subject to the economic loss rule because it alleged that the fiduciary relationship arose from contract; so, the court determined that they were contract claims and not subject to the economic loss rule. But to the extent their claims were based on pre-investment misrepresentations, they were dismissed because the alleged malfeasance occurred before the investors became “members” of the partnership in violation of the contemporaneous ownership rule. The second set of investors, however, failed to allege a contractual breach of fiduciary duty claim without establishing an independent source of fiduciary duty and was subject to the economic loss rule.

Weinreis Ethanol, LLC v. Kramer, 2022 WL 17986754 (D. Colo. Dec. 29, 2022). Plaintiffs, certain members and investors of an LLC that produced ethanol and distilled wet grain (Company), sued two of the four managers of the Company’s board of managers (Kramer and Bornhoft) and who also founded and owned a separate LLC that managed the Company (Management Company) pursuant a management agreement with the Company along with the general manager of the Company along with the Management Company. The crux of this suit is that Kramer and Bornhoft, individually and through the Management Company, improperly diverted Company profits that otherwise would have been distributed to plaintiffs. Kramer, in collaboration with Bornhoft, was alleged to have taken Company funds for Kramer’s “own use and/or used such funds to pay for or reimburse dues, fees, marketing and advertising, and sponsorship expenses for … personal race car teams.” Defendants allegedly caused the Company to pay “inflated, over-market prices” for enzymes and other products to produce ethanol from various suppliers who sponsored one of Kramer’s personal racing teams. Plaintiffs asserted several claims including breach of fiduciary duties (against Kramer and Bornhoft) and aiding and abetting breach of fiduciary duties (against Bornhoft and the Management Company). Defendants moved to dismiss several asserted claims, including breach of fiduciary duty and aiding and abetting breach of fiduciary duty. Among other arguments, defendants argued that plaintiffs’ breach of fiduciary duties and aiding and abetting claims fail because all duties not expressly set forth in the Company operating agreement have been disclaimed, so no fiduciary duties are owed.

The operating agreement explicitly described the duties and obligations of Company managers to include: conducting the Company’s business and operations, and taking actions “necessary or appropriate (i) for the continuation of the Company’s valid existence as a limited liability company … and (ii) for the accomplishment of the Company’s purposes, including the acquisition, development, maintenance, preservation, and operation of Property in accordance with the provisions of this Agreement and applicable laws and regulations.” The operating agreement stated that such duties were to be discharged “in good faith,” and that managers “shall be under no other duty (fiduciary or otherwise) to the Company or the Members to conduct the affairs of the Company in a particular manner.” Since Colorado law allows for the express disclaimer of duties in an operating agreement, including fiduciary duties, the Court agreed with defendants that any fiduciary duties were disclaims. Without a fiduciary duty, the breach of fiduciary duty and aiding and abetting claims could not survive and were dismissed.

§ 3.6.2.2. Texas

Peek v. Mayfield, 2023 WL 5967886, at *1 (Tex. App. Sept. 14, 2023). In a trust dispute, the trial court found that the trustee breached his fiduciary duties to the trust due to self-dealing and undue influence and appointed a receiver to replace the trustee. Specifically, the trial court found that the trustee unduly influenced his mother to assign certain assets away from the trust. On appeal, the trustee argued that there was insufficient evidence for the trial court to find that he breached his fiduciary duties to the trust. The court pointed to the evidence presented at trial that the trustee transferred interest in certain trust assets to the trustee’s own trust. This self-dealing transaction gave rise to an unfairness presumption, and the trustee had the burden to prove otherwise. The record did not reflect any evidence addressing this presumption or showing that the trustee transferred assets to his own trust in the best interest of the trust’s beneficiaries.

§ 3.6.3. Civil Theft

§ 3.6.3.1. Colorado

Weinreis Ethanol, LLC v. Kramer, 2022 WL 17986754 (D. Colo. Dec. 29, 2022). Plaintiffs, certain members and investors of an LLC that produced ethanol and distilled wet grain (Company), sued two of the four managers of the Company’s board of managers (Kramer and Bornhoft) and who also founded and owned a separate LLC that managed the Company (Management Company) pursuant a management agreement with the Company along with the general manager of the Company along with the Management Company. The crux of this suit is that Kramer and Bornhoft, individually and through the Management Company, improperly diverted Company profits that otherwise would have been distributed to plaintiffs. Kramer, in collaboration with Bornhoft, was alleged to have taken Company funds for Kramer’s “own use and/or used such funds to pay for or reimburse dues, fees, marketing and advertising, and sponsorship expenses for … personal race car teams.” Defendants allegedly caused the Company to pay “inflated, over-market prices” for enzymes and other products to produce ethanol from various suppliers who sponsored one of Kramer’s personal racing teams. Plaintiffs asserted several claims, including civil theft under C.R.S. § 18-4-405 (against Kramer and Bornhoft). Defendants moved to dismiss several asserted claims, including civil theft. Among other arguments, defendants argue that the civil theft claim fails because plaintiffs do not have a proprietary interest in undeclared distributions, and because plaintiffs have failed to plead that Kramer or Bornhoft took property by theft, robbery, or burglary.

The court rejected these dismissal arguments. In Tisch v. Tisch, 439 P.3d 89 (Colo. App. 2019), a Colorado appellate court ruled that the minority shareholders had “a distinct, proprietary interest in their share of … undeclared distributions that allowed them to bring an individual claim against [a majority shareholder] for civil theft.” And, since the civil theft statute does not define theft, robbery, or burglary, these terms are understood within the broader criminal statutory framework. So “[a] person commits theft when he or she knowingly obtains, retains, or exercises control over anything of value of another without authorization or by threat or deception.” C.R.S. § 18-4-401(1). By alleging that defendants have diverted profits that should have been distributions, plaintiffs have alleged a civil theft claim.

§ 3.6.4. Fraud

§ 3.6.4.1. Arizona

Ferneau v. Wilder, 256 Ariz. 68, 535 P.3d 554 (Ariz. Ct. App. 2023). This action involved a contentious dispute between co-directors of a corporation called Total Accountability Systems I, Inc. (“TAS”), an Arizona non-profit corporation that held a certificate to operate a medical marijuana dispensary. Johnny Ferneau unsuccessfully appealed from the trial court’s order removing him as a director of TAS and sanctioning him, for discovery violations, by dismissing his complaint against his co-director Kristine Wilder. The court of appeals concluded that the trial court did not err in removing Mr. Ferneau as a director of TAS because he engaged in “fraudulent conduct” under A.R.S. § 10–3810(A), which, despite Mr. Ferneau’s assertion, includes both actual and constructive fraud. In pertinent part, Mr. Ferneau alleged that Ms. Wilder denied him access to TAS’s books and records, including access to TAS’s email account (“Account”). Ms. Wilder countered that she did not have access to the Account, rather she requested access from Mr. Ferneau, which he refused to provide, and she informed the trial court of her concern that Mr. Ferneau would destroy the emails in TAS’s Account. At a pretrial conference, the trial court reminded the parties of their duty to preserve relevant evidence. Litigation ensued for years, and the trial court later found that Mr. Ferneau had “intentionally deleted the contents of the Account,” with TAS losing four years’ worth of business emails. The trial court found, and the appellate court affirmed, that this constituted fraudulent activity against TAS, a corporation toward which Mr. Ferneau owed a fiduciary duty. Accordingly, the court found, and the appellate court affirmed, that the removal of Mr. Ferneau as a director of TAS, pursuant to A.R.S. § 10–3810(A), was in TAS’s bests interests because he had engaged in “solely self-serving” conduct.

§ 3.6.5. Equitable/Statutory Relief

§ 3.6.5.1. Colorado

Air Solutions, Inc. v. Spivey, 2023 COA 14. A newly formed corporation and its sole shareholder brought a declaratory judgment action against its CFO to declare that the CFO was not an owner of the corporation. CFO countersued for breach of contract and fraud against the corporation and shareholder for refusing to make the CFO a 50 percent owner of the corporation and sought specific performance of the agreement to sell shares to the CFO along with other equitable types of relief, including a declaration that CFO was an owner of the corporation. A jury trial was conducted on only the CFO’s fraud and contract claims before the court addressed all other equitable claims and remedies. The jury found in favor of the CFO’s breach of contract counterclaim. After trial, the CFO asked the court for a decree of specific performance on the breach of contract counterclaim and for declaratory relief, arguing, among other things, that the nature of the contract rendered an award of damages inadequate to compensate him for the benefit of his bargain. The court denied the request for specific performance and the remaining declaratory judgment and equitable counterclaims.

On appeal, the appellate court concluded that the trial court was wrong in denying the CFO’s request for a decree of specific performance and that the CFO is entitled to a decree of specific performance against sole shareholder on the contract and that the trial court erred by denying the CFO’s counterclaims for declaratory judgment against both the sole shareholder and the corporation, though on remand the trial court will need to determine the precise terms of any such declaration.

§ 3.6.5.2. Delaware

Bighorn Ventures Nevada, LLC v. Solis, 2022 WL 17948659 (Del. Ch. Dec. 23, 2022). The Court of Chancery declined to enter an order appointing a receiver or custodian, holding that the subject nominal defendant corporation was not deadlocked, was not clearly insolvent—and even if it was, no special circumstances existed—and no equitable considerations required the appointment of a receiver or custodian. Plaintiff, nominal defendant’s largest shareholder, brought an action seeking appointment of a receiver or custodian on the grounds that it believed that nominal defendant was on “precarious financial footing” requiring an infusion of cash that Plaintiff believed only it could provide. The Board, however, was split 2:2 on accepting the cash infusion on the terms offered by Plaintiff in lieu of some other form of financing. The Court held that appointment of a receiver or custodian was not appropriate under 8 Del. C. § 226 because a tie-breaking director could be appointed to the board via stockholder vote under the company’s charter. The Court further held that appointment of a receiver or custodian under 8 Del. C. § 291 was not appropriate because the company was not clearly insolvent and, in any event, no special circumstances existed to warrant such extraordinary relief. Finally, the Court held that no equitable considerations required such an appointment either.

§ 3.7. Valuation and Damages

§ 3.7.1. Colorado

Snyder v. Montgomery, 2022 Colo. Dist. LEXIS 1071 (Larimer County, Colo. Oct. 4, 2022) (Order). This case involves a dispute regarding whether a minority discount should be applied in determining the buyout value for the decedent’s minority ownership interest subject to a shareholders’ agreement which required the shares to be sold to the remaining shareholder at “fair market value.” The decedent’s estate filed a motion seeking a determination of law that a minority discount is not applicable. The Court distinguished this case from others in which courts decided the appropriateness of a minority discount. Rather, the Court found that in this case the issue is whether fair market valuation does not include a minority discount. The Court reviewed the shareholders’ agreement, concluded that the term “fair market valuation” written into the shareholders’ agreement is not an ambiguous term, and declined to read into the definition “requiring or forbidding any valuation approaches like the minority discount.”

§ 3.7.2. Connecticut

Buccieri v. New Hope Realty, Inc., 2022 Conn. Super. LEXIS 2230 (Oct. 20, 2022). This case involves a corporate dissolution that was initiated after the parties could not agree on the management and operation of a realty company. The defendants elected to purchase the plaintiff’s fifty percent ownership interest but agreement regarding the value of plaintiff’s shares could not be reached. The Court heard expert witness testimony from real estate appraisers and business appraisers. The Court determined that the moving party who applied for Court to “evaluate” the shares has the burden of proof. Furthermore, the Court considered what is the standard of value and whether discounts of lack of marketability and lack of control apply. In this case, the Court found that the shareholders’ agreement specified standard of “fair market value” was not determinative because the shares had not been offered for sale. In addition, the Court found that the applicable Connecticut buyout statute required the application of the fair value standard and that because “purchase of plaintiff’s fifty percent shares by the defendants confers complete control of the … company…any minority discount is inappropriate here.” Also, the Court found that a discount for lack of control is not applicable in a statutory buyout in which no third party is entailed.

§ 3.7.3. Florida

WL Alliance LLC, Plaintiff-Appellee, v. Precision Testing Group Inc., Glenn Stuckey, Defendants Appellants, 2022 U.S. App. LEXIS 35298; 2022 WL 17830257 (11^th Cir. Dec. 21, 2022). This case involves a partnership termination dispute between two companies who had formed a partnership to provide technician serves to an energy utility company. The partners had agreed to split profits equally (50–50) each quarter. However, a dispute arose regarding accounting and payments of the profit split, and the partnership was terminated. One of the partner companies—the defendant company—attempted to replace the partnership with a new entity to enter into a new agreement with the energy utility company which would in effect cut out the original other partner—the plaintiff. The plaintiff filed claims of wrongful disassociation, breach of partnership agreement and lost profits damages against the defendant. A jury trial found the defendant liable for damages and made an award. Defendant appealed asserting that the damage award “included damages for lost future profits that were not ‘reasonably certain, and that the damage awards were not supported by the evidence because there was no accounting.”

On appeal, the Court reviewed whether there was sufficient evidence to support the award of future damages. It found that although Florida law requires that causation of lost profits damages must be proven with “reasonable certainty,” that once causation has been proven, the quantification of damages needs only to be judged by a reasonable “yardstick.” Defendant claimed that the contract the partnership had with the energy utility company was terminable at will and therefore damages are speculative. The Court rejected that argument and found that “the evidence was sufficient to support the award of future of damages,” and that the “jury did not need to speculate based on the testimony of the fact witnesses.” According to the Court, “there was specific evidence from fact witnesses that [the energy utility company customer’s] need for the [services] provided by the partnership did not change before the disassociation, had not changed since then, and was unlikely to change in the future.”

§ 3.7.4. Kansas

Hefner v. Deutscher, 2023 Kan. App. Unpub. LEXIS 136 (Mar. 24, 2023). This case involves a plaintiff professional medical practitioner who was terminated from his employment and ownership in a closely held corporation of medical professionals. His Employment and Redemption Agreement would have entitled him to a large payout for his stock ownership interest in the corporation at exit. However, the defendant corporation claimed that the plaintiff was threatening to breach the non-complete clause in his employment agreement which would mean that only a nominal payout was appropriate for the plaintiff’s stock. At trial, the plaintiff prevailed, and the trial court found that the corporation wrongly terminated the plaintiff in breach of his employment agreement, violated fiduciary duties and awarded plaintiff over $1 million in damages. The defendant appealed.

On appeal, the Court found that the trial court’s decision to be legally and factually sound and affirmed it. Furthermore, the Court noted that the trial court did not err in calculating damages. The Court noted that because the trial court found that the plaintiff did not violate the noncompete provisions this means that the plaintiff was terminated without cause. Therefore, under the Employment and Redemption Agreement, the purchase price of the stock is to be negotiated on the “existing practice value.” Because of the acrimonious situation between the parties, the Court concluded that “the task fell to the” trial court to quantify “existing practice value” and the trial court heard testimony from each party’s expert witness. Furthermore, the Court noted that the trial court weighed the evidence and gave greater weight to the expert’s appraisal which “relied on reasonable data provided by the Corporation and well-accepted appraisal principals.” In addition, the Court agreed with the trial court that in a wrongful termination, the plaintiff is additionally entitled to receive the regular salary and benefits he would have received in the meantime.

§ 3.7.5. Kentucky

Kenneth Raymond Schomp & Quality Logistics v. Holton, 2022 Ky. App. Unpub. LEXIS 584 (Oct. 14, 2022). This case involves a dispute regarding the value of the plaintiff’s ownership interest in a transportation logistics brokerage company which was organized as a limited liability company. The plaintiff was an employee with whom the company had entered into an incentive agreement which enabled him to purchase a 30.8 percent member’s interest. The founder owned the other member’s interest. Eventually, the founder and the plaintiff no longer got along, and the founder fired the plaintiff. A dispute arose regarding valuation of the plaintiff’s membership interest pursuant to the operating agreement. The trial court determined value and that decision was appealed.

The appellate court affirmed the trial court’s decision regarding value. The court noted that the trial court evaluated whether the appraisal by the company “comported with the obligations of good faith and fair dealing,” independent judgment and reasonable accuracy. At trial, issues were asserted about the accuracy of the company’s appraisal which the trial court reviewed. The appellate court found no error in the trial court’s analysis which concluded that while the appraisal “may not have been perfect, there is insufficient evidence to suggest that it was so lacking in good faith as to the make the financial data… unreliable” and that the valuation is reliable.

Also, the Court affirmed the award of pre-judgment interest because it is consistent with giving the plaintiff the benefit of his bargain as of 60 days after the company provided written notice of its intention to purchase the plaintiff’s member interest.

§ 3.7.6. Maryland

Furrer v. Siegel & Rouhana, LLC, 2022 Md. App. LEXIS 745; 2022 WL 9834101 (Oct. 17, 2022). This case involves a plaintiff attorney who was terminated and sued for the value of his unredeemed 26.5 percent member ownership interest in a five-member law practice which was organized as a limited liability company. The plaintiff member had his license to practice law indefinitely suspended and the parties could not agree regarding the value of his interest. The firm countersued for damages alleging that the withdrawing member mistreated clients.

On appeal, the Court affirmed the damages award but determined “that the trial court erred in determining the value of [plaintiff’s] unredeemed economic interest. Based on its erroneous interpretation of the applicable statutory framework under the LLC Act… the [trial] court awarded [plaintiff] his pro rata shares of the LLC’s profits and distributions for the one year after his withdrawal as a member” and still licensed to practice law. The Court noted that there was no operating agreement governing valuation, but each member had been receiving $10,000 per month in guaranteed payments, that quarterly profits were split equally without regard to who generated the revenues, and that plaintiff had been a member for over 20 years. Because of the absence of an operating agreement, the Court looked to the LLC Act to fill in the gaps. The Court determined that under the LLC Act, “withdrawing from the LLC changed [plaintiff[ from a member with an economic interest, i.e., a current right to share in the LLC’s profits, losses, and distributions, into an assignee of that economic interest, with the right to share only in the LLC’s assets, liabilities, profits, losses, and distributions, as they existed at the time of his withdrawal.” The Court concluded that the plaintiff was not “entitled, as a non-member of the LLC, to a perpetual ‘economic interest’ in the LLC,” and that “the unredeemed economic interest… as an assignee is limited to his 26% percent share of the fair value of assets, profits, losses and distributions to which he was entitled to” on the date of his withdrawal. Consequently, the Court vacated the trial court’s judgment and remanded for reconsideration of fair value.

§ 3.7.7. Michigan

In re Herremans, 653 B.R. 386 (Bankr. W.D. Mich. 2023). This case involves a dispute between two shareholders in a bankrupt restaurant business and the issue of the fair value of a 50 percent interest in the buyout of one shareholder by the other. The two owners had started the business 27 years earlier on a handshake and had no operating agreement. Five years of silence with the parties not speaking to each other, several years of litigation between the parties, and eight years in Chapter 12 bankruptcy proceedings ensued when the plaintiff filed a bankruptcy petition.

The Bankruptcy Court concluded that willful oppression on the rights of the plaintiff shareholder occurred and evaluated appropriate damages. The Court applied the Michigan shareholder oppression act as the remedy for oppressive conduct and ordered the oppressive shareholder to buyout the plaintiff’s interest at statutory “fair value.” Furthermore, the Court noted that “fair value” is not synonymous with “fair market value” and that “application of discounts in the valuation analysis is neither precluded nor required.” The Court found that the assessments by the parties of value “were mostly polar opposites.” The Court considered that the president of the franchisor testified that the brand is “a ‘lot’ less popular that it used to be, with only fifteen [restaurants] remaining in the country… and that the bulk of the value of the business is in the real estate itself,” and that the company’s financial statements showed that the company had positive but not very significant income.

Furthermore, the Court found issues with neither party choosing meaningful or consistent valuation dates. The Court determined that that most appropriate date at which to value the real estate is the date of the appraisal report itself, which was about eight months after the adversarial proceeding was filed. In addition, the Court determined that the values of the non-real estate assets listed in the corporate balance sheet should be adjusted to estimate the value as of the date of the real estate appraisal. The Court also considered that “the evidence at trial included very little credible evidence about … cash flow or earning capacity,” and found “that an asset approach is the most appropriate method for valuing.” The plaintiff argued that the appraisal’s value should be increased five percent for each year since the date of the report through the date of the Court’s decision; the Court rejected that argument. Also, the Court rejected the application of valuation discounts, stating that application of discounts would enable the oppressive 50 percent shareholder to force the plaintiff to sell at an unfair price to the benefit of the oppressor.

§ 3.7.8. Minnesota

Novak v. Miller, No. A22-1164, 2023 WL 2847207 (Minn. Ct. App. Apr. 10, 2023). Appellant-defendant was not entitled to have her interest in the LLC used to offset damages imposed by the district court’s judgment. When a member applies for and the district court orders dissolution of the company on the grounds that a member has acted in an illegal manner that is harmful to the applicant, the district court “may order a remedy other than dissolution.” Minn. Stat. § 322C.0701, subd. 2 (2022). This may be ordered “in any case where that remedy would be appropriate under all the facts and circumstances of the case.” Id. Here, the district court determined that defendant stole $494,590.94 and imposed a civil penalty of $100,000. The district court entered a judgment in favor of plaintiff against defendant for the entire amount stolen for the civil penalty. “Minnesota law permits the district court to order a remedy other than dissolution for the illegal acts of another member. Moreover, it is common sense that a party should not be able to offset the amount they converted by claiming an equal share of an LLC when it is dissolved.”

§ 3.7.9. New York

Matter of Galasso v. Cobleskill Stone Prods., Inc., 197 N.Y.S.3d 860 (2023). This case involved a petition by a decedent’s estate which owns 39 percent of the shares of a mining and construction company for judicial dissolution of the corporation and establishment of a judicial receivership. The corporate filed a written election to purchase the estate’s shares for its “fair value.” A dispute arose regarding the value which culminated in a valuation trial over two and half years later.

At the valuation trial, the Court heard testimony from expert witnesses, determined fair value and awarded pre-award interest. The Court found the income approach to value the company’s operating assets and the cost approach for valuing its non-operating assets appropriate, and applied certain adjustments for: reclamation costs on formerly-mined properties, costs to complete closure of a business line for which the decision to shut it down was previously made, excess inventory, and applied a discount for lack of marketability. The Court rejected adjustments for deferred income tax liabilities which it deemed “unlikely to ever come due,” excess cash as unwarranted given the large seasonal fluctuations and need for a working capital reserve.

Laurilliard v. McNamee Lochner, P.C., 2023 N.Y. Misc. LEXIS 3286 (Civ. Court of Richmond County, N.Y. Jun. 20, 2023) (Order). This case involves a dispute regarding the redemption buyout of a shareholder-employee in a law firm which shut down after merging into another law firm. Numerous partners refused to join the merged law firm and the firm demanded that they surrender their shares at book value, which was nominal, under the mandatory redemption provision of their employment agreements. These partners sued the firm and alleged breach of the employment agreements and breach of fiduciary duties.

The Court held that mandatory buy-sell agreements, “should not be undone simply upon an allegation of unfairness. This would destroy their very purpose, which is provide a certain formula by which to value stock in the future,” and that each plaintiff “accepted the offer to become a minority stockholder, but only for the period during which he remained an employee. The buy-back price formula was designed for the benefit of both parties precisely so that they could know their respective rights on certain dates and avoid costly and lengthy litigation on the ‘fair value’ issue.” Ultimately, the Court concluded that it would not “open the door to litigation on both the value of the stock and the date of termination and hinder the employer from fulfilling its contractual rights under the agreement.” Consequently, the Court granted defendants’ motion to dismiss the plaintiff’s complaint.

Rosenthal v. Erber, 2023 N.Y. Misc. LEXIS 4035 (New York Cnty., N.Y. Aug. 8, 2023) (Order). This case involves a dispute regarding the buyout of a passive 50 percent investor in a corporation which operated an optical business. The other 50 percent shareholder operated the business, and elected to purchase the passive investor’s interest at fair value.

The Court conducted a “fair value” hearing, during which it heard expert testimony. The court agreed with much of the plaintiff’s expert’s approach and “found him to be a credible witness.” The Court adjusted for some of the criticisms asserted by the defense side, such as overly optimistic growth rate and some non-comparable guideline companies and concluded, “The court finds and across the board 20 percent reduction to the valuations should fairly account for these aggressive assumptions.” The Court was unpersuaded by the defendant’s expert witness who “concluded based on the record evidence that the Company was worth $0.” “The notion that the Company is worthless is belied by the significant value [the defendant] derives from it.” Furthermore, the Court noted that the defendant “failed to provide all of the financial records to this expert.”

§ 3.7.10. North Carolina

Jayawardena v. Daka, 287 N.C. App. 393, 881 S.E.2d 759 (2022). This case involves a dispute among four shareholders who own shares in a physician group practice and members’ interests in two real estate limited liability companies, in which the entities have buy-sell agreements. The trial court entered partial summary judgment in favor of the defendants.

The Court of Appeals affirmed the trial court’s decision. The Court considered that the “[u]ndisputed record evidence demonstrates that the corporations’ regular accountants valued the business in good faith according to the parties’ agreement; that Plaintiff breached the operating agreements of two related LLCs by failing to identify an appraiser within the required time frame; and that the Defendants, who are minority shareholders like Plaintiff, did not act as a unified group sufficient to warrant treating them collectively as a controlling majority shareholder for purposes of fiduciary duties.”

Mauck v. Cherry Oil Co., Inc., 2023 NCBC LEXIS 144 (Supr. Court Lenoir County, N.C. Nov. 14, 2023). This case involves a dispute among family members regarding the management of their oil business, the remaining steps to buyout plaintiff’s shares in the corporation once the defendants voted to exercise the call provision in the shareholders’ agreement, and the company’s alleged refusal to permit the plaintiff to inspect certain company records.

The Court facilitated an agreement between the parties to have each party designate an appraiser, and for the two selected appraisers to select an independent third appraiser. Furthermore, the Court considered that the shareholder has statutory rights to inspect certain records until bought out and allowed certain inspection and copying of company records.

§ 3.7.11. Ohio

Miller v. Mission Essential [Grp.], LLC, 2023-Ohio-3077 (2023). This case involves an appeal from a judgement granting the fair value of a membership interest in a limited liability company, and whether the latest in a series of several operating agreements provided a sufficient basis to determine and pay the fair cash value of the dissenting member’s interest.

On appeal, the Court determined: 1) the trial court’s decision not to exclude the expert witness who relied on certain budgeted financial information was appropriate given that the trial court weighed the facts and circumstances and assessed the credibility of the witness and the relevance and reliability of the information at issue; 2) the trial court’s award of interest was appropriate because it has wide discretion to select a rate, but the trial court does not have discretion to not award interest; and 3) the trial court erred in applying discounts for minority position and lack of control, because that would result in a windfall to the buyer who would as a result become the 100 percent owner.

§ 3.7.12. Oregon

Ybarra v. Dominguez Fam. Enters., 322 Ore. App. 798 (2022). This case involves alleged shareholder deadlock and a dispute regarding the trial court’s decision that discounts for minority position and lack of marketability apply to plaintiff’s eight percent interest in a company that makes tacos. The trial court based its decision upon the reasoning that since it did not find that oppression had occurred then the “fair market value,” not “fair value,” standard of value applies.

On appeal, the Court concluded that the trial court erred, and vacated and remanded to the trial court to determine value under the “fair value” standard. However, the Court noted that it is not the case that such discounts never apply, “Rather, … the court must determine, based on all of the relevant facts and circumstances, whether to apply marketability and/or minority discounts in calculating the fair value of plaintiff’s shares under [the statute]. Because the trial court mistakenly understood that its determination of fair value required the absence of those discounts based on the absence of oppression alone, the court had no reason to consider whether these discounts were otherwise warranted in this case.”

Editor Emeritus and Editors

Contributors

§ 2.1. Introduction

The 2024 Recent Developments describes developments in business courts and summarizes significant cases from a number of business courts with publicly available opinions.^[1] There are currently functioning business courts of some type in cities, counties, regions, or statewide in twenty-five states: (1) Arizona; (2) Delaware; (3) Florida; (4) Georgia; (5) Illinois; (6) Indiana; (7) Iowa; (8) Kentucky; (9) Maine; (10) Maryland; (11) Massachusetts; (12) Michigan; (13) Nevada; (14) New Hampshire; (15) New Jersey; (16) New York; (17) North Carolina; (18) Ohio; (19) Pennsylvania; (20) Rhode Island; (21) South Carolina; (22) Tennessee; (23) West Virginia; (24) Wisconsin; and (25) Wyoming.^[2] States with dedicated complex litigation programs encompassing business and commercial cases, among other types of complex cases, include California, Connecticut, Minnesota, and Oregon.^[3] The California and Connecticut programs are expressly not business court programs as such.^[4] Utah and Texas will begin operating business courts in 2024.^[5]

§ 2.2. Recent Developments

§ 2.2.1. Business Court Resources

American College of Business Court Judges. The American College of Business Court Judges (ACBCJ) provides judicial education and resources, in terms of information and the availability of its member judges, to those jurisdictions interested in the development of business courts.^[6] The ACBCJ’s Eighteenth Annual Meeting will take place in Reno, Nevada, from April 24, 2024, to April 26, 2024.^[7]

Section, Committee, and Subcommittee Resources. The ABA Business Law Section provides a Diversity Clerkship Program that sponsors second-year law students of diverse backgrounds in summer clerkships with business and complex court judges.^[8] The ABA Business Law Section has created a pamphlet, Establishing Business Courts in Your State, which is available among other resources in the online library for the Business and Corporate Litigation Committee’s community web page.^[9] The Business and Corporate Litigation Committee’s Subcommittee on Business Courts provides documents and/or hyperlinks to business court resources.^[10] This includes links to public sources and legal publications, as well as business court related materials and panel discussions presented at ABA Business Law Section meetings. The Section also has established a Business Courts Representatives (BCR) program,^[11] where a number of specialized business, commercial, or complex litigation judges are selected to participate in and support Section activities, committees, and subcommittees. These BCRs attend Section meetings, and many have become leaders within the Section. Judge Elizabeth Hazlitt Emerson of the Supreme Court of the State of New York Commercial Division and Judge John E. Jordan of Florida’s Ninth Judicial Circuit served as BCRs for the 2021-2023 term, and Judge Julianna Theall Earp of the North Carolina Business Court and Judge Anne C. Martin of the Chancery Court of Davidson County, Tennessee, serve as BCRs for the 2022-2024 term.^[12] Finally, this publication has included a chapter on updates and developments in business courts every year since 2004.

Other Resources. “The National Center for State Courts (NCSC) and the Tennessee Administrative Office of the Courts (AOC) developed an innovative training curriculum^[13] and faculty guide^[14] – along with practical tools – to help state courts establish and manage business court dockets more efficiently and effectively.”^[15] The Business Courts Blog^[16] aims to serve as a national library to those interested in business courts, with posts on past, present, and future developments. This includes posts on reports and studies going back twenty years,^[17] as well as recent developments in business courts. In 2023, there were articles and reports addressing aspects of business courts.^[18] There are also various legal blogs with content relating to business courts in particular states.^[19]

§ 2.2.2. Developments in Existing Business Courts

§ 2.2.2.1. Arizona Commercial Court

The Arizona Rule of Civil Procedure governing Arizona’s commercial court, Rule 8.1, was amended slightly in March 2023 to fix an incorrect cross-reference. The previous version of Rule 8.1(d)(4), which governed assignment of cases to the commercial court, was amended to correctly cross-reference another subsection of the Rule. The previous version of Rule 8.1(d)(4) provided as follows:

Assignment. Upon the filing of a complaint by a plaintiff requesting assignment to the commercial court under (e)(2), or the filing by another party of a Notice Requesting Assignment to the Commercial Court under (e)(3), the case will be assigned to the commercial court.

However, subsections (e)(2) and (e)(3), referenced in the previous version of Rule 8.1(d)(4), concerned requirements surrounding the early meeting of the parties and the preparation of a joint report and proposed scheduling order, not the assignment of a case to the Arizona commercial court. The current version of the Rule 8.1(d)(4) provides as follows:

Assignment. Upon the filing of a complaint by a plaintiff requesting assignment to the commercial court under (d)(2), or the filing by another party of a Notice Requesting Assignment to the Commercial Court under (d)(3), the case will be assigned to the commercial court.

The updated cross-references to subsections (d)(2) and (d)(3) in the current version of Rule 8.1(d)(4) now correctly reference the subsections detailing what a plaintiff or another party must do to request assignment of a case to the commercial court.

Beyond this technical revision, there are no other changes that were made to Rule 8.1 concerning Arizona’s Commercial Court.

§ 2.2.2.2. Florida’s Complex Business Litigation Courts

Florida’s business courts saw a number of changes this year. Most notable, however, was the state’s expansion from six business court divisions to seven. Indeed, early this year, the Ninth Judicial Circuit completed its planned expansion and opening of a new business court division in Osceola County (Division 23).^[20] Presiding over the new division is Judge John E. Jordan, who was also re-appointed to continue presiding over the Ninth Judicial Circuit’s business court division in Orange County (Division 43).^[21]

In addition to the physical growth of its business courts, 2023 also included significant changes to Florida’s roster of business court judges. In the Eleventh Judicial Circuit, Judges Thomas Rebúll (Division 43) and Lisa Walsh (Division 44) were appointed to succeed Judges Michael Hanzman and Alan Fine, each of whom resigned from the bench to pursue new opportunities.^[22] In the Seventeenth Judicial Circuit, Judge Patti Englander Henning retired in March after 43 years of judicial service,^[23] and was succeeded in Division 26 by Judge Carol-Lisa Phillips,^[24] who now serves alongside Chief Judge Jack B. Tuter (Division 07). The business court for the Thirteenth Judicial Circuit was the only court without any significant changes this year, and Judge Darren Farfante (Division L) continues in his role there.^[25]

§ 2.2.2.3. Iowa Business Specialty Court

Iowa Supreme Court Assigns Three Iowa Business Specialty Court Judges. District Judge Rustin Davenport (Mason City), District Judge David Odekirk (Waterloo), and Senior Judge Michael Schilling (Burlington) were assigned by the Iowa Supreme Court to the Business Specialty Court on November 13, 2023.^[26] The Iowa Supreme Court based its selection on educational background, judicial and trial practice experience in business and complex commercial cases, and personal interest in the business court.^[27]

Judge Davenport earned his undergraduate degree from Drake University in 1982 and his law degree, with distinction, from the University of Iowa College of Law in 1985.^[28] Judge Davenport clerked for the Second Judicial District from 1985–1986 and for the Honorable David R. Hansen, United States District Court Judge, Northern District of Iowa from 1986–1988.^[29] Judge Davenport was in private practice from 1988–2010 and was appointed to the bench in October 2010.^[30] He has previously served as President of the Iowa Judge’s Association and is a member of the American Bar Association, Iowa State Bar Association, Judicial District 2A Bar Association, and the Cerro Gordo County Bar Association.^[31]

Judge Odekirk earned his bachelor’s degree, with honors, from the University of Iowa in 1989 and his law degree from the University of Iowa College of Law in 1993.^[32] Following his graduation, Judge Odekirk moved back to his hometown in Waterloo, Iowa, where he practiced civil litigation and trial work for over 20 years.^[33] Judge Odekirk was appointed to the bench in 2014.^[34] He is currently the immediate past president and member of the Iowa Judges Association and is a member of the Black Hawk County Bar Association, Iowa State Bar Association, and the American Bar Association.^[35]

Judge Schilling earned his undergraduate degree, with honors, from the University of Iowa in 1973 and his law degree, with distinction, from the University of Iowa College of Law in 1976.^[36] Following his law school graduation, Judge Schilling served as a VISTA volunteer lawyer on three Native American reservations in Nebraska and as an Assistant Public Defender.^[37] Judge Schilling practiced criminal and civil trial work for almost 30 years, was appointed to the bench in 2006, and took senior status in 2023.^[38] Judge Schilling has served on several committees including the Iowa Supreme Court’s Civil Justice Reform Task Force and the Eighth Judicial District’s Mediation Committee.^[39] Judge Schilling served as a drug court judge for several counties for nine years and is a member of the Des Moines County Bar Association, Iowa State Bar Association, American Bar Association, American Judicature Society, and the Iowa Judges Association.^[40]

Iowa Business Specialty Court will be Evaluated by State Court Administration Every Two Years. Starting in 2023, the Iowa Business Specialty Court will be evaluated by state court administration every two years.^[41] The evaluation is expected to ensure the court continues to accomplish its mission and to identify opportunities to improve its operations.^[42] The first report, prepared in December 2023, will evaluate the court for calendar years 2021 and 2022.^[43] Subsequent reports will be prepared by state court administration every two years.^[44]

§ 2.2.2.4. Indiana Commercial Court

The Indiana Office of Court Services continues to maintain a beta search engine for substantive Indiana Commercial Court Orders.^[45] The database allows users to narrow their search by date and the specific commercial court. Users are encouraged to provide feedback, as the Commercial Court staff works to identify and build historical content.

Additionally, the Indiana Commercial Courts Handbook, which is updated regularly, continues to be an aid for both judges and attorneys, covering procedural topics such as case management conferences, discovery, class actions, and trial preparation, and including sample case documents and forms.^[46] The Indiana Commercial Court Treatise also covers substantive topics such as non-compete covenants, fiduciary duties, piercing the corporate veil, preliminary injunctions, and receiverships.^[47]

On October 20, 2023, it was announced that Marion County Commercial Court Judge Heather A. Welch would retire effective February 2, 2024.^[48] She is one of 10 commercial court judges in Indiana and serves as the co-chair of the Commercial Courts Committee.^[49] Additionally, on November 15, 2023, President Biden nominated St. Joseph County Commercial Court Judge Cristal C. Brisco to fill a vacancy on the U.S. District Court for the Northern District of Indiana.^[50] Pursuant to Rule 7 of the Indiana Commercial Court Rules, the Commercial Courts Committee will review applications to fill the expected vacancies from current judges in each respective county, and will then provide the Indiana Supreme Court with a list of up to three recommended nominees for each vacancy.^[51] Three judges have applied for the Marion County vacancy: Judge Kurt M. Eisgruber, Judge James Joven, and Judge Christina Klineman. It is unclear whether any applications have been received for the St. Joseph County vacancy.

§ 2.2.2.5. Massachusetts Business Litigation Session (BLS)

Business Litigation Session (“BLS”) Judge Michael D. Ricciuti has been appointed Chief Justice of the Superior Court. He will begin his five-year term on December 22, 2023. The Court will announce Judge Ricciuti’s replacement in the next few weeks.

There were no new procedural orders for the BLS in 2023.

§ 2.2.2.6. Michigan Business Courts

Michigan’s Adoption of Continuing Judicial Education Rules. On November 1, 2023, the Michigan Supreme Court announced its adoption of the Michigan Continuing Judicial Education Rules, effective January 1, 2024.^[52] These rules require every judicial officer in the state to complete at least 24 hours^[53] of continuing judicial education every two years. A judicial officer’s credited hours must consist of 6 hours of education related to integrity and demeanor and 18 hours of education within the subject area of “judicial practice and related areas.” The CJE program will be overseen by a 12-member board, which will comprise two appellate court judges, two circuit court judges, two district court judges, two probate court judges, three quasi-judicial officers, and one retired judge.

Although these new rules apply to all Michigan state judges, Michigan’s business court statute has always required training for business court judges.^[54] Judge Thomas P. Boyd, Administrator of Michigan’s State Court Administrative Office, recently announced that judicial training sessions, which were suspended during the COVID-19 pandemic, are expected to return in 2024.^[55]

2023 Business Court Appointments. The business court bench remained largely the same in 2023, with only two new appointments: Curtis J. Bell (Kalamazoo County)^[56] and B. Chris Christenson (Genesee County). Both new appointees will serve for a term expiring April 1, 2025.

§ 2.2.2.7. New York Commercial Division

Commercial Division Updates Rules on Motion Papers. On December 16, 2022, Acting Chief Administrative Judge Amaker announced amendments to Commercial Division Rule 16, Motions in General, effective January 3, 2023.^[57] The amendments provide for the following:

1. Counsel submitting exhibits to motion papers should clearly separate them with divider pages with the exhibit numbers, instead of tabs.
2. Counsel shall follow the hyperlinking guidance under Commercial Division Rule 6 for motion papers.
3. The Court may direct counsel to submit hard copies of decisions or other authorities not readily available, instead of such hard copy submissions being mandatory.

These amendments to Rule 16 are identical to the language proposed by the Commercial Division Advisory Council in February of 2022.^[58] In the request for public comment on the proposed amendments, the Advisory Council explained that these revisions were aimed at modernizing the language of Rule 16 “to reflect the widespread use of electronic filing”—with the use of divider pages instead of tabs and the inclusion of hyperlinking.

Commercial Division Updates Rules on Motions in Limine. Effective June 5, 2023, Commercial Division Rule 27 regarding motions in limine was amended. The amended rule now provides a deadline for oppositions to any such motions, which must be filed no later than two days before the return date of the motion unless otherwise directed by the court.^[59] The amended rule further clarifies which issues are appropriately addressed via motion in limine, rather than via objections to pre-trial disclosures. Specifically, the rule states that basic threshold issues such as lack of foundation or hearsay should be made via objections to pre-trial disclosures, whereas “[m]otions in limine should be used to address broader issues [including] (1) the receipt or exclusion of evidence, testimony or arguments of a particular kind or concerning a particular subject matter, (2) challenges to the competence of a particular witness, or (3) challenges to qualifications of experts or to the receipt of expert testimony on a particular subject matter.”^[60] The amended rule similarly cautions that “[m]otions in limine should not be used as vehicles for summary judgment motions.”^[61]

§ 2.2.2.8. South Carolina Business Court Program

Business Court Program Amended for First Time in Four Years. On July 14, 2023, the South Carolina Supreme Court entered an administrative order narrowing the Business Court Program’s jurisdiction and replacing retired judges.^[62]

This order supersedes the previous one from January 30, 2019, which provided the program with jurisdiction over the following matters:

• Title 33—South Carolina Business Corporation Act of 1988;
• Title 35—South Carolina Uniform Securities Act of 2005;
• Title 36, Chapter 8—South Carolina Uniform Commercial Code: Investment Securities;
• Title 39, Chapter 3—Trade and Commerce: Trusts, Monopolies, and Restraints of Trade;
• Title 39, Chapter 8—Trade and Commerce: The South Carolina Trade Secrets Act; and
• Title 39, Chapter 15—Trade and Commerce: Labels and Trademarks.^[63]

In addition to these specified case types, the 2019 order allowed the program to hear “such other cases as the Chief Business Court Judge may determine.”^[64] But the 2023 order eliminates the Chief Business Court Judge’s discretion, narrowing the jurisdictional parameters to only the specified case types.^[65]

The 2019 Order also replaced Judges R. Markley Dennis, Jr. and Alison R. Lee, who retired from the bench, with Judges Jocelyn Newman and Walton J. McLeod, IV.^[66] 

§ 2.2.2.9. West Virginia Business Court Division

Proposed Rule Amendments. On October 19, 2023, the Supreme Court of Appeals of West Virginia requested comments on proposed amendments to the provisions of the Business Court Division as set out in Rules 29.07, 29.08, 29.09, and 29.10 of the West Virginia Trial Court Rules. In summary, the proposed amendments would permit business court judges to hold hearings and trials in any county in the state, if agreed to by all parties and the presiding judge. The proposed amendments would also allow for arbitration to be used as a form of alternative dispute resolution in business court cases. Comments were due on or before December 22, 2023.

Currently, Rule 29.07 sets out the procedure for assigning the presiding and resolution judges in Business Court Division cases. In addition, Rule 29.07 permits the presiding judge to preside over the case in any county within the Business Litigation Assignment Region, as defined in Rule 29.04, in which the case was filed. Proposed amendments to Rule 29.07 would be an addition, also permitting business court judges to preside over an action in any county within West Virginia if the parties and the presiding judge approve.

Rule 29.08, which prescribes the powers and duties of presiding and resolution judges, currently permits the presiding judge in a business court case to schedule conferences, motions, mediation, pretrial hearings, and trials in any circuit court courtroom within the Assignment Region, as defined by Rule 29.04. However, the proposed amendments to Rule 29.08 would permit presiding judges in business court cases to also schedule conferences, motions, mediation, pretrial hearings, and trials in (1) the filing county, (2) in any county within the Business Litigation Assignment Region, or (3) any other county within West Virginia if the parties and presiding judge approve. In addition, the proposed amendments would create an order of preference for jury trials in business court cases: (1) the filing county; (2) in any county within the Business Litigation Assignment Region; or (3) in any county within West Virginia upon the agreement of the parties and the presiding judge.

Another proposed amendment to the business court rules would create a method and procedure for arbitration in business court cases in Rule 29.09 of the West Virginia Trial Court Rules. Under the amendment, upon the agreement of the parties, any case referred to the Business Court Division is available for either binding or non-binding arbitration. The parties may have their case arbitrated by either one Business Court Division Judge or by a panel of three Business Court Division Judges. If the parties agree to have their case arbitrated by a three-judge panel, then the plaintiff will choose one judge, the defendant will choose one judge and, the Chair of the Business Court Division will choose the third judge. Usually, the arbitration will take place in the courtroom in the county where the action is pending, however, it may also be conducted in any courtroom in the Business Litigation Assignment Region, or any other place which the parties and the Chief Arbitrating Judge agree to.

Within thirty days of the conclusion of the arbitration hearing, or within thirty days after the receipt of the final memorandum of the parties, the arbitration decision is to be submitted to the Presiding Judge for entry of the judgment. However, if the arbitration was binding and carried out by a three-judge panel, then the decision must be unanimous to be binding and final.

§ 2.2.2.10. Wisconsin Commercial Docket Pilot Project

There have been no updates to Wisconsin’s Commercial Docket Pilot Project, which was extended in 2022 for two years, with an end date of July 30, 2024. The Court originally approved the Project to create specialized commercial dockets in 2017. Under the current rule, the Chief Justice of the Wisconsin Supreme Court assigns judges to the Project after considering the recommendation of the chief judge in the relevant Judicial Administrative District. Currently, twenty-six counties in Wisconsin participate in the program: Waukesha, Dane, Racine, Kenosha, Walworth, Brown, Door, Kewaunee, Marinette, Oconto, Outagamie, Waupaca, Ashland, Barron, Bayfield, Burnett, Chippewa, Douglas, Dunn, Eau Claire, Iron, Polk, Rusk, St. Croix, Sawyer, and Washburn. The state’s largest county—Milwaukee—has yet to participate in the Project.

§ 2.2.2.11. Wyoming Chancery Court

The Wyoming Chancery Court celebrated its two-year anniversary on December 1, 2023, with good reason. New case filings nearly doubled from 15 in the first year to 29 in the second year. During its first two years, the court handled 44 cases involving 152 different parties and 61 unique attorneys. For the least populated state in the nation, these numbers represent a promising trajectory.

In addition to the increase in case filings, the Chancery Court’s second year marked other notable developments. Specifically, the court seized its first two opportunities to define and clarify its jurisdictional contours through the cases of Clark v. Romo, 2023 WYCH 4 (Wy. Ch. C. June 16, 2023), and Lincolnway v. Villalpando, 2023 WYCH 6 (Wy. Ch. C. Oct. 6, 2023). Both are summarized below.

§ 2.2.3. Other Developments

§ 2.2.3.1. Texas Business Court

When Governor Abbott signed House Bill 19 and Senate Bill 1045 in June 2023, Texas became the latest state to join the modern business court movement and the first to establish an appellate business court.^[67] Both the appellate and trial courts open this fall, hearing cases filed on or after September 1, 2024.^[68]

Here are key details about Texas’s business courts.

• HB 19 created 11 business court divisions aligned with the existing administrative judicial regions in Texas.^[69] Five of the eleven divisions serve urban centers and go live September 2024. The remaining six divisions, which serve more rural areas, will be abolished if not authorized and funded by September 1, 2026.^[70]
• Unlike elected district court judges, the governor will appoint business court judges with the advice and consent of the Senate.^[71] The governor will appoint two business court judges to each of the five urban divisions and one judge for each of the six rural divisions (if funded).^[72] Appointed judges will serve two-year terms but may be reappointed.^[73]
• Parties can either file cases directly in business court or remove cases from district or county court to the business court.^[74]
• Business courts have limited jurisdiction, concurrent with district courts, over two lists of action types—one list where the amount in controversy exceeds $10 million, and another where the controversy exceeds $5 million.^[75] The $10 million minimum case list includes commercial and contract disputes, as well as certain violations of the finance or business code, while the $5 million minimum list includes governance and security disputes.^[76] The $5 million threshold does not apply if the party is a publicly traded corporation.^[77] These minimum amounts also exclude interest, statutory damages, exemplary damages, penalties, attorneys’ fees, and court costs.^[78]
• Business courts also enjoy civil jurisdiction (again, concurrent with district courts) in actions seeking injunctive or declaratory relief in the case types outlined above.^[79]
• Business courts further enjoy supplemental jurisdiction over any other related claim if all parties and the judge agree.^[80]
• Business courts must use juries when required by Texas Constitution.^[81] A jury trial in a case initially filed in business court will be held in any county in which the case could have been filed.^[82] In a case removed to district court, the jury trial must be held in the county where the action was originally filed.^[83] If a contractual provision specifies a venue, the jury trial must be held in that venue.^[84]
• Business court orders or judgments are appealable to the newly created Fifteenth Court of Appeals, a specialized appellate business court located in Austin.^[85] The procedures for an appeal from business court are the same as those for appeals from district court.^[86]

§ 2.2.3.2. Utah Business and Chancery Court

Like Texas, Utah enacted legislation in 2023 to establish its own business court.^[87] Utah named its new court the business and chancery court. It launches fall 2024 with a single judge.^[88]

Key features of Utah’s new court follow.

• The business and chancery court will conduct bench trials only, transferring cases to district court when a party requests a jury trial.^[89]
• The court will have limited, statewide, jurisdiction, concurrent with Utah’s district courts. It will handle disputes seeking monetary damages of at least $300,000, or seeking solely equitable relief, and with claims arising from specific causes of action related to business and commercial activities.^[90] These include: breach of contracts and fiduciary duties; internal business governance; sale, merger, dissolution, receivership, or liquidation of a business; liability or indemnity disputes among owners; indemnification of officers or owners; tortious interference or other unlawful act against a business; commercial insurance coverage disputes; the UCC; the Uniform Trade Secrets Act; misappropriation of intellectual property; non-compete, non-solicitations, and nondisclosure or confidentiality agreements; franchise disputes; securities; blockchain and DAO disputes; antitrust; certain malpractice claims; forum selection clauses that identify Utah or other states’ business courts; and shareholder derivative claims.^[91]
• Notably, at least 48 hours before an oral argument, the court must provide parties with tentative rulings on the motion.^[92] Final decisions and orders will be published and available on the Utah Court’s website.^[93]

§ 2.3. 2023 Cases

§ 2.3.1. Delaware Superior Court Complex Commercial Litigation Division

In re CVS Opioid Litigation^[94] (Claims seeking generalized economic damages to redress the opioid crises are not covered under liability insurance policies). Liability insurers filed suit against retail pharmacy giant, CVS Health Corporation (“CVS”), for a declaratory judgment that they owed no duty to defend or indemnify CVS in suits brought by nine governments to recover costs associated with the opioid epidemic. The insurers argued that they had no duty to defend or indemnify CVS because the policies required allegations of physical injuries for coverage and that the governments did not claim that they suffered bodily injury and did not seek damages on behalf of opioid users.

The court held that the liability policies cover only “damages because of bodily injury,” and not the negligence and public-nuisance claims brought by the state and local governments. Specifically, it held that the claims “must directly relate to and be predicated upon a particular bodily injury” to be covered, but “none of the complaints seek to recover for damages because of the individual injuries sustained by a person.” Rather, the governments’ complaints sought redress for the communal economic losses suffered. Therefore, the court granted the insurers’ motion for partial summary judgment and declared that the insurers were not required to defend CVS against lawsuits seeking only economic damages.

BCORE Timber EC Owner, LP v. Qorvo US, Inc.^[95] (Granting motion to dismiss on the basis of forum non conveniens). The court held that this is “one of those rare cases” in which the defendant met its high burden of showing that the forum non conveniens factors weighed so heavily in its favor that it would face “overwhelming hardship” were the case to proceed in Delaware. This dispute involved a commercial property in Greensboro, North Carolina, which was leased to Qorvo US, Inc. (“Qorvo”). The lease provided that, subject to certain restrictions, tenants could make alterations to the property, but, at the option of the landlord, they may be required to remove any or all alterations or improvements at their expense. When Qorvo refused to remove alterations it made to the property, BCORE Timber EC Owner, LP (“BCORE”) brought suit for waste, breach of contract, and a declaration that Qorvo is obligated to indemnify BCORE. Qorvo filed a motion to dismiss for improper venue, arguing that the subject matter of BCORE’s claims had no connection to Delaware and that it would suffer overwhelming hardship if it were forced to litigate in Delaware.

Because the Delaware action was the only action filed in this dispute, the court applied the “overwhelming hardship” standard to determine whether dismissal was warranted. The court found that this standard was met because the forum non conveniens factors weighed so overwhelmingly in Qorvo’s favor that dismissal of the Delaware litigation was required to avoid undue hardship and inconvenience to Qorvo. Those factors are: (i) the relative ease of access to proof; (ii) the availability of compulsory process for witnesses; (iii) the possibility of a view of the premises; (iv) the applicability of Delaware law; (v) the pendency or nonpendency of a similar action or actions in another jurisdiction; and (vi) “all other practical problems that would make the trial of the case easy, expeditious and inexpensive.” Here, the only salient connection between this action and Delaware was the named entities’ incorporation or registration. Considering that, along with the totality of the other factors, the court determined that dismissal was warranted.

§ 2.3.2. Florida’s Complex Business Litigation Courts

The Plurinational State of Bolivia v. Arturo Carlos Murillo-Prijic et al.^[96] (To successfully plead conspiracy jurisdiction under Florida’s long-arm statute, a plaintiff must make clear, positive and specific allegations of a defendant’s participation in the conspiracy). Following a successful appeal, the Plurinational State of Bolivia (“Bolivia”) was given leave to file a third amended complaint for the purpose of amending its allegations supporting personal jurisdiction over Condor S.A. (“Condor”). The claim against Condor arose from a conspiracy involving former senior Bolivian government officials and a national defense contractor (“Bravo”). The complaint alleged that Bolivian officials conspired with Bravo and Condor in a bribery and money laundering scheme to award Bravo a contract at an inflated rate, and for Bravo to pay bribes to the officials. In her decision on Condor’s motion to dismiss for lack of personal jurisdiction, Judge Walsh determined that Bolivia’s allegations as to Condor asserted no more than that it was an intermediary that “should have inferred” the existence of the scheme. Because those allegations fell short of making the required “specific allegations of [Condor’s] knowledge or participation in a scheme to commit bribery or money laundering,” and Bolivia failed to prove a basis for long-arm jurisdiction in light of Condor’s affidavit refuting Bolivia’s jurisdictional allegations, Judge Walsh dismissed Bolivia’s claims against Condor with prejudice.

Miami-Dade Expressway Authority et al. v. Greater Miami Expressway Agency et al.^[97] (The public official standing doctrine bars a state agency from bringing a constitutional challenge to a statute affecting them). In a long-running legal battle by state officials to establish control over the five main expressways and toll roads in Miami-Dade County, Judge Walsh recently denied Miami-Dade Expressway Authority’s (“MDX”) emergency motion for a “status quo” temporary injunction while a related appeal is pending. MDX’s emergency motion followed a final declaratory judgment in Leon County, wherein the Second Judicial Circuit held that MDX was a state agency that was dissolved by an amendment of the Florida Legislature, and ordered that its assets and obligations be transferred to a newly created state agency, the Greater Miami Expressway Agency (“GMX”). Noting that it was MDX’s ultimate goal in the litigation before her to obtain a declaratory judgment finding the amendment unconstitutional, Judge Walsh denied MDX’s motion on the ground that, as a state agency, it lacked standing to challenge a statute affecting it under the public official standing doctrine. But the battle for control over Miami-Dade’s highways continues, as GMX’s appeal of the Second Judicial Circuit’s ruling in favor of MDX is currently pending in the First District Court of Appeal.

§ 2.3.3. State-wide Business Court in Georgia

Dufour v. Dufour^[98] (Judicial dissolution of a law firm and appointment of a receiver). This partnership dispute arose between two brothers who operated a law firm in Carrollton, Georgia. For over a decade, the brothers split profits from the practice equally between them under the terms of a handwritten agreement. In 2018, Defendant suggested they shift to a pro-rata compensation structure to reflect the parties’ workloads and productivity. Defendant insisted that proposal became binding on the parties via a series of emails. Plaintiff disagreed. He sued, alleging his brother breached the original, handwritten agreement by effectively seizing control over the partnership, its accounts, and its other assets. The action was filed first in Carroll County superior court. There, Plaintiff asked that a receiver be appointed over the law firm, but the superior court denied that request. The parties later agreed to remove the case to the State-Wide Business Court, however, where Plaintiff renewed his motion to appoint a receiver.

This time, the court granted the motion. The court noted at the start that Georgia’s State-wide Business Court has authority to exercise the powers of any equity court, including to appoint a receiver to oversee a partnership’s dissolution. While the parties disagreed over whether their partnership was in fact already dissolved under Georgia’s Uniform Partnership Act because of Defendant withdrawing from it in July 2022, they both, at a minimum, acknowledged the partnership should be dissolved. The court therefore ordered the partnership dissolved, remaining intact only as needed to wind up its affairs. The court then concluded that a neutral receiver was warranted to take possession of, and protect, the partnership’s assets during that dissolution process. Support for that conclusion included dueling allegations about breaches of duty and partnership obligations; misappropriation of files; interference with each other’s legal practice; and other acrimonious dealings between the brothers. Accordingly, the court appointed a receiver agreed to by the parties.

OZ Media, LLC v. Greenberg Film and TV Studio Holdings^[99] (Criminal contempt proceedings). This action involved ownership and management rights to a television and movie production company. Ozie Areu and Steven Greenberg formed Greenberg Georgia Film and TV Studio Holdings (“Greenberg Georgia” or “the company”), a Delaware LLC, as part of a bankruptcy reorganization plan in 2021. The following year, Areu sued Greenberg alleging, among other things, that Greenberg used his authority as majority member to shut out Areu from the company’s operations. Areu also asserted that Greenberg and others were obstructing his use of an office space at a studio that Greenberg Georgia runs, in violation of the company’s operating agreement. By consent of the parties, the court entered a TRO that secured Areu’s access to the office space. But less than a month later, Defendants moved for criminal contempt. The motion contended that Plaintiffs violated the TRO by using their access to the studio to take control of its website and email system, causing Greenberg to be arrested at the studio and jailed in connection with purported threats and stalking charges, and publicizing that arrest, all of which disrupted the studio’s business.

The court denied the motion after an evidentiary hearing. First, the court emphasized the high bar for holding a party in criminal contempt, including that evidence admitted must establish guilt beyond a reasonable doubt. Second and relatedly, the court noted that, in support of their request, Defendants did not present any live witness testimony at the hearing but relied only on affidavits filed with the motion, preventing Plaintiffs an opportunity to cross examine the affiants, which a party facing criminal contempt is constitutionally entitled to do. The court therefore denied the motion. But the court observed that it would also be an abuse of discretion for the court to graft onto the TRO a restriction against Areu pursuing separate criminal proceedings for threats allegedly made against him, where the TRO was limited, by its terms, to Areu’s right to use the studio office space.

§ 2.3.4. Indiana Commercial Court

Arrow Container, LLC v. Clare Allison^[100] (Denying the plaintiff’s motion for temporary restraining order). In Arrow, Arrow Container, LLC (a manufacturer, marketer, and seller of packaging materials and related products and services) filed a complaint and motion for a TRO to enforce non-compete and non-solicit provisions against a former employee. Among other things, the Indianapolis-based plaintiff sought to restrain the defendant-employee from working for a competitor within a 100-mile radius of the plaintiff’s Indianapolis office. The defendant had accepted employment for a competitor in Green Bay, Wisconsin, supporting the competitor’s Cincinnati division in Lebanon, Ohio (i.e., more than 100 miles from the plaintiff’s office), while working remotely from her home in Greenwood, Indiana (i.e., within a 100 miles of the plaintiff’s office). The plaintiff also sought to restrain the defendant-employee from contacting or soliciting any customer of the plaintiff to whom the plaintiff had provided services within the 12 months preceding the defendant’s employment with the plaintiff. Particularly at issue was a post the defendant made on her LinkedIn page which stated:

Big things coming for this girl in 2023! Excited for a new year, new inspiration, and so thankful for new opportunities to thrive! How are you making a big impact in 2023?

#inspiration #opportunities #packaging #boxes #manufacturing #thriving #happinessmatters #operational excellence #new year #growthmindset

The post included a photograph of the defendant tossing the box into the air with the words: “Same Clare / New Company!” and “New resources & more options coming to your area!” Neither the post nor the defendant’s bio referenced her new employment at the competitor or tagged any customers or prospective customers.

The court held that the plaintiff failed to demonstrate a likelihood of success on the merits for its claim for breach of the non-compete provision. “Merely performing remote work within the geographic scope of a non-competition covenant on behalf of customers or business operations located outside the scope of the ‘restricted territory,’ without more, is insufficient to state a claim for the breach of a non-compete.” The court failed to see how the defendant received some “unique competitive advantage or ability to harm” the plaintiff by working remotely from her home and sending emails and making phone calls to customers located outside of the restricted area of her non-compete that she would otherwise not receive if she moved to a location 100+ miles from the plaintiff’s office. “Without evidence that [the defendant] is servicing or soliciting customers within the geographic scope of the Non-Compete, or otherwise directing competitive activities within the geographic scope of the Non-Compete, the Court finds that [the defendant] is not in violation of the Non-Compete.”

The court also held that the defendant’s LinkedIn post did not violate the non-solicit provision, and was instead a “generic, non-targeted job announcement” that was publicly available to anyone on LinkedIn. The court noted that the defendant did not receive any inquiries in response to her post, and that there was nothing in the record to indicate that she had any intention of soliciting or selling to any customers falling within the scope of her non-solicit agreement. Thus, the court found that the substance, apparent intent, and effect of the post did not support the conclusion that it was a customer solicitation and that it was not made for the purpose of selling packaging materials and/or related services to the plaintiff’s existing customers in violation of the non-solicit agreement.

HCW Evansville Hotel, LLC et al. v. Butler, Rosenbury & Partners, Inc. et al.^[101] (Granting in part and denying in part the defendant’s motion to dismiss and for a more definite statement). In HCW, the defendant BRP sought dismissal of claims for breach of contract, restitution, and promissory estoppel, arguing (among other things) that none of the individual plaintiffs alleged the requisite elements of breach of contract against the BRP and instead impermissibly attempted to consolidate their individual elements by alleging the breach of contract claim collectively. Specifically, BRP asserted that (1) HCW Development was not the real party in interest because it was not damaged, (2) HCW was not the real party in interest because it was neither a party to nor an intended beneficiary of the BRP contract; and (3) HCW, LLC was not the real party in interest because it had nothing to do with anything that happened and did not contract with BRP.

The court agreed that the plaintiffs’ use of the collective term “HCW” was vague and that each allegation that included the term was not “simple, concise, and direct” because it did not indicate which plaintiff(s) entered the contract with BRP (or alternatively, conferred a benefit upon BRP or relied on a promise by BRP). The court held that the plaintiffs cannot “lump together” their allegations using vague terms and definitions to create a valid claim against BRP. Rather, BRP is entitled to know which entity is asserting a claim against it. However, the court declined to dismiss the claims against BRP because, once specified, the allegations might state claims for breach of contract, restitution, and promissory estoppel. Instead, the court granted BRP’s request for a more definite statement, holding that if the plaintiffs still could not assert that the party to the contract was the party that suffered damages, then BRP could seek dismissal.

BNAB, LLC et al. v. Franklin St Lofts LLC et al.^[102] (Granting the defendants’ motion to compel). In BNAB, the defendants sought to compel the production of handwritten notes taken by the plaintiffs’ (30)(b)(6) designee and which he had discussed during his deposition. In support of their motion, the defendants cited Indiana Rule of Evidence 612, which provides that an adverse party is entitled to receive copies of the writings used to refresh a witnesses’ recollection before testifying. The defendants argued that the witness stated during his deposition that he used the notes to refresh his memory, and therefore waived any attorney-client privilege regarding the notes. They further argued that the notes were not protected because they documented conversations and meetings that occurred outside the presence of counsel and prior to the initiation of the lawsuit. In response, the plaintiffs argued that the witness took the notes at the request of the plaintiffs’ attorney for the purpose of communicating with its attorney in anticipation of litigation and therefore the notes were protected. The plaintiffs also argued that the defendants failed to satisfy the Sporck Test which provides that (1) the witness must use the object or writing to refresh his memory; (2) the witness used the document for the purpose of testifying; and (3) allowing the questioning party to inspect the writing is necessary in the interest of justice. See Ind. R. Evid. 612(a)(2); Sporck v. Peil, 759 F.2d 312, 317-318 (3d Cir. 1985).

The court found that, taking the Plaintiffs’ contentions as true, the notes were prepared by the witness to provide information to his attorney and as such were protected by the attorney-client privilege. The court also found that the notes were protected by the work-product doctrine because they contained “information gathered with an eye toward litigation by the client himself.” However, in looking at the Sporck Test, the court found that the attorney-client privilege and work-product doctrine were waived when the witness used the notes to refresh his recollection. Specifically, the witness stated that he read his notes the day prior to his deposition, and he answered affirmatively that the notes refreshed his recollection as to what the parties talked about at those meetings. The court also noted that his statements showed that his testimony was affected by his review of the notes the day before. The court further found that it was in the interests of justice for the defendants to have the opportunity to inspect the notes to determine if there are discrepancies between the notes and the witness’s testimony. Finally, the court determined that the notes did not contain pure mental impressions or conclusions, so redaction was not required prior to inspection by the defendants.

Core Bore, LLC et al. v. Martell Electric, LLC^[103] (Granting the defendant’s motion to stay). In 2019, the U.S. Government awarded a contract to BFBC, LLC (“BFBC”) to construct portions of a border wall along the United States/Mexico border. BFBC then entered into two general contracts in 2019 and 2020 with the defendant to perform border wall construction in portions of California and Arizona. The defendant subsequently entered into two subcontracts with the plaintiff to perform some of the work under the general contracts. In May 2021, following a change in administration from President Trump to President Biden, the U.S. Government ordered work on the border wall to cease, and the work under the general contracts and subcontracts was terminated. The plaintiff submitted its “close out” claims (i.e., claims for materials or other things that were provided after notice of termination was provided), along with other invoices, to the defendant which in turn submitted them to the U.S. Government for payment.

After the defendant failed to pay, the plaintiff filed suit, alleging that it had completed the work pursuant to the subcontracts, that the U.S. Government fully paid the defendant for the work performed by the plaintiff, and that the defendant was owed an outstanding principal balance of $2.3 million. The defendant then filed a motion to stay based on the terms of the subcontracts. The subcontracts provided the following:

If [the plaintiff] has damages or a claim against [the defendant] which is only partially covered by the “Pass Through” disputes clause, then any lawsuit or arbitration brought by [the plaintiff] shall, in [the defendant’s] discretion, be stayed until the “Pass Through” portion of the claim is finally determined.

The subcontracts defined a “Pass Through” claim as

any damages or claims which arise from or relate to any directive, interference, rejections of work, breach of express or implied warranty, failure of payment, termination, or other act, failure to act, or conduct by [BFBC], [BFBC’s] separate contractors, or another third party[.]

The defendant asserted that it had presented the plaintiff’s claims to the U.S. Government for payment but had not yet received payment in full for the “close out” claims or for other work performed by the plaintiff. In response to the defendant’s motion to stay, the plaintiff noted that they would amend their complaint to withdraw their claim for the “close out” expenses.

The court noted that even if the plaintiff amended their complaint, it would not change the fact that there were unresolved pending claims given that the defendant’s receipt of payment from BFBC was an express condition precedent to the defendant’s obligation to pay the plaintiff. Because the defendant had not received final payment from BFBC for the plaintiff’s work, a portion of the claims were still covered by the “Pass Through” provision. Thus, the court held that the subcontracts gave the defendant the contractual right in the defendant’s discretion to stay the case. Under Indiana law, a trial court’s decision to stay civil proceedings is discretionary and may occur when the “interest of justice” requires such action. However, the court found that a stay in perpetuity would not be in the “interest of justice.” The court therefore granted a six-month stay and set a mediation deadline prior to the expiration of the stay.

McLaughlin Real Estate Indiana, LLC v. LCI Construction, Inc. d/b/a Leatherman Construction^[104] (Transferring venue) and Seaside Ice, LLC d/b/a Ice America v. Town of Zionsville, et al.^[105] (Denying the defendant’s motion to transfer venue). These two decisions are addressed together because they examine the extent to which Indiana statutes, Trial Rules, and Commercial Court Rules identify when a county with a Commercial Court may be considered a “preferred venue.” This is particularly relevant given that Commercial Courts exist in only 10 of Indiana’s 92 counties. To identify when a county may be considered a preferred venue county, Trial Rule 75(A) lists ten categories of preferred venue. The most relevant category here is “the county where a claim in the plaintiff’s complaint may be commenced under any statute recognizing or creating a special or general remedy or proceeding.” See Trial Rule 75(A)(8). Ind. Code § 23-0.5-8-3 (“the Commercial Court venue statute”) provides that “[n]otwithstanding any law that requires that a case must be filed in a specific court, a case, if otherwise eligible, may also be filed in or transferred to a business or commercial court or docket established or designated by law or supreme court rule.”

In McLaughlin, the Allen County Commercial Court held that the mere fact that Allen County had a Commercial Court did not provide for preferred venue in Allen County for a case that was previously assigned to the Commercial Court docket. There, the plaintiff filed its complaint in Allen County, along with a Notice Identifying Commercial Court Docket Case. The defendant subsequently filed its motion to dismiss, along with a Notice of Refusal to Consent to Commercial Court Docket. The court then issued an order removing the case from its Commercial Court Docket, pursuant to Ind. Comm. Court Rule 4(D) which provides that “if a Refusal Notice is timely filed, the clerk shall transfer and assign the case to the non-Commercial Court Docket of the Commercial Court Judge.” A dispute then arose as to whether there was preferred venue in Allen County. The defendant asserted that preferred venue was in Noble County, not Allen County, based on the allegations of the complaint. The plaintiff argued that reading Commercial Court Rule 4(D) in conjunction with Trial Rule 75(A)(8) and Ind. Code § 23-0.5-8-3 required the case to remain on the non-Commercial Court Docket of the Commercial Court judge. The court noted that this appeared to be an issue of first impression, and noted that, taken together, the rules and statute might appear to create preferred venue in any county in Indiana that has a Commercial Court. However, the court rejected such an interpretation of the interplay between the rules and statute, finding that the statute’s phrase “any law that requires a case must be filed in a specific court” did not encompass the trial rule’s preferred venue scheme because the rule did not “require” a case to be filed anywhere. The trial rule merely provided venue options, not requirements. Further, the court noted that the statute was enacted so that commercial court cases that were previously filed in a county’s circuit court, could be filed in that county’s superior court, and vice-versa. There was no indication of legislative intent to create preferred venue for Commercial Court cases in any of the ten counties that had a Commercial Court. Thus, the court concluded that Allen County was not a county of preferred venue, and transferred the case to Noble County, which had preferred venue.

In contrast, the Marion County Superior Court in Seaside held that there was preferred venue in Marion County for a case that was permanently assigned to the Commercial Court docket. In Seaside, the plaintiff filed its complaint in Marion County, along with a Notice Identifying Commercial Court Docket Case. The defendant subsequently filed its motion to dismiss or transfer to Boone County but did not file a Notice of Refusal to Consent to Commercial Court Docket. The plaintiff thereafter filed an objection to the defendant’s motion, along with a motion for permanent assignment to the Commercial Court docket. The defendant asserted that proper preferred venue was in Boone County, not Marion County, because the defendant’s principal office was in Boone County, and the complaint failed to include any operative facts that would establish preferred venue in Marion County under the categories set forth in Trial Rule 75(A). In response, the plaintiff argued that Marion County was a preferred venue because the case was filed in Commercial Court and was “commenced under [a] statute recognizing … a special or general … proceeding.” See Trial Rule 75(A)(8); Ind. Code § 23-0.5-8-3. As a threshold matter, the court found that the case should be permanently assigned to the Commercial Court docket under Ind. Comm. Ct. Rule 4(D)(2) because the defendant did not file a Notice of Refusal. The court then determined that Marion County was indeed a preferred venue under Trial Rule 75(A)(8) because the case had been permanently assigned to the Commercial Court docket and Indiana statutes provided that the Commercial Court in Marion could oversee such a proceeding. Because Marion County was a preferred venue, the court could not transfer the case to Boone County, even if it was also a preferred venue. Further, the court noted that the case could not remain on a Commercial Court docket and be transferred to Boone County because a Commercial Court does not exist in Boone County.

Thus, the differing outcome between the two decisions appears based on a key factual distinction, i.e., that McLaughlin was no longer assigned to the Commercial Court docket after the defendant filed a Notice of Refusal to Consent to the Commercial Court Docket while Seaside remained permanently assigned to the Commercial Court docket after the defendant failed to file a Notice of Refusal. However, it is possible that a future decision could differ from these decisions and find that preferred venue does exist in a county with a Commercial Court, even if the case has been re-assigned from a Commercial Court judge’s Commercial Court docket to his non-Commercial Court docket, because the case was initially filed on the Commercial Court docket. See Ind. Comm. Ct. Rule 4(D)(3); Ind. Trial Rule 75(A)(8); Ind. Code § 23-0.5-8-3. Hopefully, this lack of ambiguity will be resolved by Indiana’s appellate courts, or by a clarification of Indiana’s Trial and Commercial Court rules.

§ 2.3.5. Iowa Business Specialty Court

Southern Disaster Recovery, LLC v. City of Marion, Iowa^[106] (Public improvement contract, attorneys’ fees, interest). After Iowa’s 2020 derecho, Plaintiff Southern Disaster Recovery, LLC (“SDR”) contracted with Defendant City of Marion (“City”) to remove debris from waterways. SDR conducted the work, but the City withheld payment of SDR’s later invoices in the amount of $4,928,993.28. SDR filed suit against the City for failure to pay the outstanding invoices pursuant to its contract. SDR also asserted a claim for attorneys’ fees and expenses under Chapter 573 of the Iowa Code, which governs public improvements, and later added a claim for alleged false reporting by the City to law enforcement under Iowa Code § 708.7(7). Shortly before trial, the City paid SDR’s outstanding invoices in full. The parties submitted SDR’s false reporting claim to the jury, and after seven trial days, the jury returned a verdict for the City. The parties then submitted SDR’s claim for attorneys’ fees to the court. SDR also argued it was entitled to interest in the amount of $377,502.70 under Iowa Code Chapter 535 because the City refused to pay the invoices for more than a year and a half.

The court rejected SDR’s attorneys’ fees claim under Chapter 573 but granted SDR’s interest claim under Chapter 535. The court concluded that Chapter 573 was inapplicable to the case because the contract between the parties was not a public improvement contract. The court explained that under Chapter 573, “public improvement” required work related to construction, and SDR did not build, or claim to demolish, anything in connection with the services it provided to the City. However, the court granted SDR’s claim for interest on the invoices pursuant to Iowa Code § 535.2 because the contract provided that the City and its debris monitoring agent would exercise their discretion in determining what debris SDR removed. Although the court recognized the City’s concerns with possible ineligible debris removal, the City’s debris monitor oversaw all the work of SDR and approved every invoice. The court thus concluded that the City did not have a good faith basis for disputing the amount of SDR’s invoices and awarded interest on the unpaid invoices.

§ 2.3.6. Maine Business and Consumer Docket

Desjardin v. Wirchak^[107] (Order denying individual defendants’ motion to dismiss). This BCD case centered around claims against individual hospital employees (the “Individual Defendants”) and the hospital itself (the “Hospital Defendants”) for inappropriate and unlawful access to patient medical records. The question presented by the Individual Defendants’ motion to dismiss was whether a hospital patient whose electronic medical record was repeatedly accessed, viewed, and misappropriated for illegitimate reasons by prying unauthorized hospital employees during the nine months of her pregnancy and beyond could bring a claim against the employees without first going through the medical malpractice pre-litigation screening panel.

Plaintiff had been in a contentious relationship with one of the Individual Defendants from 2020 through 2021, and learned that she was pregnant with his child, which he denied. That Individual Defendant was employed by the Hospital Defendants, as was his mother, both as non-clinical, administrative employees. During Plaintiff’s prenatal, labor and delivery, and postpartum care through the Hospital Defendants, the Individual Defendants either accessed directly or directed other Hospital employees to access Plaintiff’s health care information and protected health information via Plaintiff’s electronic medical records, without her knowledge or consent. Eventually, in late 2021, Plaintiff received an anonymous message notifying her that the Individual Defendants had accessed her medical record. After Plaintiff’s report, the Hospital Defendants commenced an investigation and found that Plaintiff’s records had been inappropriately accessed, but did not take any action against the Individual Defendants, and did not take any effective steps to protect Plaintiff’s private healthcare information. The unauthorized access continued, and Plaintiff was anonymously alerted a second time.

In May of 2023, Plaintiff filed a seven-count complaint, including claims for Invasion of Privacy, Unlawful Disclosure of Health Care Information under 22 M.R.S. § 1711-C(13)(B), and Intentional Infliction of Emotional Distress. The Individual Defendants filed a Motion to Dismiss all claims against them for lack of subject matter jurisdiction, on the grounds that Plaintiff did not comply with the Maine Health Security Act (“MHSA”), 24 M.R.S. §§ 2501-2988 (2023), because Plaintiff’s allegations arose from professional negligence and therefore should have been brought pursuant to the MHSA.

The court denied the Individual Defendants’ Motion to Dismiss in the grounds that the “MHSA was enacted to regulate the medical malpractice insurance industry in response to the rising insurance costs against health care providers – not to create procedural hurdles for every claim against or involving the medical field.” As a result, despite the breadth of the MHSA, health care services under the MHSA are defined as “acts of diagnosis, treatment, medical evaluation or advice or such other acts as may be permissible under the health care licensing, certification or registration laws of this State.” In this case, the Individual Defendants did not have a work-related reason for accessing Plaintiff’s medical records and personal health information, were not providing health care services, and were not performing related activities such as billing, scheduling, or other legitimate activities. The court stated: “The conduct of a hospital employee accessing a patient’s confidential information for illegitimate purposes like snooping or spying is no more providing a health care service subject to the MHSA than if a health care practitioner ran over her own patient in the hospital parking lot.” Thus, since Plaintiff’s claims against the Individual Defendants did not arise out of the provision or failure to provide health care services, she was not first required to submit her claims to a prelitigation screening panel pursuant to the MHSA.

§ 2.3.7. Maryland Business and Technology Courts

Wilber v. Feldman^[108] (The nature of the action brought by plaintiffs in breach of fiduciary claims determines whether it is a derivative or direct claim, not the label given to the claim by the plaintiffs). In September 2020, the Board of Directors (“Board”) of Resource Real Estate Opportunity REIT Inc. (“REIT I”), a Maryland real estate investment trust, approved an internalization transaction to internalize its management functions (“Self-Management Transaction”) and then later merged with and into Resource Real Estate Opportunity REIT II Inc. (“REIT II”), another Maryland real estate investment trust (“Merger Transaction”). The newly merged company (the “Company”) also later acquired Resource Apartment REIT III, Inc. (“REIT III”), another Maryland real estate investment trust. In June 2021, Plaintiffs delivered a stockholder demand letter to the Board in which they alleged breaches of fiduciary duties by the Board in the Self-Management Transaction and the Merger Transaction. After receiving the demand letter, the Board formed a Special Litigation Committee (“SLC”) and delegated to the SLC the ability to investigate and make a determination regarding how the Company should respond to the demand letter. The SLC engaged separate independent counsel, investigated Plaintiffs’ claims in the demand letter and determined on January 23, 2022, that the claims had no merit. During the pendency of the SLC investigation, the Company’s management met with several financial advisors in September 2021 to discuss potentially listing the Company’s common stock or sale of the Company. Ultimately, after running its process, Blackstone Real Estate Income Trust Inc. became the successful bidder to acquire the Company through the use of a cash-out merger at the price of $14.75 per share and closed on the transaction in May 2022 (the “BREIT Transaction”). Plaintiffs filed a class action complaint against the Board in February 2022 alleging that the directors of the Board breached their fiduciary duties and were unjustly enriched to the detriment of stockholders when the Company completed the Self-Management Transaction, the Merger Transaction, and BREIT Transaction. The defendant directors moved to dismiss Plaintiffs’ complaint.

The court held that Plaintiffs’ claims for breach of fiduciary duty and unjust enrichment as to the Self-Management Transaction and the Merger Transaction were derivative claims that could not be maintained because Plaintiffs were no longer stockholders. In reaching this conclusion, the court looked to the language of the Plaintiffs’ complaint and the demand letter, which both asserted damages to the Company rather than articulated how the Plaintiffs were distinctly and separately harmed. The court rejected Plaintiffs’ contention that share dilution caused individual harm that would render their claims direct claims instead of derivative claims. In concluding that the Plaintiffs’ derivative claims failed, the court noted that a plaintiff must continuously own shares in the company to maintain a derivative action. However, a plaintiff may be able to bring a derivative action if its ownership of shares is terminated by a merger and it shows that the board pursued the merger fraudulently and merely to preclude a derivative action. Because Plaintiffs had not alleged that the Board pursued the Merger Transaction fraudulently and with the purpose of avoiding a derivative action, the court held that Plaintiffs were unable to maintain the derivative claims. Noting that the SLC was composed of independent and disinterest directors that were newly added to create the SLC, the SLC’s use of independent counsel and extensive investigation that was not restrained by the Board in making its determinations, the court found Plaintiffs’ claims to also fail because the business judgment rule applied to the SLC’s rejection of Plaintiffs’ demand letter. Furthermore, the court held that Plaintiffs’ breach of duty claim as to the BREIT Transaction was not actionable because defendant directors were fully transparent in the proxy material pertaining to the sale and the sale was ratified by informed stockholders of the Company and found the inclusion of immunity for the Board through broad indemnification rights in the BREIT Transaction failed to establish that the directors engaged in self-dealing.

Whitlow v. Bowser^[109] (Claims for breach of fiduciary duty in connection with a transaction are foreclosed when the transaction is approved by the requisite vote of informed and disinterested stockholders). In a class action, Plaintiffs alleged that the directors of the board of directors (the “Directors”) of Columbia Property Trust Inc. (“Columbia”) breached their fiduciary duties of good faith and loyalty by allegedly choosing to merge with Pacific Investment Management Company LLC (the “Merger”) to appease an activist investor to the detriment of Columbia’s stockholders and through the Directors’ receipt of an improper benefit resulting from the Directors’ receipt of “easy liquidity” and reputation protection. Plaintiffs further alleged the Directors breached their duty of disclosure by withholding information about the proposed Merger to the stockholders, thus preventing stockholders from evaluating the necessary information to make an informed decision regarding the Merger. Defendant Directors moved to dismiss. The court granted Defendants’ motion to dismiss.

The court held that the business judgment rule applied to the Board’s decision to enter into and consummate the Merger, found that Plaintiffs’ allegations that an activist stockholder threatening a proxy fight bullied Defendants into a merger to protect their reputation and avoid a proxy contest were speculative and were insufficient to overcome the presumption that the actions of the Directors were in the best interest of Columbia—especially considering the extensive efforts Columbia and the Directors took in the review process and its consultation with independent legal counsel as well as financial advisors. The court further held that Plaintiffs’ claims also failed because the stockholders voted in favor of the Merger and therefore, even if Plaintiffs presented a sufficient claim for breach of fiduciary duty arising from the Merger, those claims became foreclosed when a majority of informed and disinterested stockholders voted to ratify the Merger. In considering a violation of the duty of disclosure, the court noted that a materiality standard is applied when determining the scope of information that must be disclosed to stockholders prior to a merger, such that an omitted fact is only considered material if there is a substantial likelihood that a reasonable stockholder would consider it important in deciding how to vote. Thus, a plaintiff must explain how omitted information would have altered a stockholder’s vote. In dismissing Plaintiffs’ disclosure allegations, the court considered the extent of information that was given to the stockholders and ultimately found Plaintiffs’ disclosure claims to be speculative and insufficient and to not state how or why the allegedly undisclosed information was in fact material. Finally, the court held that Plaintiffs’ claims were also barred by the exculpatory provision in Columbia’s charter, which provided that no director or officer of Columbia would be liable to stockholders for money damages. Under Maryland law, for claims to survive such an exculpatory provision, a plaintiff must show that the officer or director received an improper benefit or engaged in active or deliberate dishonesty. In dismissing this claim, the court found that Plaintiffs’ claims that the Merger provided Defendants with “easy liquidity” and protected their reputations were not sufficient to demonstrate the receipt of an improper benefit and Plaintiff provided no facts showing that Defendants engaged in active and deliberate dishonesty.

Shareholder Representative Services, LLC v. Columbia Care Inc.^[110] (Motion to Dismiss Granted due to Failure to establish personal jurisdiction, standing, and to plead facts sufficient to establish fraud). Shareholder Representative Services, LLC, on behalf of former securityholders of Green Leaf Medical LLC (“Green Leaf”), sued Columbia Care Inc. (“Columbia Care”), Kroll Inc. (“Kroll”), and Columbia Care’s Chief Financial Officer, Chief Executive Officer, and Executive Chairman of Board of Directors (collectively the “Individual Defendants”) alleging that Defendants fraudulently deprived the former securityholders of milestone payments totaling more than $72 million that they would be entitled to receive as a result of Green Leaf achieving certain performance metrics after being acquired by, and becoming a subsidiary of Columbia Care pursuant to a merger entered into in December 2020. Plaintiff alleged that the Individual Defendants were instrumental in an effort to defraud them and that the Individual Defendants retained Defendant Kroll, who provided accounting services that improperly deflated the performance results of Green Leaf. Plaintiff further alleged that Columbia Care and its Chief Executive Officer made fraudulent or negligent misrepresentations regarding a litigation matter that was pending against Columbia Care prior to the merger. Defendants moved to dismiss the Plaintiff’s claims. The court ultimately granted the Defendants’ motions to dismiss.

First, the court explained that despite the lengthy nature of the Plaintiff’s complaint, the Plaintiff failed to establish that the court had personal jurisdiction over any of the Defendants due to none of the Defendants having enough contacts and/or soliciting business in the State of Maryland sufficient to establish personal jurisdiction. Next, the court explained that Plaintiff failed to establish standing to bring claims alleging breach of fiduciary duties due to those claims only being claims that can be brought by the securityholders themselves and not the Plaintiff. Additionally, the court noted that the assignment document that required the Plaintiff to distribute any proceeds received from the litigation was insufficient to actually assign the right of the former securityholders of Green Leaf to bring derivative or direct claims resulting from the merger transaction. The court also dismissed Plaintiff’s fraud and intentional misrepresentation claims against Columbia Care and its Chief Executive Officer. Despite Plaintiff’s allegations that Columbia Care failed to identify pending litigation and the Chief Executive Officer’s characterization of the pending litigation as immaterial, the court found that the allegations on their own were insufficient to maintain a claim for fraudulent misrepresentation. The Plaintiff failed to allege facts to indicate that the Individual Defendants knew of the falsity of their statements, made such statements with the intent to deceive, or that the former securityholders relied on those statements to enter into the Merger Agreement with Columbia Care. The court further held that Plaintiff’s claim against Columbia Care and its Chief Executive Officer for negligent misrepresentation were contractually waived by the exclusive remedy clause in the Merger Agreement, leaving indemnification as the sole remedy available. The court also dismissed the claim of breach of fiduciary duty against the Defendants on the basis that officers and directors owe no duty directly to shareholders. Finally, the court dismissed claims for tortious interference against the Individual Defendants and Kroll. In reaching this decision, the court noted that officers and directors cannot be held liable for intentional interference with contractual relations and, therefore, the Individual Defendants cannot interfere with a contract concerning their own company. As to Kroll, the court held that a conclusory allegation that a party was aware of the existence of a contract was insufficient to support a claim for tortious interference.

§ 2.3.8. Massachusetts Business Litigation Session

Adelman v. Proskauer Rose LLP^[111] (legal malpractice, superseding causation). Dr. Robert Adelman retained Proskauer Rose LLP (“Proskauer”) to prepare contract documents that would effectuate a hedge fund spin-off from the life sciences investment firm he had helped found. The contract documents Proskauer prepared included a provision that allowed the new hedge fund’s manager to redeem Dr. Adelman’s interests in the fund and its profits if the hedge fund manager carried out certain permitted transactions. The hedge fund manager took advantage of the provision and engaged in certain strategic transactions that stripped Dr. Adelman of his economic interests. Dr. Adelman brought a legal malpractice claim against Proskauer, alleging that the firm had negligently copied and pasted the referenced provision from a prior contract it had worked on. He sought $636 million in damages.

At summary judgment, Proskauer conceded a triable issue as to whether it breached the standard of care by including the provision at issue. It contended, however, that the hedge fund manager had himself breached other contractual provisions and his fiduciary duty to Dr. Adelman, and that each of those breaches severed the chain of causation between its conduct and Dr. Adelman’s injury. The court disagreed, denying Proskauer’s motion for summary judgment and finding that the contractual breaches invoked by Proskauer were irrelevant; the contracting parties had agreed that the hedge fund manager did not owe Dr. Adelman any fiduciary duty; Proskauer had failed to show the hedge fund manager’s conduct was an unforeseeable superseding cause of the harm; the record supported a finding that Proskauer’s negligence caused the loss of Dr. Adelman’s share of future hedge fund profits; and Dr. Adelman had standing to sue for the loss of his right to share in those profits.

On the superseding causation issue, the court explained that, in a legal malpractice case, intervening events or conduct by a third party may relieve a defendant of liability only where the intervening events or conduct (i) occurred after the original negligence; (ii) were not the consequence of the attorney’s negligence; (3) created a result that would not otherwise have followed from the original negligence; and (4) were not reasonably foreseeable. Where the intervening cause was reasonably foreseeable and the attorney could have taken reasonable steps to mitigate the harm, the intervening cause is simply a “concurring cause.” Accordingly, even if the hedge fund manager had breached material portions of the agreement (which he did not), that would still not be a superseding cause that absolved Proskauer of liability. The record suggested that the hedge fund manager would not have been able to redeem Dr. Adelman’s interest but for Proskauer’s alleged negligence. It was foreseeable that, once Proskauer drafted the agreement to let the hedge fund manager engage in the underlying transaction without Dr. Adelman’s consent, then Dr. Adelman would have trouble collecting his share of the consideration from the hedge fund manager. A jury could reasonably find that Proskauer could have protected Dr. Adelman from this risk by, for example, not including the strategic transaction provision in the agreement.

Alves v. BJ’s Wholesale Club, Inc.^[112] (electronic data collection, wiretapping). Alves is one of a number of decisions issued by the Business Litigation Session in 2023 related to whether certain internet tracking technologies violate the Massachusetts Wiretap Statute, G.L. c. 272, § 99 (“Wiretap Statute”). Here, the court considered, and ultimately denied, a motion to dismiss a class action complaint challenging BJ’s Wholesale Club, Inc.’s (“BJ’s”) use of “Session Replay Code” (“SRC”) to record visitors’ activities on its website. SRC is computer code that enables website operators to record, save, and replay visitors’ interactions with a website—including mouse clicks, scrolls, zooms, keystrokes, and text entries. SRC recordings are not necessarily anonymized, and personally identifiable information typed by a website visitor may be captured. The Alves plaintiff alleged that BJ’s use of SRC violated both the Wiretap Statute and the Massachusetts statute governing invasion of privacy, G.L c. 214, § 1B. BJ’s moved to dismiss all claims, arguing with respect to the Wiretap Statute that the plaintiff (i) failed to plausibly allege that BJ’s conduct concerned wire communications and (ii) failed to plausibly allege that the conduct amounted to an interception within the meaning of the statute. The court rejected each argument in turn.

A “wire communication” is defined in the Wiretap Statute as “any communication made in whole or in part through the use of facilities for the transmission of communications by the aid of wire, cable, or other like connection between the point of origin and the point of reception.” G.L. c. 272, § 99(B)(1). BJ’s asserted that the plaintiff’s claims did not implicate “wire communications” because the activities tracked by its SRC (i) were not “communications” and (ii) did not involve the use of a wire, cable, or other like connection. The court disagreed. Citing to the dictionary definition of “communication,” the court found that the mouse movements, clicks, and keystrokes recorded by BJ’s SRC may properly be considered an exchange of information between the website owner and the website user. The court further rejected BJ’s contention that an Internet-based communication does not occur by wire, reasoning that internet technology is rooted in telephone infrastructure.

BJ’s arguments as to the absence of an “interception” likewise failed. As defined in the statute, “interception” means to “secretly hear, secretly record, or aid another to secretly hear or secretly record the contents of any wire or oral communication through the use of any intercepting device by any person other than a person given prior authority by all parties to such communication.” G.L. c. 272, § 99(B)(4). BJ’s argued that, even if these were wire communications, the plaintiff’s claims still failed because he did not allege that the contents of any wire communication were recorded. BJ’s further argued that the plaintiff failed to plausibly allege that SRC is an intercepting device. Citing the breadth of the statutory language, the court found that keystrokes, clicks, mouse movements, and other data constitute recorded “contents” within the meaning of the statute. The court further rejected BJ’s claims that SRC is not a “device” or “apparatus,” and declined to find that SRC falls within the so-called “telephone equipment exception.” The court found the case law cited by BJ’s to be distinguishable based on the degree of invasion involved, and concluded that SRC’s characteristics are “quite different” from telephone equipment. Finally, the court refused to dismiss the plaintiff’s invasion of privacy claim on the grounds that (i) whether an intrusion transgresses the privacy statute is a fact question not resolvable on a motion to dismiss; (ii) the standards for acceptable data collection on the internet are evolving; and (iii) the scope of discovery would not change if the invasion of privacy claim remained.

JFF Cecilia LLC v. Weiner Ventures LLC^[113] (spoliation, sanctions). Read together, these decisions (i) clarify the legal standard in Massachusetts for when the duty to preserve evidence begins and (ii) explain when sanctions may be imposed for spoliation of evidence. The plaintiffs in JFF Cecilia LLC moved for sanctions based on the defendants’ deletion of various emails and texts after they had been provided with formal written notice of a contract dispute between the parties. The notice was provided on August 20, 2019. In the days that followed, however, multiple attorneys communicated that the notice was not meant to serve as a precursor to litigation. Then, on October 1, 2019, counsel for the plaintiffs sent a settlement offer that threatened recovery through “other mechanisms” if the offer was not accepted. Shortly thereafter, one of the defendants performed a factory reset of his cell phone, permanently destroying any electronic evidence that might otherwise have been recoverable. The defendants also continued their practice of deleting old texts and emails until October 23, 2019.

In its initial decision, the court denied the plaintiffs’ motion for sanctions on the grounds that the defendants would not reasonably have expected to be sued until October 1, 2019, and that the plaintiffs failed to show they suffered any prejudice from spoliation that occurred between October 1 and October 23, 2019. The court reasoned that the duty to preserve evidence arises once litigation becomes “probable” and “not merely possible.” Here, litigation became “probable” upon the defendants’ receipt of the October 1 settlement offer, at which point any reasonable person would have understood there to be a clear threat of litigation.

On appeal, a single justice held that the lower court had applied the wrong legal standard and remanded with an order that the court “determine if the defendants knew or reasonably should have known that evidence might have been relevant to a possible action.” On remand, the lower court stated that it understood the phrase “possible action” to mean something materially different than “likely” litigation. It concluded that a future lawsuit is “possible” if it is within the limits of ability, capacity, or realization but “likely” only if it has a high probability of occurring. Under this standard, sanctions were warranted based on the defendants’ spoliation of evidence after their receipt of the August 20, 2019, notice. Because the plaintiffs were prejudiced by the destruction of evidence during this time period, the court held that the plaintiffs would be permitted to offer evidence of the spoliation at trial and found that the jury should be instructed as to an unfavorable inference against the defendants regarding the contents of the deleted messages.

§ 2.3.9. Michigan Business Courts

Thomas A. Robinson and The Mack Shop, LLC v. Gretchen C. Valade Revocable Living Trust^[114] (Arbitration, deadlock, dissolution, operating agreements). In 2012, Plaintiff Thomas Robinson established Plaintiff The Mack Shop, LLC with Gretchen Valade. Robinson and Valade were 50/50 owners and co-managers of the company. The company owned a commercial building, of which Valade occupied 20% and Robinson occupied 80%. Each paid below-market rent of $1,000 per month and shared the building’s operating expenses. Nearly a decade later, Valade transferred her interest in the company to the Defendant Trust and granted authorization to her son and to her business representative to manage the company on behalf of the trust. At that time, Valade also relinquished her tenancy and leased her 20% of the building to a third party, who continued to pay the $1,000 rental rate.

Then, in December 2021, the trust’s representatives called a member/manager meeting and submitted two resolutions, one that would require the company to increase its rental rates for both tenants and another that would require the company to sell the building before March 2022. Robinson voted against both resolutions, prompting the trust to submit a third resolution to dissolve the company. Robinson voted against this resolution as well. Consequently, the trust filed a demand for arbitration claiming that the members were at an impasse and seeking dissolution pursuant to Michigan’s LLC Act. Robinson countered that the company had operated the same way for a decade, and that so long as it maintained its historical operations, there was no deadlock. The arbitrator agreed with the trust and ordered a dissolution.

Robinson and the company filed a complaint in the Wayne County Business Court seeking to vacate the arbitrator’s ruling. The trust moved to dismiss and to confirm the award. Robinson argued that the arbitrator erred by applying the LLC Act’s dissolution provision instead of a provision in the company’s operating agreement that prohibited the company’s members from seeking to “compel dissolution of the company, even if such power is otherwise conferred by law.” Given the conflict between the provision and the statute, the court considered the question of which should prevail. After reviewing the caselaw and the particulars of the case, the court agreed with the arbitrator’s harmonization of the statute and the operating agreement and found that the statute permits dissolution where, as here, an operating agreement has no mechanism for resolving an impasse. Thus, the court upheld the arbitration award.

Graczyk Holdings, LLC, Offshore Spars Co., and Eric Graczyk v. Steven King^[115] (Breach of contract; fraud; economic loss doctrine). In September 2021, Plaintiff Eric Graczyk and Defendant Steven King executed a letter of intent (“LOI”) for Graczyk’s company, Graczyk Holdings (“GH”), to purchase King’s company, Offshore Spars (“Offshore”) The LOI provided for due diligence review by Graczyk and required King to make disclosures concerning Offshore’s finances and operations. In December 2021, Graczyk and King executed a stock purchase agreement (“SPA”) by which GH purchased all of Offshore’s shares for $3,000,000. The SPA required King and Offshore to make further disclosures to GH. The sale closed in January 2022, and was financed by a bank loan, two promissory notes, and a personal guaranty from Graczyk.

Plaintiffs alleged that just months after closing, they discovered that King made multiple misrepresentations and omissions during the LOI’s due diligence and disclosure period and breached the representations and warranties he made during that period. Plaintiffs further alleged that King made multiple misrepresentations and omissions in the SPA’s required disclosures. Plaintiffs sued in the Macomb County Business Court, raising claims for breach of contract and unjust enrichment as well as multiple fraud claims, including misrepresentation, silent fraud, and fraudulent inducement. King moved to dismiss all of Plaintiffs’ claims, which the court granted for the fraud claims only.

The court first considered King’s arguments based on the economic loss doctrine, which precludes tort claims based on a breach of a duty arising out of a contractual obligation. The court found that Plaintiffs’ misrepresentation and silent fraud allegations (such as the claim that King “falsely represented that all disclosures required under the [SPA] were fully, accurately, and completely made”) related directly to King’s disclosure obligations under the SPA, and in fact were the same allegations underlying Plaintiffs’ breach of contract claims. The court rejected Plaintiffs’ argument that the SPA’s indemnification provision excepted fraud and thus created a carve-out for the doctrine. The court stated that allowing parties to contract around the doctrine would undermine its purpose to keep contract and tort law distinct. Furthermore, the court rejected Plaintiffs’ assertion that their fraudulent inducement claim is exempt from the economic loss doctrine. The court stated that while there is an exemption for inducement claims relating to fraud extraneous to the contract, Plaintiffs’ inducement claims all concerned King’s performance of the contract. Accordingly, the court held that Plaintiffs’ fraud claims were barred by the economic loss doctrine.

Pinnacle North, LLC v Keith A. White^[116] (Voidable transactions, capital contributions, distributions). Non-party Marketplace Home Mortgage, LLC (“MHM”) leased office space from Plaintiff. In October 2019, Plaintiff obtained a default judgment against MHM of approximately $53,000, plus interest, costs, and attorneys’ fees. Plaintiff was unable to collect on the judgment, and brought a subsequent suit in the Oakland County Business Court against Defendant’s former owner, seeking to pierce the corporate veil and recover the default judgment. The matter went to a bench trial, where the central dispute was the characterization of a $50,000 payment Defendant made from MHM to himself in December 2019. If the payment was a distribution to Defendant, then it would be a voidable transfer under the Voidable Transactions Act that Plaintiff could collect to satisfy the judgment; but if it was a loan repayment as Defendant contended, then it would not be a transfer under the Act and therefore would not be collectible.

The court first considered whether Defendant had made any loan to MHM at all. Defendant claimed to have deposited $275,000 in order to use a line of credit for the company and claimed that this deposit was a loan to the company. However, the deposit was characterized differently on different documents: MHM’s books and records showed it as a capital contribution made on November 30, 2018; a separate loan document and security agreement showed it as a loan made on December 3, 2018; tax documents did not show it as a liability; and MHM’s balance sheet did not show it as a loan. Defendant, for his part, testified that the deposit was both a loan and a capital contribution. The court did not find Defendant credible and found that the books and records unambiguously proved the $275,000 deposit to be a capital contribution.

Turning to the $50,000 payment, the court found that it was a distribution from MHM to Defendant, and not a repayment of the alleged loan, because the check: (1) was made to MHM’s sole owner; (2) was made at the end of the year; (3) did not identify any consideration; (4) did not correspond to any loan schedule; (5) did not correspond to any loans on MHM’s books; (6) had no description of the payment; and (7) was shown on MHM’s books as a return of a capital contribution. Additionally, Defendant had sworn to the IRS that there were no outstanding loans from MHM officers. Accordingly, the payment was a distribution, and because it was made after Plaintiff’s claim against MHM and while MHM was insolvent, it was voidable under the Voidable Transactions Act. The court found Defendant responsible for the entirety of Plaintiff’s default judgment against MHM, including nearly $70,000 in attorneys’ fees pursuant to the underlying contract.

Fastenal Company v. Kurt Patrick Gross and Hi-Tech Fasteners, LLC^[117] (Noncompete, trade secrets, preliminary injunctions). Defendant Kurt Gross was an employee of Plaintiff Fastenal Company. Gross had a confidentiality and noncompetition agreement that prohibited Gross from soliciting Fastenal’s customers for a year after leaving Fastenel’s employ. On June 3, 2022, Gross resigned from Fastenal. On that same day, Gross began employment with Defendant Hi-Tech Fasteners, LLC, a competitor of Fastenol. Upon exiting Fastenal, Gross emailed to himself a “rolodex” spreadsheet listing Fastenal customers and confidential customer information. Fastenal alleged that while at Hi-Tech, Gross used his connections with Fastenal’s customers and Fastenal’s confidential customer information to solicit numerous Fastenal customers to buy parts from Hi-Tech, and that Hi-Tech could not have secured those customers without Fastenal’s proprietary and confidential information. Believing Gross breached his agreement, Fastenal filed suit in the Ottawa County Business Court, alleging breach of the confidentiality and noncompetition agreement, misappropriation of trade secrets, and tortious interference. Fastenal sought a preliminary injunction prohibiting Gross from failing to maintain the confidentiality of Fastenal’s customer information and from soliciting Fastenal’s customers and prohibiting Hi-Tech from causing Gross to violate the confidentiality and noncompetition agreement.

The court held an evidentiary hearing, after which it considered the traditional injunction factors. First, the court found that Fastenal showed a substantial likelihood of success on its breach of contract claim because Gross took employment with a direct competitor, emailed himself a customer list with proprietary information, and an email exchange proved at least one incident of impermissible solicitation. However, the court found that there was not a likelihood that Fastenal would succeed on its misappropriation of trade secrets claim, as Fastenal provided only speculative and circumstantial allegations of improper disclosure, which Gross denied.

Next the court stated that a breach of a noncompetition agreement can establish irreparable injury in the form of the “loss of consumer goodwill and the weakened ability to fairly compete that would result from disclosure of trade secrets and breach of a non-compete.” Gross argued that his agreement with Fastenal was not actually a noncompetition agreement because it did not totally prohibit him from working for a direct competitor, but instead prohibited him from soliciting customers and sharing information. The court disagreed, noting that the agreement’s narrow employment restrictions merely complied with Michigan’s statutory requirement that a noncompete agreement be reasonable.

The court then looked to the balance of hardships and found that while Fastenal had established it would suffer some irreparable harm, the proposed injunction would not subject Gross or Hi-Tech to comparable harm. Under the proposed injunction, Gross could still continue working at Hi-Tech, and Hi-Tech had other salespeople that are not subject to Gross’s agreement and thus could do business with Fastenal’s customers.

Finally, the court considered the public interest, and found that the public has a general interest in the courts’ enforcement of contracts, which support the legitimate business interests of all contracting parties. The court further found that the proposed injunction was a limited and reasonable restriction on Gross, who would still be able to utilize his years of experience.

Having found all of the preliminary injunction factors in Fastenal’s favor, the court issued the requested preliminary injunction pending final judgment on Fastenal’s claims.

Franks v. Franks^[118] (Shareholder oppression, business judgment rule, dividends; buyout).^[119] Plaintiffs owned 50% of the non-voting shares of Defendant Burr Oak Tool, Inc. The individual Defendants were officers and directors who made a low offer to redeem Plaintiffs’ shares, which they followed up by refusing to pay dividends despite the company having ample funds to do so. Plaintiffs brought a claim for, among other things, shareholder oppression.

A Kent County Business Court judge, sitting by designation, conducted a Zoom trial over 11 days. After trial, the court found that Defendants had committed intentional shareholder oppression and had acted in bad faith by withholding dividends, and that because of that bad faith, Defendants could not avail themselves of the protection of the business judgment rule.^[120] The court ordered four of the individual Defendants and the company to pay damages to the Plaintiffs in the form of a dividend totaling $2,100,000, including interest. However, the court declined to order a buyout, finding that because of Plaintiffs’ substantial holdings, such a remedy would have an adverse effect on the company and third parties who rely on the company. Instead, the court ordered damages and the appointment of an independent outside director, which the court believed would improve the corporate culture.

§2.3.10. New Hampshire Commercial Dispute Docket

Under the following case headings, you will find direct excerpts from the respective opinions of the New Hampshire Commercial Dispute Docket, featuring key language from the court’s decision.

Scott Komaridis v. Kevin D’Amelio, et al.^[121] (Minority shareholder freezeout claims). “The New Hampshire Supreme Court has not explicitly adopted the tort of corporate freezeout but has assumed its existence arguendo. See Thorndike v. Thorndike, 154 N.H. 443, 446 (2006). Another superior court, as part of the Business and Commercial Dispute Docket, ‘has previously held that if the question were squarely presented, the New Hampshire Supreme Court would find that majority shareholders owe an actionable fiduciary obligation to minority shareholders.’ Ronzio v. Tannariello, No. 226-2019-CV-00671, 2019 WL 678358, at *7 (N.H. Super. Ct. Dec. 19, 2019) (McNamara, J.); see also Meehan v. Gould, No. 218-2017-CV-1322, 2019 WL 3519455, at *5 (N.H. Super. Ct. July 31, 2019) (McNamara, J.). ‘[T]he assumed existence of the freeze-out claim under New Hampshire law is based on the existence of a fiduciary duty between shareholders in a closely held corporation.’ Ronzio v. Tannariello, No. 226-2019-CV-671, 2020 WL 13663046, at *5 (N.H. Super. Ct. Dec. 11, 2020).

“The Court finds that the nature of a member-managed LLC, perhaps the most common form of a closely held corporation, supports Plaintiff’s position. See Pointer v. Castellani, 918 N.E.2d 805, 808 (Mass. 2009) (describing an LLC as ‘a closely held corporate entity.’). ‘Only in the close corporation does the power to manage carry with it the de facto power to allocate the benefits of ownership arbitrarily among the shareholders and to discriminate against a minority whose investment is imprisoned in the enterprise.’ Meiselman v. Meiselman, 307 S.E.2d 551, 559 (N.C. 1983) (quotation omitted). The unequal power inherent in a closely held corporation leaves minority shareholders in an especially vulnerable situation because they cannot readily sell off their shares to recoup their investment. See Donahue v. Rodd Electrotype Co. of New England, Inc., 328 N.E.2d 505, 514–15 (Mass. 1975) (explaining that compared to a large public corporation where a dissatisfied shareholder could sell off shares, the minority shareholder in a closely held corporation does not have a ready market to reclaim capital). Additionally, courts’ general reluctance to become involved with business decisions of a corporation have also left minority shareholders susceptible to majority shareholders’ oppressive conduct. See id. at 513–14.”

Atlantic Anesthesia, P.A. v. Ira Lehrer, et al.^[122] (Common interest doctrine). “It is well settled that ‘[w]here legal advice of any kind is sought from a professional legal adviser in his capacity as such, the communications related to that purpose, made in confidence by the client, are at his instance permanently protected from disclosure by himself or by the legal adviser unless the protection is waived by the client or his legal representatives.’ Riddle Spring Realty Co. v. State, 107 N.H. 271, 273 (1966). The burden to prove the existence of the attorney-client relationship lies with the party asserting the privilege. McCabe v. Arcidy, 138 N.H. 20, 25 (1993).

“‘Although occasionally termed a privilege itself, the common interest doctrine is really an exception to the rule that no privilege attaches to communications between a client and an attorney in the presence of a third person.’ United States v. BDO Seidman, LLP, 492 F.3d 806, 815 (7th Cir. 2007). The common interest doctrine applies when two or more clients consult or retain the same attorney to represent them on a matter of common interest. Cavallaro v. United States, 284 F.3d 236, 249 (1st Cir. 2002). ‘In such a situation, the communications between each of them and the attorney are privileged against third parties.’ Id. ‘[T]he privilege [also] applies to communications made by the client or the client’s lawyer to a lawyer representing another in a matter of common interest.’ Id. at 249–50; see also N.H. R. Evid. 502(b) (codifying the common interest doctrine and providing that it applies to ‘confidential communications made for the purpose of facilitating the rendition of professional legal services,’ when between, inter alia, the client’s lawyer and a lawyer ‘representing another party in a pending action and concerning a matter of common interest therein.’). The doctrine ‘is not an independent basis for privilege, but an exception to the general rule that the attorney-client privilege is waived when privileged information is disclosed to a third party.’ Cavallaro, 284 F.3d at 250. It generally does not protect communications that did not include an attorney or another privileged person. See United States v. Krug, 868 F.3d 82, 87 (2d Cir. 2017) (noting that, while the doctrine ‘somewhat relaxes the requirement of confidentiality by defining a widened circle of persons to whom clients may disclose privileged communications,’ a communication only among the clients is only privileged if it was ‘made for the purpose of communicating with a privileged person, i.e., the lawyer,’ or the lawyer’s agent or client’s agent). ‘The application of properly formulated doctrine to the facts remains a matter of discretion for the district court.’ Massachusetts Eye & Ear Infirmary v. QLT Phototherapeutics, Inc., 412 F.3d 215, 225 (1st Cir. 2005).”

Vermont Telephone Company, Inc. v. FirstLight Fiber, Inc.^[123] (Material breaches of contract). “Plaintiff next argues that even if it did breach the Lease, said breach was not material as a matter of law. ‘For a breach of contract to be material, it must go to the root or essence of the agreement between the parties, or be one which touches the fundamental purpose of the contract.’ Found. for Seacoast Health v. Hosp. Corp. of Am., 165 N.H. 168, 181–82 (2013). ‘A breach is material if: (1) a party fails to perform a substantial part of the contract or one or more of its essential terms of conditions; (2) the breach substantially defeats the contract’s purpose; or (3) the breach is such that upon a reasonable interpretation of the contract, the parties considered the breach as vital to the existence of the contract.’ Id. at 182. ‘Whether a breach of contract is material is a question of fact.’ Id. at 181.”

§ 2.3.11. New Jersey’s Complex Business Litigation Program

Twp. Of Parsippany-Troy Hills v. Thomas Controls, Inc. v. Keystone Engineering Group, et al.^[124] (Breach of contract and negligence). In this breach of contract and negligence action arising from a dispute in connection with construction improvements to be made to plaintiff’s wastewater treatment plan, the New Jersey Superior Court confirmed that New Jersey’s Affidavit of Merit statute indeed has teeth. The court dismissed with prejudice the third-party complaint of defendant/third-party plaintiff, Thomas Controls, Inc. (TCI) for TCI’s failure to timely serve an Affidavit of Merit (AOM) in connection with TCI’s third-party complaint alleging, inter alia, professional malpractice against Keystone, the engineer for the construction project at issue.

New Jersey’s AOM Statute (N.J.S.A. 2A:53-27, et seq.) requires a plaintiff seeking damages for personal injuries, wrongful death or property damage resulting from an alleged act of negligence or malpractice by a licensed person in his or her profession or occupation to provide the defendant with an affidavit of an appropriate licensed person that such claims have merit (i.e., an AOM). Under the statute, the AOM must be provided within 120 days following the filing of the answer to the complaint. TCI acknowledged that it failed to timely serve the AOM, but argued that it had nonetheless substantially complied with the AOM Statute by filing the AOM shortly after receiving Keystone’s motion to dismiss.

In granting Keystone’s motion to dismiss with prejudice, the court (at least tacitly) agreed with Keystone’s arguments that the AOM Statute applies to malpractice actions against engineers, as well as to third-party complaints. The court also ruled that TCI failed to substantially comply with the AOM Statute and granted Keystone’s motion to dismiss the third-party complaint with prejudice for failure to comply with the AOM Statute.

Weston Landing Condominium Assoc., Inc. v. Centex et al.^[125] (Construction defect). In this construction defect case concerning roofing work performed by certain defendants, the New Jersey Superior Court reaffirmed New Jersey’s “strong public policy favoring non-disclosure of confidential settlements.” In this multi-party action, a non-settling defendant filed a motion to compel the terms of a settlement between plaintiff and other settling defendants. The non-settling defendant argued that, because the other roofing defendants had already settled and the cost to repair the roof was a fixed amount given that the roof repairs had already been made, the non-settling defendant was entitled to information about the settlement so that plaintiff would not receive an unfair windfall if the non-settling defendant was not provided with a post-trial credit.

In denying the non-settling defendant’s motion to compel, the court noted that while New Jersey’s strong public policy favoring settlements does not override the presumption of access to court records, the terms of the settlement in the instant case, as opposed to other cases cited by the non-settling defendant, were not placed on the record in court and were not a matter of public record. Therefore, the court denied the non-settling defendant’s motion as “[defendant] fail[ed] to cite to any case that allows a court in New Jersey to compel the disclosure of confidential settlement terms if those terms were not a matter of public record.”

§ 2.3.12. New York Supreme Court Commercial Division

Chen v Fox Rehab. Servs., P.C.^[126] (Pre-answer motion to dismiss). This case is an example of a pre-answer motion to dismiss based on documentary evidence—a form of motion practice that is relatively unique to New York. There, the Bronx County Commercial Division dismissed nine of ten claims brought by the plaintiffs for failure to state a claim, but did not dismiss the plaintiffs’ breach of contract claim, despite the defendants’ introduction of documentary evidence aimed at defeating that claim.

In Chen, a group of five physical and occupational therapists brought suit against their former/current employer (Fox Rehabilitation Services, P.C. or “Fox”), its founder, CEO, chief of staff, and a related company (Fox Rehabilitation Physical, Occupational and Speech Therapy Services, L.L.C. or “FTS”). In their amended complaint, the plaintiffs alleged that the defendants represented to them “explicitly and in writing—that they would be paid out of a deferred compensation plan upon a 50% change in control of the company (i.e. an acquisition) . . . .” When the acquisition occurred and the plaintiffs requested their deferred compensation, they claimed that the defendants improperly denied their compensation on the grounds that the transaction did not satisfy the definition for change of control and that the compensation plan had been abolished five years earlier. Critically, the plaintiffs pleaded that they were never shown copies of what the defendants claimed to have been the actual compensation plan or copies of the notice that the plan was abolished, just copies of a Summary Plan Description (or “SPD”). The plaintiffs asserted a variety of claims, including for breach of contract, which the defendants moved to dismiss in full on the basis of documentary evidence under CPLR § 3211(a)(1) and for failure to state a cause of action under CPLR § 3211(a)(7).

The defendants introduced four sets of documents to support their motion to dismiss, including copies of the Plan, the SPD, a document terminating the Plan, and documents reflecting the denial of plaintiffs’ requests for compensation under claims procedure provisions in the Plan. The introduction of these documents placed the case into a unique procedural posture. As the court noted, the New York Court of Appeals has previously stated that “‘when evidentiary material [in support of dismissal] is considered the criterion is whether the proponent of the pleading has a cause of action not whether he has stated one.’” In light of this binding precedent, the court explained “that if the evidence submitted controverts the allegations in the complaint, they are not deemed true and dismissal for failure to state a cause of action is warranted.” The court further explained that, at the motion to dismiss stage, documentary evidence can be considered, but only “judicial records, judgments, orders, contracts, deeds, wills, mortgages and ‘a paper whose content is essentially undeniable and which, assuming the verity of its contents and the validity of its execution, will itself support the ground upon which the motion is based’. . . .”

With those principles in mind, the court determined that the documents submitted by the defendants constituted documentary evidence under CPLR § 3211(a)(1) and stated that it “must view the allegations in the complaint against the backdrop of these documents and resolve any conflict in favor of the documents. This is no less true despite plaintiffs’ assertion that they question the authenticity and validity of the Plan and termination document.” The court held that the SPD was not the agreement between the parties; instead, the Plan governed between the parties. Then, pursuant to a New Jersey choice-of-law provision in the Plan, the court applied New Jersey substantive law to interpret the contract, concluding that the termination provision in the Plan “proscribed cancellation of the Plan if any participant had earned equity appreciation under the terms of the Plan on the date of cancellation.” While the defendants submitted documents claiming that there was no value at termination, the court noted that “they submitted documents which only conclusorily alleged that when the Plan was terminated, as relevant here, that the company’s value was less than plaintiffs’ base value in the Plan”; the “[d]efendants could and should have submitted documents detailing the [specific values] . . . when the Plan was terminated thereby establishing that the Plan was terminated in accordance with its terms.” The court stated that “the record is bereft of specific and detailed information establishing that Fox terminated the Plan in accordance with section 8.2 of the same,” and it denied dismissal of the breach of contract claim. At the end of the decision, the court also denied the defendants’ motion to dismiss the breach of contract claim under CPLR § 3211(a)(1) on the same grounds.

Magnetic Parts Trading Ltd. v. National Air Cargo Group, Inc.^[127] (Motion to amend the pleadings). The Commercial Division’s decision in Magnetic Parts Trading Limited v. National Air Cargo Group, Inc., demonstrates the flexibility and leniency courts embody when adjudicating motions to amend pleadings. In Magnetic Parts, the New York County Commercial Division granted National Airlines Cargo Group’s (National Airlines) motion for leave to amend its answer to assert counterclaims against Magnetic Parts Trading Limited (Magnetic Parts).

In December 2002 Magnetic Parts, as lessor, and National Airlines, as lessee, entered into a written lease (the Lease) for a Rolls Royce aircraft engine. National Airlines agreed to pay Magnetic Parts a $150,000 deposit and $60,000 fee each month. The Lease provided that if National Airlines failed to redeliver the engine, the lease term would automatically extend. In January 2020, National Airlines informed Magnetic Parts that it did not intend to re-lease the engine but failed to redeliver the engine. Magnetic Parts took the position that the lease term had been automatically extended and continued to charge National Airlines a monthly fee. A later inspection of the engine revealed several defects including corrosion on the fan case. Magnetic Parts claimed that the defects were caused by National Airlines and rendered the engine unserviceable. As a result, Magnetic Parts filed a complaint in September 2020 pleading causes of actions for breach of the Lease, unjust enrichment, and an account stated. National Airlines interposed seven affirmative defenses in its answer, and two years later moved to amend its answer to assert two counterclaims for breach of contract and for breach of the covenant of good faith and fair dealing on the ground that Magnetic Parts had prior knowledge of pre-existing corrosion problems with Rolls-Royce engines. Magnetic Parts opposed the motion on the ground that National Airlines had waited for more than two years to assert its counterclaims.

The court first explained the standard for granting leave to amend pleadings, holding that it is well settled that “leave to amend a pleading should be freely granted in the absence of prejudice to the nonmoving party where the amendment is not patently lacking in merit,” and that a “party opposing leave to amend ‘must overcome a heavy presumption of validity in favor of permitting amendment’” by demonstrating prejudice or surprise or that the proposed amendment is palpably insufficient or patently devoid of merit.

The court found Magnetic Parts’ undue delay argument unpersuasive, explaining that a “showing of lateness must be coupled with significant prejudice to the other side to warrant relief,” and such prejudice exists only where a party “has been hindered in the preparation of its case or has been prevented from taking some measure in support of its position.” Because Magnetic Parts had not demonstrated any such prejudice, the court ultimately concluded that the two-year delay was not so significant as to warrant denial of the motion.

This did not end the inquiry, however. Turning to the substance of the proposed counterclaims, the court explained that the “party moving for the amendment need not establish the merit of the claim, only that the proposed amendment is not palpably insufficient or clearly devoid of merit.” The court held that National Airlines had met its burden on the proposed counterclaim for a breach of contract. To support its claim National Airlines alleged that corrosion of the fan case was a known issue falling outside of “routine-scheduled, condition monitored or on-condition line maintenance” as provided by the Lease and that it was therefore under no obligation to correct the condition, as doing so would violate the clause of the Lease prohibiting modification, alteration, overhaul, or repair of the engine. National Airlines also alleged that Magnetic Parts refused to cover the cost of replacing the fan case despite having collected $150,000 in fees for that purpose and failed to designate a redelivery location when National Airline offered to redeliver the engine. Magnetic Parts argued that these allegations were insufficient to state a claim because National Airlines could not establish willful misconduct or gross negligence based on the fact that it had been in possession of the engine for several years, was responsible for its care and maintenance, and had superior knowledge about its condition. The court rejected these arguments, found that National Airlines assertions were sufficient to state a cause of action for breach of contract, and granted leave to amend. Because National Airlines’ breach of good faith and fair dealing counterclaim rested on the same facts as its breach of contract claim, the court held it was duplicative and denied the motion with respect to this counterclaim.

Five Star Elec. Corp. v. Silverite Constr. Co. Inc.^[128] (No-damages for delay contract provision). The New York County Commercial Division’s decision in Five Star Elec. Corp. v. Silverite Constr. Co. Inc. demonstrates the narrow scope, and strict interpretation, of no-damages for delay provisions in a contract. The decision reaffirmed the proposition that no-damages for delay clauses are enforceable and a party challenging such clauses bears a heavy burden to demonstrate that an exception to enforcement applies or that enforcement has been waived based on the parties’ conduct or prior business dealings.

In June 2012, Silverite entered a contract with New York City School Construction Authority (SCA) to construct P.S. 315, a school in Queens (the “Project”). Later that year, in September 2012, Plaintiff Five Star and Defendant Silverite entered a subcontract under which Five Star was to furnish and install electrical and fire alarm equipment for the Project. Both the contract between Silverite and the SCA and the subcontract between Silverite and Five Star contained “no-damages for delay” clauses, which provided that the parties waived their claims for damages based on delay in performance and that the sole remedy for any such delay would be an extension of the time to perform and completion of the required work. These clauses notwithstanding, when work on the project was ultimately delayed, Five Start filed suit against Silverite, asserting that due to “Silverite’s bad faith, gross negligence and fundamental breach of its obligations under the… [s]ubcontract,” Five Star sustained damages. Specifically, Five Star claimed that Silverite unreasonably delayed “the review/resolution of [] requests for information, change orders, field work orders and related… project issues” and generally acted in “bad faith and with willful, malicious and grossly negligent conduct.” Silverite moved to dismiss the action, arguing that Five Star’s claims were clearly barred by the relevant no-damages clauses.

The court was not persuaded by Five Star’s argument that SCA and Silverite waived enforcement of the no-damages for delay provisions in the underlying agreements “because Silverite submitted at least some of Five Star and Silverite’s claims for delay damages to SCA.” In support Five Star relied on Pizzarotti, LLC v. FPG Maiden Lane LLC, 187 A.D.3d 420, 420 (1st Dept 2020), where “the First Department found, in a Lien Law case, that the waivers in the defendant’s payment applications ‘raised an issue of fact as to whether the waivers released plaintiff’s payment claims.’” The court in Five Star was not convinced and held that the “no-damages for delay provision b[ound] the parties.” Relying on the Court of Appeal’s decision in Corinno Civetta Constr. Corp. v. City of New York, 67 N.Y.2d 297, 309 (1986) (Corinno Civetta)—which held that “‘[a] clause which exculpates a contractee from liability to a contractor for damages resulting from delays in the performance of the latter’s work is valid and enforceable’ when the underlying contract and the provision satisfy the general requirements for contractual validity”—the court found that because Five Star did not assert that the relevant contract or subcontract themselves were invalid, the no damages for delay provisions in those agreements were generally enforceable.

Moreover, the court held that none of the recognized exceptions to the enforcement of a no-damages for delay provision were applicable here. Pursuant to Corinno Civetta, “damages may be recovered for: (1) delays caused by the contractee’s bad faith or its willful, malicious, or grossly negligent conduct, (2) uncontemplated delays, (3) delays so unreasonable that they constitute an intentional abandonment of the contract by the contractee, and (4) delays resulting from the contractee’s breach of a fundamental obligation of the contract.” Specifically, the court held that Five Star failed to allege any facts in support of its conclusory allegations that “(1) Silverite unreasonably delayed, disrupted, and interfered with Five Star’s performance, (2) these disruptions were not contemplated by the subcontract, (3) Silverite did not properly coordinate Five Star’s work, (4) Silverite did not ‘promptly review/resolve . . . requests for information, change orders, field work orders and related . . . Project issues,’ (5) Silverite acted in bad faith, willfully, maliciously, and in a grossly negligent manner, and (6) Silverite did not perform ‘numerous fundamental obligations of the . . . Subcontract,’” and it therefore had failed to meet its pleading burden to establish that one of the recognized exceptions applied to its claims. Ultimately, the court concluded that that the “no-damages provision [was] clear on its face, and courts habitually enforce[d] such clauses.”

SPG Cap. Partners LLC v. Cascade 553 LLC^[129] (Preliminary agreement in advance of a term sheet). In SPG Cap. Partners LLC v. Cascade 553 LLC, the New York County Commercial Division considered the enforceability of certain types of preliminary agreements in connection with a term sheet signed by the parties in anticipation of a real estate investment that later fell through. The court’s decision in this case highlights the risks of using these types of agreements to obtain promises from a counterparty, and it underscores the importance of drafting clear expressions of intent to ensure that such contracts are enforceable.

In this case, the plaintiff, SPG Capital Partners LLC (“SPG”), reached an agreement in principle with the defendant, Cascade 553 LLC (“Cascade”), whereby SPG would provide a mortgage loan to Cascade in connection with a planned real estate development in Brooklyn. Pursuant to the term sheet signed by the parties, SPG would provide a first mortgage loan to Cascade of $110,000,000, and Cascade would pay SPG $200,000 as a good-faith deposit. The term sheet stated that the document was “for discussion purposes only and [] subject to the Lender’s satisfactory completion of its due diligence, internal credit approvals and satisfactory legal review.” It further included an exclusivity clause and a liquidated damages clause obligating Cascade to pay SPG a breakup fee in the event the borrower elected not to proceed with the loan. The loan process did not go as planned and Cascade ultimately decided to obtain financing from another company. SPG then sued Cascade, seeking, inter alia, to enforce the term sheet’s liquidated damages and exclusivity clauses. SPG argued that even if the term sheet were otherwise unenforceable, the relevant clause was “independently enforceable” because the document expressly stated that those provisions would “survive the termination of this Term Sheet.” Cascade ultimately moved for summary judgment on SPG’s claims.

In its decision, the court agreed with Cascade that the parties’ term sheet was unenforceable. It found that “the document repeatedly emphasize[d] its nonbinding nature,” insofar as the term sheet was “expressly conditioned on the completion of the lender’s due diligence, further satisfactory negotiation by the parties, and the acceptance of the loan documents.” The court noted that “in those cases where courts have found letters of intent or term sheets to be binding, courts have relied not only on the specificity of the details in the documents but a similar manifestation of intent,” which was nowhere to be found in the term sheet at issue. Further, “virtually all the obligations in the term sheet fell upon” Cascade, whereas the agreement gave SPG “sole discretion” to “terminate the term sheet” and “determine the terms upon which it would extend credit.” And although SPG agreed to perform due diligence in connection with the transaction, the term sheet “bound Cascade to refrain from seeking other financing without regard to whether [SPG] moved forward with its due diligence in a timely fashion or adhered to the other provisions in the term sheet.” The court thus found that the lack of “mutuality of obligation” in the agreement, coupled with its nonbinding and conditional language, suggested that the parties did not intend to be bound by its terms.

Moreover, the court rejected SPG’s alternative argument that the exclusivity provisions in the agreement—which forbade Cascade from obtaining a first mortgage loan from a different lender—were independently enforceable, even if the term sheet were otherwise an unenforceable agreement to agree. The court noted that courts have enforced similar terms only where the “exclusivity provision [states that it] shall survive the term sheet and is binding regardless of the binding nature of the term sheet.” Here, although the document stated that the exclusivity provisions would “survive the termination of this Term Sheet,” there was “no statement that render[ed] the provision enforceable notwithstanding the nonbinding nature of the term sheet.” The court thus found that the exclusivity provisions could not be severed from the rest of the document.

CDx Diagnostics, Inc. v. Rutenberg^[130] (Motion to compel arbitration, Noerr-Pennington doctrine, tortious interference). In CDx Diagnostics, Inc. v. Rutenberg, the Commercial Division for New York County, clarified a range of legal issues involving motions to compel arbitration, the scope of the Noerr-Pennington doctrine, and tortious interference with contractual rights.

This case arose out of the transfer of control of the plaintiff CDx Diagnostics, Inc. from its founder, the defendant Dr. Mark Rutenberg, to private equity firm Galen. In connection with this transaction, Rutenberg entered into an Executive Employment Agreement (“EEA”) and an IP Agreement with CDx. Under the IP Agreement, Rutenberg assigned all proprietary rights to his inventions developed during the course of his employment to CDx. The EEA contained an arbitration clause that provided, in relevant part, that, “any dispute between the parties arising out of or relating to the negotiation, execution, performance or termination of this Agreement or Executive’s employment, including, but not limited to, any claim arising out of this Agreement … shall be settled by binding arbitration in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association.” Several years after this transaction, the parties fell into a dispute regarding a patent application for cancer detection technology filed by Rutenberg, which ultimately led to the termination of his employment. Shortly thereafter, CDx commenced an action against Rutenberg, seeking, among other things, (1) a declaration that the IP Agreement was enforceable; (2) an order invalidating Rutenberg’s assignment of the cancer detection technology; (3) a declaration that CDx was the rightful owner of the relevant patent; and (4) an order compelling Rutenberg to assign the intellectual property to CDx. In response, Rutenberg raised a host of affirmative defenses and counter-claims, including claims of wrongful termination, abuse of process, conversion, civil conspiracy, and misappropriation of commercial advantage. Specifically, Rutenberg claimed that by filing a “fraudulent lawsuit,” CDx had “usurped” and “misappropriate[d] economic opportunity” from the defendants. CDx moved to compel Rutenberg to arbitrate his counter-claims.

Ultimately, the court granted CDx’s motion to compel arbitration. The court began with the proposition that agreements to arbitrate disputes are both favored as a matter of policy and binding as a matter of law, as per the terms of the Federal Arbitration Act. Under New York law, the court emphasized that the court’s role in deciding motions to arbitrate is narrow: it must determine only whether there is a reasonable relationship between the subject-matter of the dispute and the general subject-matter of the underlying contract. Once such a reasonable relationship is established, the court must grant the motion. Any ambiguity in the scope of the arbitration clause must be resolved in favor of arbitration. The court held that the scope of the arbitration clause in the EEA was sufficiently broad to capture within its ambit most of Rutenberg’s counter-claims against CDx, including the wrongful termination claim.

The court also rejected both arguments Rutenberg raised in opposition to the motion. First, Rutenberg argued that the arbitration clause in the EEA terminated when Rutenberg’s role in CDx changed from CEO to Chief Scientific Officer a year before his termination from the company. As a result, Rutenberg argued, the EEA’s arbitration clause did not extend to his wrongful termination claim. The court held that the question of whether an arbitration clause survived the change in Rutenberg’s employment at CDx was a matter for the arbitrator to decide. Second, Rutenberg argued that the arbitration clause did not apply to the dispute over the intellectual property between Rutenberg and CDx, which was the crux of the litigation between the parties. Rutenberg claimed that granting the motion to arbitrate would lead to multiple and overlapping claims before multiple fora. The court ruled, relying on binding appellate precedent in PNE Media, LLC v. Cistrone, 294 A.D.2d 143 (1st Dep’t 2002), that “arbitration clauses are binding contracts which must be strictly enforced, even if enforcement will lead to bifurcated and overlapping litigation.” The court ultimately concluded that even if the employment dispute had to be arbitrated before an arbitrator and the intellectual property claim had to be litigated before a court, the possibility of bifurcated litigation was not sufficient grounds to deny CDx’s motion to compel arbitration.

Turning to the counter-claims, the court held that commencing a legal action in court was a protected activity under the First Amendment, and that the Noerr-Pennington thus doctrine barred the counter-claims. Under the Noerr-Pennington doctrine, “parties may not be subjected to liability for petitioning the government.” The court held that the act of filing a complaint and summons in court fell within the scope of “petitioning activity” under the Noerr-Pennington doctrine. The court concluded that “the Noerr-Pennington doctrine precludes precisely what [defendants] attempt to do here: interfere with the act of filing a lawsuit, which is protected First Amendment activity, by bringing civil claims against the plaintiff, CDx, based on that act.” The court then rejected Rutenberg’s argument that the instant action fell within the “sham lawsuit” exception to the doctrine, holding that the exception was a narrow one and that the burden of proving the exception fell on the party invoking it. In order to successfully invoke the “sham lawsuit” exception, Rutenberg and the other defendants had to show that “no reasonable litigant could realistically expect success on the merits of CDx’s declaratory judgment claim.” The court concluded that so long as CDx had “probable cause” to bring the lawsuit, which the court found existed in this case, the company was protected under the Noerr-Pennington doctrine. Accordingly, the court dismissed most of the defendants’ counter-claims.

The court also dismissed the claim against Galen for tortious interference with Rutenberg’s contract. A party asserting tortious interference must a plead the following facts: “(1) that a valid contract exists; (2) that a third party had knowledge of the contract; (3) that the third party intentionally and improperly procured the breach of the contract; and (4) that the breach resulted in damage to the plaintiff.” However, the third party is not liable for tortious interference if such conduct was justified under the economic interest doctrine, which provides that a third party is immune from liability for interfering with someone else’s contract, when such third party is “acting to protect its own legal or financial stake in the breaching party’s business.” The court noted that “a corporation that acquires another corporation and then causes one of the acquired corporation’s contracts to be terminated, is not liable for interference with that contract, because it had an economic justification for its actions.” The court held that Galen pleaded sufficient facts to establish the economic justification defense. Once the economic interest defense is established, the party asserting tortious interference must plead that the contractual interference was affected “through illegal or fraudulent means, or were otherwise motivated by malice.” Since the court found that Rutenberg’s allegations of illegality and malice against Galen were merely conclusory in nature, the court dismissed the tortious interference claim.

Haart v. Scaglia^[131] (Res judicata and collateral estoppel). In Haart v. Scaglia, the New York County Commercial Division partially granted the defendant’s motion to dismiss based on the doctrines of res judicata and collateral estoppel. The court found that the plaintiff was attempting to relitigate issues and facts that were previously decided in a Delaware case.

This case was at least the fourth of five lawsuits filed by Julia Haart (“Haart”) and Silvio Scaglia (“Scaglia”) in Delaware and New York in recent years related to their personal and business divorce. Scaglia is an Italian entrepreneur and investor, and Haart is a designer who became CEO of Elite World Group (EWG), one of Scaglia’s companies. After marrying Haart, Scaglia formed a holding company called Freedom and transferred his interests in EWG to it. Scaglia then transferred ownership of half of Freedom’s common stock to Haart, retaining 100% ownership of Freedom’s preferred stock. Haart alleged that Scaglia fraudulently concealed the existence of these preferred shares from her in connection with this transaction and that she entered into the deal with the understanding that the transfer of the common stock would make her an equal partner with Scaglia. Haart alleged that she only learned about the preferred shares during negotiations for a possible SPAC transaction for EWG, at which point Scaglia allegedly transferred her half of the preferred stock in the company. Haart also alleged that Scaglia unilaterally transferred $1.5 million from Freedom’s bank account and transferred other company property without informing her, in a manner inconsistent with their purported 50-50 partnership. Eventually, the personal and business relationship between the parties soured, leading to the instant action.

Prior to the instant action, Haart filed suit against Scaglia in Delaware, Haart v. Scaglia and Freedom Holding, Inc. & Elite World Group, LLC, C.A. No. 2022-0145-MTZ (the “Delaware Action”) seeking a declaratory judgment acknowledging her equal ownership of Freedom with Scaglia, invalidating her removal as a director and CEO of Freedom, affecting a judicial dissolution of Freedom, and asserting claims for breach of fiduciary duty. After a multi-day trial, the Delaware Court concluded (based on the language of the written agreements between the parties and Haart’s testimony about promises made by Scaglia to make her a 50% partner) that Haart was not in fact a 50% owner of Freedom.

In the instant action, Haart filed a lawsuit, inter alia, seeking a declaratory judgment and asserting claims for fraudulent inducement, fraudulent concealment, breach of contract, breach of fiduciary duty, unjust enrichment, promissory estoppel, and conversion. Haart alleged that Scaglia promised her that she would be a 50% partner in Freedom as compensation for her work as EWG’s CEO, but he intentionally concealed the existence of a preferred class of shares when he transferred 50% of the company’s common stock to her. Haart further alleged that Scaglia breached his promises, converted her property, and benefited from her work without compensating her. Scaglia sought dismissal of these claims on res judicata and collateral estoppel grounds in light of the earlier decision in the Delaware Action. In her opposition papers, Haart argued that the issues in the New York case were not identical to those in the Delaware Action because she explicitly conceded here that she was not a 50% owner of Freedom.

The New York County Commercial Division held that most of Haart’s claims were barred by the doctrines of res judicata and collateral estoppel. Citing controlling law from the New York Court of Appeals, the court explained that “[u]nder the doctrine of res judicata, when a claim is brought to a final conclusion, all other claims arising from the same transaction or series of transactions are barred, even if based on different theories or if seeking a different remedy.” As the court further explained, the “doctrine of collateral estoppel precludes a party from litigating an issue which has previously been decided against them in a proceeding in which they had a fair opportunity to fully litigate the point.” Here, the court found that the claims at issue in the Delaware Action involved the same documents, testimony, and evidence, and involved many of the same questions that would be at issue in the instant action, namely, whether Scaglia had promised to make Haart a 50-50 owner of Freedom (a question that the Delaware court ultimately answered in the negative). Thus, even though Haart may have been advancing a slightly different theory to seek recovery in the instant action, the court concluded that her claims for fraudulent inducement, fraudulent concealment, breach of contract, and promissory estoppel all arose from the same transaction or occurrence or involved the same questions at issue in the Delaware Action, and dismissed these claims from the case on res judicata and collateral estoppel grounds.

With respect to Haart’s remaining claims for breach of fiduciary duty, conversion, and the declaratory judgement that she owned a 49.9% share of Freedom—all of which were unrelated to Haart’s claim she had been promised a 50% stake in the company—the court found that res judicata and collateral estoppel did not apply and denied the motion to dismiss, finding that Haart had pled sufficient facts to state a claim for these causes of action.

Worbes Corp. v. Sebrow^[132] (Arbitration). In Worbes Corp. v. Sebrow, the Bronx County Commercial Division addressed the question of how long and to what extent can a party litigate in court before claiming that the dispute needs to be arbitrated. Ultimately, the court dismissed the plaintiffs’ motion seeking to compel arbitration against the defendants, reaffirming that despite favoring arbitration (where the parties have agreed to arbitrate their claims), courts may not compel arbitration if a party has litigated a matter extensively in court.

The complaint in Worbes alleged that plaintiff ZVI Sebrow (“ZS”) owned 50% of the stocks in Worbes Corp. (“Worbes”), a corporation, whose sole asset was real property located in the Bronx and whose exclusive business was to own, hold, and operate the property. Worbes Corp. was governed by a Stockholder’s Agreement (“Agreement”), which included an arbitration clause and whereby the shares in the corporation were equally owned by Abraham Sebrow (“AS”), Joseph Sebrow (“JS”), ZS, and David Sebrow (“DS”). When AS died in 2000, ZS became the owner of 50% of the shares in Worbes, and upon JS’s death, DS became the owner of 50% of the shares in the corporation. When DS died in 2017, his shares were reverted to Worbes. In 2019, DS’s wife Betty Sebrow (“BS”) filed an action seeking a declaration that, upon DS’s death, she and DS’s estate became owners of 50% of the shares in Worbes. She was unsuccessful, moved to reargue the court’s decision, and also filed an appeal. The motion to reargue and the appeal were pending when the instant decision was issued.

On January 5, 2022, ZS entered into a contract on behalf of Worbes to sell the property for $5,500,000, and sought a declaratory judgement from the court that BS did not own any of the shares in Worbes. ZS also argued that BS’s initiation of the prior action prevented ZS from selling the property and amounted to tortious interference with prospective business relations, abuse of process, and malicious prosecution. Additionally, ZS asserted that if it was found that BS owned any share in Worbes, “the refusal to consent to the sale of the [property] unless their demands [were] met constitute[d] a breach of duty of loyalty to Worbes.” ZS also moved for an order pursuant to CPLR §7503(a), compelling defendants to participate in arbitration, pursuant to the arbitration clause in the Stockholders Agreement.

In ruling on the motion, the court explained that under CPLR §7503(a), a party can seek leave to compel arbitration, and similarly, under CPLR §7503(b), an opposing party may seek an injunction to stay arbitration. It further noted that the right to arbitrate was not “unfettered and irrevocable,” and a party, “by his conduct, can waive the right” even if it was granted by an agreement between the parties. The court went on to consider five factors to determine whether the right to arbitrate had been waived, including: (1) whether the party seeking arbitration had “elected to proceed and/or resolve the otherwise arbitral dispute between the parties in a ‘judicial arena,’” which usually depends on “the amount of litigation that has occurred, the length of time between the start of the litigation and the arbitration request, and whether prejudice has been established”; (2) whether the party seeking to compel arbitration availed itself of the remedies available in court; (3) “whether the claims before the court are the same as those sought to be arbitrated”; (4) whether the party seeking to compel arbitration delayed seeking arbitration of its claims; and (5) whether arbitration would result in prejudice to the party opposing arbitration.

Applying the first and second factor to the matter before it, the court held that the plaintiffs, ZS and Worbes, had “so significantly availed themselves of the litigation process in th[e] action, so as to constitute waiver of the right to arbitration.” The court explained that the plaintiffs initiated the action by filing a complaint containing causes of actions sounding in declaratory judgement, tortious interference with prospective business relations, abuse of process, malicious prosecution, and breach of fiduciary duty. Moreover, the plaintiffs had filed five motions seeking various relief and remedies before they filed the instant motion to compel arbitration. The court noted that it agreed with the plaintiff that “under the circumstances then existing—the existence of a tax lien …—judicial intervention authorizing the sale of the [property] was necessary.” Thus, the court’s decision was “not premised on the plaintiffs’ initiation of the instant action”; “[h]ad the plaintiffs sought arbitration at that point, it is likely that the instant motion would have been granted.” However, the plaintiffs “decided to avail themselves of this court’s ability to decide this action on papers and made a motion, their third, seeking summary judgement.” The court held that this was clearly inconsistent with the plaintiffs’ claim that the parties were obligated to settle their differences by arbitration.

Moving to the third factor, the court noted that although the plaintiffs’ motion papers were “bereft of any indication of what issues” they seek to arbitrate, the court “will assume that they are the very issues asserted in the complaint.” The court denied the motion to compel arbitration because the claims that the plaintiffs seek to arbitrate had already been asserted before the court.

Addressing the fourth and fifth factors, the court held that the plaintiffs had “for months charted a course of litigation,” causing a significant delay in the resolution of the claims. The “plaintiffs waited almost a year from the time they were granted the exigent relief that they could not get via arbitration to seek arbitration.” The court opined that this delay “when viewed against the procedural history is egregious and militates in favor of the conclusion urged by defendants, namely that when it became apparent that the litigation in this action would be protracted, plaintiffs’ moved to abandon it and avail themselves of arbitration.” The court found this unacceptable as it would enable the plaintiffs to create their own unique structure combining litigation and arbitration. Lastly, the court noted that the defendant had incurred unnecessary delay and expense; hence, it would be prejudiced if compelled to arbitrate.

Trump v. Trump^[133] (Anti-SLAPP, breach of contract). The New York County Commercial Division’s decision in Trump v. Trump, 192 N.Y.S.3d 891 (Sup. Ct. N.Y. Cnty. June 9, 2023), provides an example of how courts can approach the interactions between New York’s recently amended anti-SLAPP law and traditional breach of contract claims. This decision largely denied Mary Trump’s motion to dismiss the claims brought by former president Donald Trump alleging that she breached a settlement agreement by disclosing documents to The New York Times and publishing a book that discussed the finances of the Trump family.

This decision arose out of a long-running dispute over the publication of financial information from the Trump family in the pages of the Times—specifically, in a 2018 article titled “Trump Engaged in Suspect Tax Schemes as He Reaped Riches from His Father”—as well as Mary Trump’s 2020 book, Too Much and Never Enough: How My Family Created the World’s Most Dangerous Man. As the court explained, Mary Trump had access to this information as a result of her participation as an objectant in litigation over the estate of Frederick C. Trump. The case was ultimately resolved with a 2001 settlement agreement, which included a confidentiality clause.

In 2021, Donald Trump brought claims against Mary Trump for the publication of her book, as well as claims against Mary Trump, the Times, and several Times journalists related to the Times article. While the suit was pending, New York expanded the scope of its anti-SLAPP law—which is aimed at frivolous strategic lawsuits against public participation (SLAPP) that seek to deter free speech. Mechanically, New York’s anti-SLAPP law operates by, inter alia, requiring a showing either that (a) the “cause of action has a substantial basis in law” or (b) the cause of action “is supported by a substantial argument for an extension, modification or reversal of existing law” under CPLR § 3211(g). However, this heightened standard only applies to actions “involving public petition and participation.” Prior to the 2020 expansion, actions involving public petition and participation were limited “to instances where speech was aimed toward a public applicant or permittee.” In 2020, New York expanded the scope of those actions to include “any communication in a place open to the public or a public forum in connection with an issue of public interest.”

The Times, its employees, and Mary Trump all filed motions to dismiss under the revised anti-SLAPP law. On May 3, 2023, the court found that the anti-SLAPP law applied to claims asserted against the Times and its employees and dismissed those claims. This left three claims—for (1) breach of contract, (2) breach of the implied covenant of good faith and fair dealing, and (3) unjust enrichment, against Mary Trump—to be decided in her motion to dismiss.

As a threshold matter, the court first addressed whether or not the claims against Mary Trump were covered by New York’s anti-SLAPP law. As the court noted, “Mary Trump argues that each claim asserted against her predicated liability on protected speech—the publication of the book and the provision of documents to a journalist reporting on issues of public interest and concern.” In contrast, Donald Trump argued that “his claims against Mary Trump are not subject to the anti-SLAPP law because the claims . . . are based upon on Mary Trump’s alleged violation of a binding settlement agreement that explicitly prohibited such publication.”

Weighing California law interpreting California’s similar anti-SLAPP law, the court ultimately found the decision in City of Alhambra v. D’Ausilio, 193 Cal. App. 4th 1301 (Ct. App. 2011) to be persuasive. In City of Alhambra, the City sued the defendant for breaching a settlement agreement that prohibited him from certain speech-related conduct. As the court summarized, “the court of appeal held that the ‘City did not sue [D’Ausilio] because he engaged in protected speech,’ but rather because ‘it believed he breached a contract which prevented him from engaging in certain speech-related conduct and a dispute exists as to the scope and validity of the contract,’ and that the suit, therefore, did not ‘arise from’ the protected activities.” Applying the same logic to this case, the court found that “New York’s amended anti-SLAPP law does not apply to prohibit plaintiff’s claims as asserted against Mary Trump.”

As a part of this discussion, the court also distinguished its determination in this motion sequence from the Times’ motion by noting first that the claims against the Times sounded in tort, not contract, and that “a wealth of case law supports the notion that the press is constitutionally protected to engage in the activity of newsgathering.” “In contrast,” the court noted, “Mary Trump has not cited any case law in which a court has held that breaching one’s own confidentiality obligations, by virtue of engaging in commercial speech and publishing a book that specifically addresses matters that are deemed confidential, constitutes, as a matter of law, a protected activity under the anti-SLAPP statute.”

§ 2.3.13. North Carolina Business Court

Cutter v. Vojnovic^[134] (Derivate action by a general partner on behalf of the general partnership against another general partner). The plaintiff alleged that he and the individual defendant were equal general partners in a common law partnership formed to purchase three family-owned hot dog restaurants in Ohio and that the individual defendant later misappropriated this partnership opportunity. The plaintiff asserted various claims, both individually and derivatively on behalf of the general partnership. The court dismissed the derivative claims for lack of standing.

Absent contract or consent, North Carolina law does not permit a general partner to bring a claim derivatively on behalf of the general partnership against another general partner. The North Carolina Uniform Partnership Act (“NCUPA”) does not authorize one general partner to assert a derivative action against another general partner (unlike other corporate statutes that permit derivative actions). And because general partners all have the ability to act on behalf of the partnership, all have management rights, and owe one another fiduciary duties, there is no need for derivative action in the general partnership context. Further, the NCUPA creates an adequate remedy for general partners, a claim for an accounting, through which one general partner may pursue claims directly against another general partner to obtain both equitable and monetary relief.

Notably, no reported North Carolina decision has held that a general partner may sue another general partner derivatively. A prior decision permitted a derivative claim by a general partner against a non-partner who allegedly colluded with another general partner to injure the partnership, but that claim was permitted because the partnership had no recourse against the non-partner, since it was impractical to expect the unfaithful general partner to consent to a direct action by the partnership. That decision thus did not hold that general partners may sue each other derivatively.

Visionary Ed. Tech. Holdings Grp., Inc. v. Issuer Direct Corp.^[135] (Standing of a corporation and its majority shareholder to demand that the corporation’s transfer agent not register transfer of shares of stock to the registered owner of the shares). The issuer (a Canadian corporation) of certain shares of stock and the issuer’s majority shareholder sued the issuer’s transfer agent under Section 25-8-403 of North Carolina’s Uniform Commercial Code. The majority shareholder (who previously owned the shares) had transferred the shares to two former directors of the issuer. The issuer later claimed that the former directors had no right to retain the shares because they had not met certain performance goals that they had agreed to in connection with the share transfer. The issuer and the majority shareholder thus requested an order that barred the transfer agent from removing restrictions on the shares and registering a transfer of the shares, as well as a declaration that the transfer agent could not be liable to the former directors for refusing a request to register transfer.

The court concluded that the issuer and the majority shareholder lacked standing to seek relief under section 25-8-403. The purpose of section 25-8-403 is to help the registered owner of a security prevent a sham registration request. To that end, the statute allows an “appropriate person” to demand that an issuer’s transfer agent not register transfer of a security. A related statute (section 25-8-107) defines “appropriate person” to mean the security’s registered owner. Accordingly, no one other than the registered owner is allowed to make a demand under section 25-8-403, and the issuer or past owner of shares may not interfere with the registered owner’s right to request registration of a share transfer. As a result, because it was undisputed that the shares at issue here were registered in the name of the former directors, the issuer and majority shareholder did not have standing under section 25-8-403 to make a demand on the transfer agent, obtain an injunction against the transfer agent, or seek a declaration concerning the transfer agent’s potential liability to the former directors.

Harris Teeter Supermarkets, Inc. v. Ace Am. Ins. Co.^[136] (Personal jurisdiction over insurance companies based on application of recent Mallory Supreme Court decision). This case involved an insurance coverage dispute between two supermarket chains and their insurers concerning whether the insurers owe coverage to the supermarket chains as to nearly 800 underlying lawsuits seeking damages related to injuries allegedly caused by the supermarket chains’ distribution and dispensing of opioid drugs. Some of the insurers moved to dismiss on personal jurisdiction grounds.

The court concluded that it had personal jurisdiction over the insurers based on the U.S. Supreme Court’s decisions in Mallory v. Norfolk Southern Railway Co.^[137] (a case decided while the court was considering the insurers’ motion to dismiss) and Pennsylvania Fire Insurance. Co. of Philadelphia v. Gold Issue Mining & Milling Co.^[138] (a 1917 case). Mallory held that a Pennsylvania law requiring registered foreign corporations to consent to suit in Pennsylvania courts in order to do business in Pennsylvania did not violate the Due Process Clause. In doing so, the Supreme Court reaffirmed its prior holding in Pennsylvania Fire, which had rejected a Due Process challenge to a Missouri law requiring out-of-state insurance companies to file “with the Superintendent of the Insurance Department a power of attorney consenting that service of process upon the superintendent should be deemed personal service upon the company so long as it should have any liabilities outstanding in the State.”

Here, the court reasoned that North Carolina has a statutory scheme similar to the Missouri law at issue in Pennsylvania Fire. In particular, the court determined that N.C.G.S. § 58-16-5, a statute that sets forth requirements for foreign insurance companies to be admitted and authorized to do business in North Carolina, makes it “mandatory” for foreign insurance companies to file an “instrument appointing the Commissioner of Insurance as agent for purposes of service of process” under N.C.G.S. § 58-16-30. And because it was undisputed that all the insurers (except one) were licensed to conduct insurance business in North Carolina, all the insurers (except one) had filed an instrument appointing the Commissioner as their agent on whom any legal process may be served under Section 58-16-30, and all the insurers had accepted service of process through the Commissioner, the court ruled that all the insurers (except one) “consented to suit in this State by completing the statutorily required registration procedures for foreign corporations.” As for the one insurer that was a surplus lines insurance company and subject to different licensing requirements under the North Carolina Surplus Lines Act, the court interpreted this statute to “mean that a surplus lines insurer may be sued in this State upon a cause of action arising here under any surplus lines insurance contract made by that insurer, so long as service of process is made upon the Commissioner pursuant to N.C.G.S. § 58-16-30.” Accordingly, personal jurisdiction over that insurer was also proper because it had accepted service of process through the Commissioner under 58-16-30.

Murphy Brown, LLC v. Ace Insurance Company^[139] (Allocation of liability among insurers). This insurance coverage dispute arose from several nuisance lawsuits brought against Smithfield Foods and its wholly owned subsidiary, Murphy Brown, in 2013 and 2014. Nearby property owners complained of excessive odor, dust, and noise in connection with Smithfield’s hog farming operations. Following several “bellwether” trials in the Eastern District of North Carolina that resulted in verdicts for the neighboring property owners, all of which were upheld on appeal, Smithfield and Murphy Brown entered into a global settlement with the remaining property owners. Smithfield and Murphy Brown then sued their various insurers who provided primary and excess coverage between 2010 and 2015, seeking a declaratory judgment that the insurers should be liable for the settlement amounts and costs in defending the lawsuits. Previously in this case, the court determined that the insurers owed a duty to defend. The court also granted in part and denied in part motions for partial summary judgment based on the “Pollution Exclusions” contained in Defendants’ various insurance policies.

In the instant summary judgment motion, the court considered the proper method to allocate indemnity liability among the various insurers. The insurers argued that the allocation should be “pro rata” based on the amount of time each insurer provided coverage to Plaintiffs. They relied on a provision in the policies stating that the policies only covered injuries for accidents occurring during the stated policy periods. Plaintiffs, however, pointed to different language in the policies stating that coverage would be provided for “any continuation, change, or resumption” of that injury after the policy period has ended. Based on that language, Plaintiffs claimed they were entitled to recover the entirety of their loss under an “all sums” theory.

The court relied on recent precedent from the North Carolina Supreme Court in Radiator Specialty Co. v. Arrowood Indem. Co., 383 N.C. 387, 881 S.E.2d 597 (2022), which had analyzed similar coverage requirements for damages allegedly caused by repeated exposure to benzene over time. Although noting that state courts were split on the issue, the North Carolina Supreme Court recognized the “modern trend” to give greater weight to the limiting effect of the phrase “during the policy period,” and apply pro rata allocation, even in the presence of other policy language suggesting the insurer would pay all sums arising out of certain injuries. Id. at 414, S.E.2d at 615 and n. 12. Based on the controlling language and reasoning of Radiator Specialty Co., the Business Court concluded that Defendants’ similarly worded policies should also be applied pro rata.

Chi v. Northern Riverfront Marina and Hotel, LLLP^[140] (Statute of limitations, equitable estoppel, fiduciary duties). Plaintiffs were a group of Chinese nationals who invested and became limited partners in Northern Riverfront Marina and Hotel, LLLP, a development project in downtown Wilmington, at various times between 2011 and 2013, as part of an EB-5 Visa program. Northern Riverfront’s general partner was Wilmington Riverfront Development, LLC, managed by Charles Schoninger, the project’s lead developer. The investment offers to Plaintiffs were for five-year terms, making the last term’s expiration date February 18, 2018. Plaintiffs filed suit on December 13, 2021, claiming that their investments failed to provide the promised return and asserting, inter alia, claims for fraud, negligent misrepresentation, breach of fiduciary duties, breach of contract, and violations of the North Carolina Securities Act against a host of defendants, including Wilmington Riverfront and Schoninger. Defendants moved to dismiss the complaint in its entirety.

The court dismissed most of the claims with prejudice, largely on statute of limitations grounds. The fraud and securities violation claims were largely barred by the three-year statute of limitations because Plaintiffs were on notice of their claims long before 2021. For instance, despite the development plan to have a hotel operating by 2014, no hotel was ever built. With respect to Wilmington Riverfront and Schoninger, however, the court noted that Schoninger had written letters to investors in his role as managing member of Wilmington Development, updating them on the project’s status. These contained potential misrepresentations causing Plaintiffs to delay bringing their lawsuit. Therefore, those two defendants were equitably estopped from asserting a statute of limitations defense. Nevertheless, Plaintiffs failed to plead fraud with the particularity required under Rule 9, even after being given multiple opportunities to amend the complaint. Notably though, because Wilmington Development was estopped from invoking the statute of limitations, Plaintiffs’ breach of contract claims against it for an alleged transfer of property and failure to repurchase Plaintiffs’ partnership interests survived—the only significant claim to do so.

As to the breach of fiduciary duty claims, the court refused to find a de facto fiduciary duty owed by Northern Riverfront Marina and Schoninger. The court concluded that those Defendants did not “hold all the cards” with respect to the financial and technical knowledge of the project. Plaintiffs were sophisticated parties who all warranted that they were accredited investors, had access to information about the project, and understood English or had the offering circulars translated for them. Accordingly, those Defendants owed no fiduciary duties. Finally, the court concluded that Plaintiffs’ fiduciary claims against Wilmington Development as general partner should also be dismissed. The allegations that Wilmington Development breached its fiduciary duties to the limited partners were harms to the partnership as a whole, not individualized direct harms giving rise to a private cause of action under North Carolina law. Because no derivative claims were brought, all fiduciary duty claims were dismissed.

§ 2.3.14. Philadelphia Commerce Case Management Program

Antonio v. Wilmington Sav. Fund Soc’y, FSB^[141] (Grant of summary judgment in favor of lender dismissing class action alleging violation of Uniform Commercial Code). This is one of an increasing number of class actions in Philadelphia’s Commerce Court claiming that post-repossession automobile loan deficiency notices violate the UCC. When Antonio fell behind on her car payments, the Bank repossessed her vehicle, and sent her a “Notice of Repossession, Redemption Rights and Sale.” The Notice included a list of “Charges as of Date of Mailing” and directed Antonio to call the Bank for the exact redemption amount. Antonio did not redeem her vehicle, and the Bank sold it. Thereafter, the Bank informed Antonio that she still owed a deficiency.

Antonio filed a class action alleging that the Notice of Repossession, Redemption Rights and Sale violated the UCC and was misleading because it allegedly misstated the amount owed by Antonio. However, Judge Paula Patrick held that the Notice was not defective because the Notice directed Antonio to contact the Bank for the exact amount she needed to pay for the Bank to return her car. The UCC did not require the Bank to list every item owed by Antonio, and the Notice did not purport to be exhaustive. The UCC also did not mandate that the Notice be in a particular format. It was not misleading for the Notice to reference the possibility of additional costs, including the daily storage fee, which the Bank could easily determine, or repair costs, when there were none. Antonio could have called to learn the deficiency amount and its components.

Ambox Operations Co., LLC v. Pocklington^[142] (Grant of preliminary objections [motion to dismiss] in favor of defendant on the ground of judicial privilege). Philadelphia’s Commerce Court continues to frown upon “litigation about litigation.” Pocklington sued Randazzo, the principal of Ambox, for fraud over an investment. Ambox filed a retaliatory lawsuit using facts and language Pockington had averred against Randazzo. Ambox alleged that Pockington’s statements in his complaint were themselves false and tortious.

Judge Ramy I. Djerassi dismissed Ambox’s complaint on judicial privilege grounds, but also allowed Ambox to amend its claim for tortious interference with prospective economic advantage. Ambox declined, contending that there was no judicial privilege because the alleged false statements and tortious conduct by Pocklington predated his complaint against Randazzo. Judge Djerassi noted that traditionally judicial privilege applied to libel and slander claims. Emphasizing the broad scope of judicial privilege—and its grant of absolute immunity even to false or malicious communications made in the regular course of litigation—Judge Djerassi proceeded to extend judicial privilege protection to the alleged tortious interference by Pocklington in his pleading. Because Pocklington’s allegations in his pleading against Randazzo were privileged, Ambox could not use them as the basis for a tort claim against Pocklington. Absent those allegations, Ambox did not state a cause of action, and Judge Djerassi dismissed. In sum, judicial privilege bars a claim that allegations in a pleading are tortious and actionable.

LL Cap. Partners I, LP v. Tambur^[143] (Denial of stay of civil case pending resolution of alleged federal criminal investigation). Philadelphia’s Commerce Court remains skeptical of stay requests, even if occasioned by a possible related criminal action against a party. Tambur and other defendants sought a stay after learning that the U.S. Attorney’s Office and FBI served a subpoena on one of the plaintiffs and interviewed its CEO. Tambur was concerned about the government indicting him because of the fraud and other wrongdoing alleged by the plaintiffs, and about discovery in the civil case possible provoking the government. However, the government had not subpoenaed or interviewed Tambur. Tambur also proffered no evidence about the specific subject matter of any alleged investigation, how long the alleged investigation might take, or whether indictments might result. Nevertheless, Tambur sought an indefinite stay.

Judge Nina W. Padilla balanced (1) the overlap between the civil and criminal cases; (2) the status of any criminal case, including the indictment of Tambur; (3) the plaintiff’s interests in expeditious civil proceedings versus any prejudice caused to the plaintiff by the requested delay; (4) the burden on Tambur; (5) the interests of the court; and (6) the public interest. Judge Padilla concluded a stay was not warranted because (1) there was no actual criminal case; (2) any alleged criminal case was not advanced, and it was possible that no indictments would result; (3) discovery disputes had already prejudiced the plaintiff by significantly delaying the case; (4) the minimal burden on Tambur, who had already invoked his right not to incriminate himself, and the lack of any showing that Tambur could not defend himself in the civil case; and (5) the court and (6) the public’s interest in prompt adjudication of the civil case unless it interfered with any criminal case. At this point, Tambur’s concerns were speculative and entitled to little weight. However, Judge Padilla was open to re-visiting the situation should the circumstances change.

Skw-B Acquisitions v. Stobba Residential Assocs., L.P.^[144] (Grant of petition to appoint receiver). This is the rare case where Philadelphia’s Commerce Court imposed a receiver with broad powers to manage property. Loan documents required the defendant commercial borrowers to deposit rent payments into a bank account for the benefit of the lender. However, the borrowers defaulted by failing to make monthly payments, and then their loan matured. Thereafter, the borrowers instructed their tenants to direct their rent payments to the borrower’s operating account. The lender sued and filed an emergency petition for the appointment of a receiver because of the loss of two tenants and the declining condition of the property that was the collateral for the loan. The court refused, but the Superior Court [Pennsylvania’s intermediate appellate court] vacated. On remand, the lender renewed its petition and also alleged that the borrowers had misappropriated rent and mismanaged the property. This time, the court granted the petition.

Judge Paula Patrick observed that in Pennsylvania there is a stringent, cautious standard for the appointment of a receiver of a solvent business. The test is similar to that for injunctive relief. The court must be “absolutely certain” that a receiver is necessary to protect creditors. The appointment of a receiver cannot cause more harm than good, and there cannot be another less drastic remedy, such as damages. Judge Patrick emphasized that the borrowers were diverting funds to themselves, in violation of the loan documents. Furthermore, commercial vacancies at the property were increasing, much of the first floor of the property was empty, and several remaining commercial tenants had ceased to pay rent. Conditions at the property were deteriorating. The borrowers were not making meaningful efforts to find replacement tenants and they were behind on their taxes. A receiver was necessary to prevent the circumstances from further deteriorating, and in particular, to stop the misappropriation of funds. Judge Patrick included with her decision a comprehensive order that is a model for the scope of the authority and duties of a receiver for distressed property.

§ 2.3.15. Rhode Island Superior Court Business Calendar

MKG Beauty & Business, LLC et al. v. Independence Bank^[145] (commercially reasonable sales). Defendant Independence Bank moved for summary judgment on the remaining counts in the Verified Complaint filed by Plaintiffs MKG Beauty & Business, LLC, et al. Defendant also moved for summary judgment on its Counterclaim against Plaintiffs for the unpaid balance of a promissory note, plus reasonable attorneys’ fees and costs. Plaintiffs objected to both motions.

The primary issue addressed was “whether there exists a genuine issue of material fact that Defendant did not sell 395 Atwood in a commercially reasonable manner. Defendant argues that Plaintiffs have failed to provide any evidence that supports a finding that the sale price of $450,000 for 395 Atwood” was not commercially reasonable. “Conversely, Plaintiffs argue that ‘the sale price’ of $450,000 for 395 Atwood alone establishes that it was not sold in a commercially reasonable manner or, at the very least, creates a genuine issue of material fact as to the commercial reasonableness of the sale.”

“Under Rhode Island law, a mere discrepancy between a market value appraisal and a foreclosure sale price, without more, is not sufficient to establish that a transaction is commercially unreasonable.” “The primary focus of whether a sale is commercially reasonable ‘is not the proceeds received from the sale but rather the procedures employed for the sale.’”

“Defendant has presented substantial evidence to support a finding that … it sold 395 Atwood in a commercially reasonable manner. Notably, Defendant has provided competent evidence indicating that it was both ready and willing to accept private offers and that, by no fault of Defendant, both prospects failed.”

“[T]he only evidence that Plaintiffs have set forth in support of their position is the fact that 395 Atwood sold for less than its assessed value for property taxes. (Citation omitted). However, … selling a property at a value less than what it is appraised or assessed at is not enough” to make a case for commercial unreasonableness. “Plaintiffs have failed to present any evidence indicating collusion or impropriety on the part of Defendant with respect to accepting a sale price of $450,000.” “Plaintiffs have neither advanced expert appraisal regarding the value of 395 Atwood at the time of the public auction nor have Plaintiffs provided any other substantive grounds as to why $450,000 was insufficient. Moreover, Plaintiffs have provided no evidence that the procedures employed by Defendant were commercially unreasonable.”

“Furthermore, this Court finds that the unambiguous language of Section 9G of the Note supports a finding that no dispute exists as to Defendant’s liability to Plaintiffs for its failure to secure the FMV of 395 Atwood at the time of sale. Section 9G of the Note provides in part, ‘Borrower also waives any defenses based upon any claim that Lender did not…obtain the fair market value of Collateral at a sale.’ Plaintiffs, in their written or oral objections to the motion, have failed to provide any reason as to why this section should be ignored. Thus, viewing the evidence in the light most favorable to Plaintiffs, Plaintiffs have failed to show by competent evidence that a genuine issue of material fact exists as to the commercial reasonableness of the 395 Atwood sale.”

The Court also rejected the Plaintiffs’ claim that the workout deal amounted to a usurious loan. That deal called for the Plaintiffs to repay the original principal plus interest, surrender the properties without deduction on the loan balance, and enter the lease on one of the properties.

Beretta v. DeQuattro^[146] (breach of contract, breach of fiduciary duty). Plaintiff brought an action against the company (the “Company”) he was a shareholder of and the individual to whom Plaintiff transferred his shares in that entity for claims of breach of contract, breach of covenant of good faith and fair dealing, breach of fiduciary duty, indemnification, and seeking the appointment of a special master. The parties executed two separate agreements in 2009 and 2016 and under both agreements the Plaintiff agreed to transfer his shares in the company. A bench trial was conducted to determine which agreement controls. Providence Country Superior Court, Justice Brian P. Stern held: (1) “the 2016 Operating Agreement constitutes the entire agreement between the parties with respect to transitioning ownership of” the Company; (2) the Company “was intimately and closely managed by a small group of shareholders … like a partnership.” The Plaintiff and the Defendant “owed fiduciary duties toward one another and to [the Company] as shareholders of a close corporation”; (3) the Plaintiff “did not breach a fiduciary duty to disclose”; (4) “[h]aving found that [the Plaintiff] did not breach a fiduciary duty to disclose, there is no legally sufficient reason to unwind the 2016 Operating Agreement” and the Defendants’ counterclaims are without merit; (5) Defendant’s “actions in connection with the contractual dispute at bar did not constitute a breach of the duties of good faith or loyalty”; (6) Defendant “is in breach [of the 2016 Operating Agreement] by failing to adhere to its terms”; (7) Defendant did not breach the implied covenant of good faith and fair dealing; (8) the Plaintiff’s request for indemnification is denied; (9) the Plaintiff is awarded $404,797.50 in damages, “representing a 50 percent share of [the Company]’s accrued net income for calendar year 2018”; and (9) Plaintiff failed to prove damages with reasonable certainty regarding additional compensation for calendar year 2019, a 401(k) contribution for calendar year 2019, profit-sharing distributions for calendar year 2019 and his 50-percent share of the Company’s profits in calendar year 2018, and therefore “the Court does not award any damages for additional compensation.”

Wilson v. 2 Tower, LLC^[147] (breach of contract, fraud, breach of fiduciary duty). An individual brought claims against her two business partners and two entities she had an interest in for alleged breach of contract, fraud, and breach of fiduciary duty. Washington County Superior Court Judge Sarah Taft-Carter held that (1) Plaintiff’s claim for rescission of the Operating Agreement of 2 Tower, LLC on a theory of fraud and negligent misrepresentation failed due to the plaintiff’s failure to demonstrate reasonable or justifiable reliance on the alleged misrepresentation because the “weight of the credible evidence prove[d] otherwise”; (2) found Plaintiff suffered no damage for breach of the operating agreement’s notice requirement; (3) found for Plaintiff as to the claim of breach of promissory note in the amount $13,949.71; and (4) Plaintiff’s claim for breach of fiduciary duty fails (the operating agreement of 2 Tower, LLC permitted the sale of its assets with an affirmative vote of its members).

Jutonus, LLC v. Fiano^[148] (tax sale in violation of automatic stay). Jutonus, LLC, having won a property through a tax sale, petitioned the Superior Court to foreclose all rights of redemption. Prior to the tax sale the owner filed for Chapter 13 Bankruptcy and an automatic stay issued. Premier Capital, a creditor, held a writ of attachment that had issued and been recorded on the property prior to the initiation of the Chapter 13 bankruptcy and tax sale. Premier challenged the petition to foreclose all rights of redemption on the grounds that the tax sale violated the automatic stay. The Court held that a creditor had standing because the creditor’s imminent risk of divestment of its interest in the property is fairly traceable to the violation of the automatic stay. The Court further denied the request to foreclose the right of redemption due to the underlying tax sale violating the automatic stay and that the tax sale was invalid.

§ 2.3.16. West Virginia Business Court Division

The Thrasher Group v. Bear Contracting, LLC and Great American Insurance Company^[149] (Order Granting Defendant’s Motion for Summary Judgment Regarding Certain Diana Deck and Pike Fork Damage Counterclaims; Order Granting Defendant’s Motion for Summary Judgment Regarding Certain Diana Deck and Pike Fork Counterclaims). This case was referred to the Business Court Division on October 30, 2020, and involves three construction projects in which Bear Contracting, LLC and The Thrasher Group contracted together, wherein Bear Contracting, LLC was to provide construction services and the Thrasher Group was to provide engineering services for the two projects.

After hearing oral argument regarding Defendant Bear Contracting, LLC’s Motion for Summary Judgment Regarding Certain Diana Deck and Pike Fork Damage Counterclaims, on March 8, 2023, the Business Court Division granted Bear Contracting, LLC’s motion for summary judgment. Bear Contracting, LLC argued that it was entitled to certain damages that it incurred in completing the project, after The Thrasher Group’s termination, including inspection costs, survey layout costs, and right of way acquisition costs. The Thrasher Group argued that it had provided an itemized list of services in its pricing proposal, Bear Contracting, LLC agreed to the scope of the pricing proposals, and therefore, the disputed damages were outside of the scope of services which The Thrasher Group was to provide. Ruling in favor of Bear Contracting, LLC, the Business Court Division held that (1) The Thrasher Group could not bill for inspection services in addition to the lump sum payment owed under the contract, as inspection services were included in the lump sum payment; (2) Bear Contracting, LLC was entitled to $161,172.53 in replacement damages for inspection services; (3) Bear Contracting, LLC was entitled to $14,405.81 in damages for survey and layout work costs; and (4) Bear Contracting, LLC was entitled to either performance of right of way work or the costs of a subcontractor to complete right of way work. This case remains pending before the Business Court Division.

American Bituminous Power Partners v. Horizon Ventures of West Virginia^[150] (Order – Findings of Fact and Conclusions of Law from Bench Trial). This case was referred to the Business Court Division on January 10, 2019, and involves disputes arising from an amended lease agreement between American Bituminous Power Partners, L.P. (“AMBIT”) and Horizon Ventures of West Virginia, Inc. The original lease agreement allowed AMBIT to rent property from Horizon Ventures for the purposes of building a power plant, which would primarily use waste coal from the site to produce electricity. The original lease agreement required AMBIT to pay Horizon Ventures a certain amount of their gross revenues, depending on whether the fuel used at the power plant was “Foreign Fuel” or “Local Fuel” and whether it was used for “Operating” or “Non-Operating” reasons. The parties largely disagreed over the interpretation of a particular clause in the amended lease agreement, in which the parties defined all “Foreign Fuel” as “Non-Operating,” and in exchange, Horizon Ventures agreed that AMBIT would pay Horizon Ventures 2.5% of all gross revenues for the use of “Foreign Fuel” for “Non-Operating” reasons.

After being remanded to the Business Court Division from the West Virginia Supreme Court of Appeals, on October 10-12 of 2023, the Business Court Division held a three-day bench trial. The Business Court Division found that in the amended lease agreement the parties defined “Foreign Fuel” as “Non-Operating,” and in exchange the amended lease agreement did not contain a requirement that the “Local Fuel” be of any particular quality. Therefore, the amended lease agreement dispensed with any issue regarding the quality of “Local Fuel” used at the power plant. Resolving the disputes between the parties and interpreting the terms according to the amended lease agreement, the Business Court Division held that AMBIT owed Horizon Ventures of West Virginia 2.5% of gross revenues until all “Local Fuel” is used and no longer present on the site. This case remains pending in the Business Court Division.

Dallas Runyon, Sr. v. Citizens Telecommunications Company of West Virginia, Frontier West Virginia, Inc., and Appalachian Power Company^[151] (Order Denying Frontier’s Motion for Summary Judgment – Entered June 28, 2023) (Order Denying Plaintiff’s Motion for Partial Summary Judgment on Their Trespass and Unjust Enrichment Claims – Entered June 27, 2023). This case was referred to the Business Court Division on September 9, 2019, and involves a dispute regarding telecommunications utility poles placed on the plaintiff’s property.

On June 27, 2023, the Business Court Division entered an order denying Plaintiff’s Motion for Partial Summary Judgment on Their Trespass and Unjust Enrichment Claims. Then, on June 28, 2023, the Business Court Division entered another order denying Frontier’s Motion for Summary Judgment. In denying both motions, the court noted that the two easements were central to the litigation. While the plaintiffs alleged that the 2014 easement superseded the 1939 easement on the property, Frontier contended that the 2014 easement did not cancel the 1939 easement. Further, Frontier claimed that the plaintiff refused to sign a new easement, while the plaintiff claimed that a new easement was proffered to Frontier, but Frontier refused to agree to the proffered easement. The Business Court Division noted that due to the factual disputes, summary judgment was not appropriate.

§ 2.3.17. Wisconsin Commercial Docket Pilot Project

Nestlé USA, Inc. v. Advanced Boiler Control Services, et al.^[152] (Summary judgment related to insurance coverage). In Nestlé, the circuit court considered opposing motions for summary judgment related to insurance coverage filed by Plaintiff Nestlé and Defendants Cincinnati Specialty Underwriters Insurance Company (“Cincinnati”) and Evanston Insurance Company (“Evanston”). The underlying lawsuit arose out of an explosion at Nestlé’s factory that occurred during the performance of services by Advanced Boiler Control Services, Inc. (“ABC”). Nestlé sought a summary judgment ruling that there was coverage through Cincinnati’s Commercial General Liability (“CGL”) policy issued to ABC, and by extension coverage under Evanston’s excess policy. Cincinnati and Evanston sought a summary judgment ruling that coverage does not exist and that neither had a duty to defend or indemnify ABC. Ultimately, the court granted summary judgment to Nestlé. The court noted that insurance policies are contracts governed by the same rules of construction as any other, and that insurance coverage determinations are made using a three-step analysis. First, the court examines the claim to determine whether the policy makes an initial grant of coverage. If so, the court then determines whether any of the policy’s exclusions preclude coverage. Exclusions are narrowly and strictly construed against the insurer if their effect is uncertain. Last, if an exclusion applies, the court determines whether an exception to that exclusion reinstates coverage. The court emphasized that ambiguities as to coverage must be resolved in favor of the insured. Applying this analysis, the court determined that Nestlé had demonstrated initial coverage under the CGL, and that Cincinnati and Evanston did not prove that any of the asserted exclusions applied. The court was therefore not required to look at the exclusions’ exceptions. The court refrained from ruling on the merits as to one other defense: that any alleged misrepresentation made by ABC regarding the events leading up to the explosion and claimed investigation costs incurred by Nestlé were not covered. The court determined that any alleged misrepresentation would not relieve Cincinnati from its legal responsibility for such costs, but that Cincinnati could challenge the reasonableness of them if a jury found that ABC had made a misrepresentation which resulted in additional costs. The court instructed that that jury should be provided specific verdict forms to that effect.

§ 2.3.18. Wyoming Chancery Court

Clark v. Romo^[153] and Lincolnway v. Villalpando^[154] (Chancery Court’s limited jurisdiction). Both orders focused on statutory language granting the court limited jurisdiction over “disputes involving commercial [and] business . . . issues.” Wyo. Stat. § 5-13-115(a).

In Clark, the Chancery Court interpreted this statutory phrase to encompass “disputes among businesses, disputes between businesses and financial institutions, and disputes about business governance” while excluding disputes between business and consumers. Consequently, the court dismissed a complaint involving a consumer-business dispute.

In keeping with this definition, in Lincolnway, the court determined disputes involving private sellers—individuals not engaged in regular trade or business—fall beyond the court’s limited jurisdiction. Accordingly, the court dismissed a complaint filed by a corporation against private sellers.

These orders underscore the Chancery Court’s awareness of its unique yet limited role within Wyoming’s judicial system. They also signal the court’s commitment to strictly delineating its jurisdictional boundaries, maintaining a focus on business-to-business and trust cases.

1. For a more detailed discussion on what may be defined as a business court, see generally A.B.A. Bus. Law Section, The Business Courts Bench Book: Procedures and Best Practices in Business and Commercial Cases (Vanessa R. Tiradentes, et al., eds., 2019) [hereinafter Business Courts Bench Book]; Mitchell L. Bach & Lee Applebaum, A History of the Creation and Jurisdiction of Business Courts in the Last Decade, 60 Bus. Law. 147 (2004) [hereinafter Business Courts History]. ↑

2. For an overview of business courts in the United States, see, e.g., Business Courts Bench Book, supra note 1, Business Courts History, supra note 1, Lee Applebaum & Mitchell L. Bach, Business Courts in the United States: 20 Years of Innovation, in The Improvement of the Administration of Justice (Peter M. Koelling ed., 8th ed. 2016); Joseph R. Slights, III & Elizabeth A. Powers, Delaware Courts Continue to Excel in Business Litigation with the Success of the Complex Commercial Litigation Division of the Superior Court, 70 Bus. Law. 1039 (Fall 2015); John Coyle, Business Courts and Inter-State Competition, 53 Wm. & Mary L. Rev. 1915 (2012); The Honorable Ben F. Tennille, Lee Applebaum, & Anne Tucker Nees, Getting to Yes in Specialized Courts: The Unique Role of ADR in Business Court Cases, 11 Pepp. Disp. Resol. L. J. 35 (2010); Ann Tucker Nees, Making a Case for Business Courts: A Survey of and Proposed Framework to Evaluate Business Courts, 24 Ga. St. U. L. Rev. 477 (2007); Tim Dibble & Geoff Gallas, Best Practices in U.S. Business Courts, 19 Court Manager, no. 2, 2004, at 25. Further, the Business Courts chapter of this publication has provided details on developments in business courts every year since 2004. Finally, the Business Courts Blog went online in 2019, and serves as a library for past, present and future business court developments, www.businesscourtsblog.com (last visited Jan. 17, 2024). ↑

3. Business Courts Bench Book, supra note 1, at xx. ↑

4. Business Courts History, supra note 1, at 207, 211. ↑

5. Benjamin D. Perkins & Julianne P. Blanch, Utah businesses get their own court, Utah Business (April 3, 2023), https://www.utahbusiness.com/utah-businesses-get-their-own-court/; Stephen E. Fox, Bill Mateja, Amanda L. Cottrell & Jonathan E. Clark, Texas Revolution: State Legislature Creates New Business Court System to Handle Significant Commercial Disputes, Nat’l L. Rev. (July 28, 2023), https://www.natlawreview.com/article/texas-revolution-state-legislature-creates-new-business-court-system-to-handle. ↑

6. American College of Business Court Judges, https://masonlec.org/divisions/mason-judicial-education-program/american-college-business-court-judges/ (last visited Jan. 17, 2024). ↑

7. See Meeting Agenda, Law & Econ. Ctr, https://web.cvent.com/event/f195b17a-4af1-449d-b956-8ff7f6315767/websitePage:8deb4542-d9c4-4193-9354-d3f8f3426f81 (last visited Jan. 17, 2024). ↑

8. Diversity Clerkship Program, ABA: Bus. Law Section, https://www.americanbar.org/groups/business_law/initiatives_awards/diversity/ (last visited Jan. 17, 2024). ↑

9. Establishing Business Courts in Your State, https://communities.americanbar.org/topics/13510/media_center/file/0040887f-858d-41e9-a1a3-b1c1aa1c7440 (ABA login required) (last visited Jan. 17, 2024). ↑

10. These materials are located on the Business Court Subcommittee’s Library web page, https://communities.americanbar.org/topics/13503/media_center/folder/8c312eb8-3c18-4feb-acba-bbce37a8ff97 (ABA login required) (last visited Jan. 17, 2024). ↑

11. Business Court Representatives, ABA: Bus. Law Section, https://www.americanbar.org/groups/business_law/about/awards-initiatives/business-court-representatives/ (ABA login required) (last visited Jan. 17, 2024). ↑

12. Id. ↑

13. Business and Commercial Courts Training Curriculum, Nat’l Ctr. for State Courts, https://ncsc.contentdm.oclc.org/digital/collection/traffic/id/92/rec/9 (last visited Jan. 17, 2024). ↑

14. Faculty Guide, Business and Commercial Litigation Courts Course Curriculum, Nat’l Ctr. for State Courts, https://ncsc.contentdm.oclc.org/digital/collection/traffic/id/91/rec/4 (last visited Jan. 17, 2024). ↑

15. New business court docket curriculum developed for courts nationwide, State justice institute, https://www.sji.gov/new-business-court-docket-curriculum-developed-for-courts-nationwide/ (last visited Jan. 17, 2024). ↑

16. www.businesscourtsblog.com. ↑

17. See, e.g., Business Court Studies and Reports 2000–2009, Bus. Courts Blog (May 30, 2023), https://www.businesscourtsblog.com/business-court-studies-and-reports-2000-2009; Business Court Studies and Reports 2010–2018, Bus. Courts Blog (May 30, 2023), https://www.businesscourtsblog.com/business-court-studies-and-reports-2010-2018; Business Court Studies and Reports 2019–2023, Bus. Courts Blog (May 30, 2023), https://www.businesscourtsblog.com/business-court-reports-and-studies-from-2019-to-present/; New York Commercial Division Advisory Council Report on Business Court Benefits, Bus. Courts Blog (July 10, 2019), https://www.businesscourtsblog.com/category/reports-and-studies. ↑

18. See, e.g., ABA Section of Business Law’s Business and Corporate Litigation Committee, Business Courts (chapter), in Recent Developments in Business and Corporate Litigation (2023), https://businesslawtoday.org/2023/04/recent-developments-in-business-courts-2023/ (ABA login required); Douglas L. Toering and Michael Butterfield, Touring the Business Courts – A National Perspective, Mich. Bus. L.J. (Spring 2023), https://manteselaw.com/wp-content/uploads/2023/04/Touring-the-Business-Courts-Spring-2023-3.pdf ; Benjamin D. Perkins & Julianne P. Blanch, Utah businesses get their own court, Utah Business (April 3, 2023), https://www.utahbusiness.com/utah-businesses-get-their-own-court/; Hayley Fowler, How A Real-Life ‘Lincoln Lawyer’ Hatched NC’s Business Court, Law360 (June 5, 2023), https://www.law360.com/articles/1681851/how-a-real-life-lincoln-lawyer-hatched-nc-s-business-court; Stephen E. Fox, Bill Mateja, Amanda L. Cottrell & Jonathan E. Clark, Texas Revolution: State Legislature Creates New Business Court System to Handle Significant Commercial Disputes, Nat’l L. Rev. (July 28, 2023), https://www.natlawreview.com/article/texas-revolution-state-legislature-creates-new-business-court-system-to-handle; Douglas L. Toering, Ian Williamson, Michigan’s business courts: A decade of success, Mich. Bar J. (Oct. 2023), https://www.michbar.org/journal/Details/Michigans-business-courts-A-decade-of-success?ArticleID=4722; Jonathan Hugg, Sarah Boutros, The 4 Top Philadelphia Commerce Court Opinions of 2023, Law360 (Dec. 18, 2023), https://www.law360.com/pennsylvania/articles/1777178/the-4-top-philadelphia-commerce-court-opinions-of-2023. ↑

19. See, e.g., Delaware Corporate & Commercial Litigation Blog, http://www.delawarelitigation.com (last visited Jan. 19, 2024); Mass Law Blog, http://www.masslawblog.com (last visited Jan. 19, 2024); New York Business Divorce Blog, http://www.nybusinessdivorce.com (last visited Jan. 19, 2024); NY Commercial Division Blog, https://www.pbwt.com/ny-commercial-division-blog/ (last visited Jan. 19, 2024); New York Commercial Division Practice, https://www.nycomdiv.com/ (last visited Jan. 19, 2024); Duane Morris Delaware Business Law Blog, http://blogs.duanemorris.com/delawarebusinesslaw/ (last visited Jan. 19, 2024); Commercial Division Blog: Current Developments in the Commercial Division of the New York State Courts, http://schlamstone.com/commercial/ (last visited Jan. 19, 2024); The North Carolina Business Litigation Report, http://www.ncbusinesslitigationreport.com (last visited Jan. 19, 2024); The Nevada Business Court Report, https://www.sierracrestlaw.com/news-blog/ (last visited Jan. 19, 2024); It’s Just Business (North Carolina), https://itsjustbusiness.foxrothschild.com/ (last visited Jan. 19, 2024); and the New York Commercial Division Roundup, https://www.newyorkcommercialdivroundup.com/ (last visited Jan. 19, 2024). ↑

20. Ninth Judicial Circuit of Florida, Divisions of Court, Business Court, https://ninthcircuit.org/divisions/business-court (last visited Dec. 4, 2023). ↑

21. Ninth Judicial Circuit of Florida, Judicial Directory, Judge John E. Jordan, https://ninthcircuit.org/judges/circuit/john-e-jordan (last visited Dec. 4, 2023). ↑

22. Michael Mora, This Miami Judge is Retiring to Open an ADR Firm, Daily Business Review (January 18, 2023), https://www.law.com/dailybusinessreview/2023/01/18/this-miami-judge-is-retiring-to-open-an-adr-firm/ (last visited Dec. 4, 2023). ↑

23. Notice of Retirement, Judge Patti Englander Henning, available at https://www.flgov.com/wp-content/uploads/2023/04/17th-Cir.-Henning.pdf (last visited Dec. 4, 2023). ↑

24. Seventeenth Judicial Circuit of Florida, Circuit Civil Division (26) Procedures (December 4, 2023), https://www.17th.flcourts.org/division-26/ (last visited Dec. 4, 2023). ↑

25. Thirteenth Judicial Circuit of Florida, Judicial Directory, Judge Darren D. Farfante, https://www.fljud13.org/JudicialDirectory/DarrenDFarfante.aspx (last visited Dec. 4, 2023). ↑

26. Iowa Judicial Branch, https://www.iowacourts.gov/newsroom/news-releases/iowa-supreme-court-assigns-three-iowa-business-specialty-court-judges/. ↑

27. Id. ↑

28. Id. ↑

29. Id. ↑

30. Id. ↑

31. Id. ↑

32. Id. ↑

33. Id. ↑

34. Id. ↑

35. Id. ↑

36. Id. ↑

37. Id. ↑

38. Id. ↑

39. Id. ↑

40. Id. ↑

41. Iowa Judicial Branch, https://www.iowacourts.gov/iowa-courts/district-court/iowa-business-specialty-court#:~:text=Starting%20in%202023%2C%20the%20business,calendar%20years%202021%20and%202022. ↑

42. Id. ↑

43. Id. ↑

44. Id. ↑

45. Commercial Court Document Search, https://public.courts.in.gov/CCDocSearch. ↑

46. Indiana Commercial Courts Handbook, https://www.in.gov/courts/iocs/publications/commercial-handbook/. ↑

47. Indiana Commercial Court Treatise, https://www.in.gov/courts/iocs/files/commercial-court-treatise.pdf. ↑

48. The Indiana Lawyer, Marion Superior Judge Welch to retire in February; applications open to fill vacancy, Oct. 20, 2023 https://www.theindianalawyer.com/articles/marion-superior-judge-welch-to-retire-in-february-applications-open-to-fill-vacancy. ↑

49. Indiana Judicial Branch, https://www.in.gov/courts/iocs/committees/commercial-courts/#members. ↑

50. The Indiana Lawyer, Brisco, Lund nominated to IN Northern District Court, Nov. 15, 2023 https://www.theindianalawyer.com/articles/brisco-lund-nominated-to-in-northern-district-court. ↑

51. See Indiana Commercial Court Rule 7, https://www.in.gov/courts/rules/commercial/index.html#_Toc62198784. ↑

52. The full text of the Order adopting these rules can be found at https://www.courts.michigan.gov/siteassets/rules-instructions-administrative-orders/proposed-and-recently-adopted-orders-on-admin-matters/adopted-orders/2019-33_2023-11-01_formor_mcjerules.pdf. ↑

53. Retired judges taking assignment are also required to complete CJE, albeit they need only complete 8 hours. ↑

54. MCL 600.8043 (“The Michigan judicial institute shall provide appropriate training for all circuit judges serving

    as business court judges.”). ↑

55. Toering & Lockhart, Touring the Business Courts, 43-3 Mich. Bus. L.J. 10 (Fall 2023). ↑

56. Judge Bell’s appointment came in December 2022. ↑

57. See Administrative Order 286/22, N.Y.S. Unified Court Sys. (Dec. 16, 2022). ↑

58. See Request for Public Comment on Proposal to Amend Commercial Division Rules 2, 5, 15, 16, and 19, N.Y.S. Unified Court Sys. (Feb. 18, 2022). ↑

59. See Administrative Order 147/23, N.Y.S. Unified Court Sys. (May 15, 2023). ↑

60. Id. ↑

61. Id. ↑

62. Administrative Order, In Re Amended Business Court Program (S.C. July 14, 2023) (C.J. Beatty). ↑

63. Administrative Order, In Re Amended Business Court Program (S.C. Jan. 30, 2019) (C.J. Beatty). ↑

64. Id. ↑

65. Administrative Order, In Re Amended Business Court Program (S.C. July 14, 2023) (C.J. Beatty). ↑

66. Id. ↑

67. H.B. 19, 88th Leg., R.S. (2023); S.B. 1045, 88th Leg., R.S (2023). ↑

68. H.B. 19, §§ 5, 8; S.B. 1045, §§ 1.14, 1.15. ↑

69. H.B. 19, § 1; Tex. Gov’t Code § 25A.003. ↑

70. H.B. 19, § 1; Tex. Gov’t Code § 25A.003(c)-(m). ↑

71. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.009(a). ↑

72. H.B. 19, § 6; Tex. Gov’t Code Ann. § 25A.009(a). ↑

73. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.009(b) and (c). ↑

74. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.006. ↑

75. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.004. ↑

76. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.004(b)–(d). ↑

77. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.004(c). ↑

78. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.004(b) and (d). ↑

79. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.004(e). ↑

80. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.004(f). ↑

81. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.015(a). ↑

82. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.015(b). ↑

83. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.015(c). ↑

84. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.015(d). ↑

85. H.B. 19, § 1; S.B. 1045, §§ 1.02; Tex. Gov’t Code Ann. § 25A.007. ↑

86. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.007(c). ↑

87. Utah H.B. 216, 65th Leg., Gen. Sess. (2023). ↑

88. Wyoming Judicial Council, Meeting Minutes, 4 (Mar. 16, 2023), available at https://legacy.utcourts.gov/utc/judicial-council/wp-content/uploads/sites/48/2023/03/2023-03-Council-Approved-minutes.pdf. ↑

89. Utah Code Ann. § 78A-5a-104. ↑

90. Utah Code. Ann. § 78A-5a-103. ↑

91. Id. ↑

92. Utah Code Ann. § 78A-5a-302. ↑

93. Utah Code Ann. § 78A-5a-301. ↑

94. C.A. No. N22C-02-045 PRW CCLD, 301 A.3d 1194 (Del. Super. Ct. 2023). ↑

95. N22C-07-139 PRW CCLD (Del. Super. Ct. Apr. 18, 2023). ↑

96. Order Granting Condor S.A.’s Motion to Dismiss Third Amended Complaint for Lack of Personal Jurisdiction DE 363, The Plurinational State of Bolivia v. Arturo Carlos Murillo-Prijjic, et al., No. 2021-0184420CA-01 (Fla. 11th Jud. Cir. Aug. 28, 2023) (Walsh, J.). ↑

97. Order Denying Plaintiffs’ Emergency Motion for Preliminary Injunction, Miami-Dade Expressway Authority, et al. v. Greater Miami Expressway Agency, et al., No. 2023-018598-CA-01 (Fla. 11th Jud. Cir. Aug. 16, 2023) (Walsh, J.). ↑

98. Dufour v. Dufour, No. 22-GSBC-0014, 2023 WL 3016876 (Ga. Bus. Ct. April 10, 2023). ↑

99. OZ Media, LLC v. Greenberg Film and TV Studio Holdings, LLC, No. 22-GSBC-0006, 2023 WL 2466118 (Ga. Bus. Ct. Feb. 27, 2023). ↑

100. No. 49D01-2212-PL-044296, (Ind. Comm. Ct., Marion Cnty., Jan. 9, 2023), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch. ↑

101. No. 82D07-2207-PL-003441, (Ind. Comm. Ct., Vanderburgh Cnty., Mar. 16, 2023), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch. ↑

102. No. 82D07-2212-PL-005678, (Ind. Comm. Ct., Vanderburgh Cnty., Nov. 10, 2023), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch. ↑

103. No. 71D04-2209-PL-000161, (Ind. Comm. Ct., St. Joseph Cnty., Jan. 19, 2023), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch. ↑

104. No. 02D02-2301-PL-000026, (Ind. Comm. Ct., Allen Cnty., Apr. 11, 2023), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch. ↑

105. No. 49D01-2302-PL-008564, (Ind. Comm. Ct., Marion Cnty., Jun. 2, 2023), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch. ↑

106. No. LACV098830 (Iowa Dist. Ct. Linn Cnty. May 1, 2023). ↑

107. No. BCD-CIV-2023-00028, 2023 WL 6309681 (Me. B.C.D. August 31, 2023). ↑

108. No. 24-C-22-000531, 2023 WL 8582354 (Md. Cir. Ct. Mar. 30, 2023). ↑

109. No. 24-C-21-004813, 2023 WL 8582355 (Md. Cir. Ct. Jan. 4, 2023). ↑

110. No. 24-C-23-001344, 2023 WL 8582356 (Md. Cir. Ct. Aug. 29, 2023) ↑

111. Case No. 2084CV00735-BLS2, 2023 WL 3792880 (May 16, 2023) (Salinger, J.). ↑

112. No. 22-2509-BLS1, 2023 WL 4456956 (June 21, 2023) (Krupp, J.). The authors of this section note that members of their Firm represent BJ’s Wholesale Club, Inc. in connection with this matter. The authors are not personally involved in the litigation. ↑

113. No. 1984CV03317-BLS2, 2023 WL 1804376 (Jan. 6, 2023) and 2023 WL 1804375 (Jan. 30, 2023) (Salinger, J.) ↑

114. Wayne County, Case No. 23-001951-CB, Hon. Annette J. Berry, Sept. 21, 2023. ↑

115. Macomb County, 22-004565-CB, Hon. Kathryn A. Viviano, May 10, 2023. ↑

116. Oakland County, 20-183261-CB, Hon. Victoria A. Valentine, Mar. 27, 2023. ↑

117. Ottawa County, 22-007065-CB, Hon. Jon A. Van Allsburg, May 8, 2023. ↑

118. St. Joseph County, 13-809-CBB, Hon. T.J. Ackert (Kent County Business Court Judge sitting by assignment), June 12, 2023. ↑

119. The authors’ firm, Mantese Honigman, P.C., was counsel for Plaintiffs in this matter. ↑

120. Prior to trial, the case generated the appellate decision of Franks v. Franks, 330 Mich. App. 69, 944 N.W.2d 388 (2019), where the Michigan Court of Appeals held that the business judgment rule defense is inapplicable where oppression is shown. ↑

121. No. 216-2023-cv-00094, 2023 N.H. Super. LEXIS 8, at *5-6 (Super. Ct. Hillsborough Cnty. Aug. 23, 2023). ↑

122. Nos. 218-2019-cv-933, 218-2019-cv-1683, 219-2019-cv-424 (April 19, 2023), at 19-20, available at
     https://www.courts.nh.gov/sites/g/files/ehbemt471/files/documents/2023-08/april-19-2023-order-redacted.pdf.

     ↑

123. No. 216-2020-cv-00312, 2023 N.H. Super. LEXIS 1, at *10-11 (Super. Ct. Hillsborough Cnty. Jan 3. 2023). ↑

124. No. MRS-L-1530-22 (N.J. Super. Law Div., Complex Business Litigation Program, Oct. 23, 2023 (unpublished)). ↑

125. No. MON-L-1518-20 (N.J. Super. Law Div., Complex Business Litigation Program, Nov. 16, 2023 (unpublished)). ↑

126. 175 N.Y.S.3d 713, 2022 NY Slip Op. 50986(U) (Sup. Ct. Bronx Cnty. Oct. 11, 2022). ↑

127. 77 Misc. 3d 1220(A) (Sup. Ct. N.Y. Cnty., Jan. 5, 2023). ↑

128. 174 N.Y.S.3d 825, 76 Misc. 3d 1213(A) (Sup. Ct. N.Y. Cnty. Sept. 26, 2022). ↑

129. 180 N.Y.S.3d 524, 77 Misc. 3d 1222(A) (Sup. Ct. N.Y. Cnty. Jan. 6, 2023). ↑

130. 2022 BL 479595, 76 Misc. 3d 1220(A), 175 N.Y.S.3d 714 (Sup. Ct. N.Y. Cnty., Oct. 12, 2022). ↑

131. 183 N.Y.S.3d 727, 78 Misc. 3d 1202 (Sup. Ct. N.Y. Cnty. Feb. 27, 2023). ↑

132. 184 N.Y.S.3d 591, 78 Misc. 3d 1212(A) (Sup. Ct. Bronx Cnty. March 17, 2023). ↑

133. 192 N.Y.S.3d 891 (Sup. Ct. N.Y. Cnty. June 9, 2023). ↑

134. No. 21-CVS-10487, 2023 NCBC 7 (Mecklenburg Cnty. Super. Ct. Jan. 24, 2023) (Bledsoe, C.J.), https://www.nccourts.gov/documents/business-court-opinions/cutter-v-vojnovic-2023-ncbc-7. ↑

135. No. 23-CVS-20101, 2023 NCBC 65 (Wake Cnty. Super. Ct. Sept. 22, 2023) (Conrad, J.), https://www.nccourts.gov/documents/business-court-opinions/visionary-ed-tech-holdings-grp-inc-v-issuer-direct-corp-2023-ncbc-65. ↑

136. No. 22-CVS-5279, 2023 NCBC 68 (Forsyth Cnty. Super. Ct. Oct. 10, 2023) (Robinson, J.), https://www.nccourts.gov/assets/documents/opinions/2023%20NCBC%2068.pdf?VersionId=XXYCaBlaI6hK0U_fYcrd5Y40xUFIBOAe. ↑

137. 600 U.S. 122 (2023). ↑

138. 243 U.S. 93 (1917). ↑

139. No. 19-CVS-2793, 2023 NCBC 52 (N.C. Super. August. 7, 2023) (Davis, J.), https://www.nccourts.gov/documents/business-court-opinions. ↑

140. No. 121-CVS-4611, 2023 NCBC 47 (N.C. Super. July 27, 2023) (Earp, J.), https://www.nccourts.gov/documents/business-court-opinions. ↑

141. 2023 Phila. Ct. Com. Pl. LEXIS 3 (Jan. 9, 2023). ↑

142. 2023 Phila. Ct. Com. Pl. LEXIS 10 (Apr. 25, 2023). ↑

143. 2023 Phila. Ct. Com. Pl. LEXIS 17 (July 7, 2023). ↑

144. 2023 Phila. Ct. Com. Pl. LEXIS 23 (Aug. 30, 2023). ↑

145. C.A. No. KC-2019-1354, 2022 R.I. Super. LEXIS 78 (R.I. Super. Ct. Kent Cnty. Oct. 24, 2022) (Licht, J.). ↑

146. No. PC-2020-03404, 2023 WL 2716424 (R.I. Super. Ct. Providence Cnty. Mar. 23, 2023). ↑

147. No. WC-2017-0018, 2022 WL 4541155 (R.I. Super. Ct. Washington Cnty. Sept. 20, 2022). ↑

148. No. WM-2022-0091, 2022 WL 17225090 (R.I. Super. Ct. Washington Cnty. Nov. 18, 2022) ↑

149. No. 20-C-772 (W. Va. Cir. Ct. Kanawha Cnty. Mar. 8, 2023). ↑

150. No. CC-24-2018-C-130 (W. Va. Cir. Ct. Marion Cnty. Oct. 31, 2023). ↑

151. No. CC-30-2017-C-108 (W. Va. Cir. Ct. Mingo Cnty. June 27-28, 2023). ↑

152. No. 2020CV1292 (Wis. Cir. Ct. Racine Cnty. Apr. 11, 2023). ↑

153. 2023 WYCH 4 (Wy. Ch. Ct. June 16, 2023). ↑

154. 2023 WYCH 6 (Wy. Ch. Ct. Oct. 6, 2023). ↑

Editors

§ 1.1.1. Supreme Court

Bartenwerfer v. Buckley, 598 U.S. 69, 143665 (2023). In this case the Court was confronted with the Bankruptcy Code’s exception to discharge for any debt obtained by fraud (contained in Section 523(a)(2)(A)). While this provision clearly applies to the active fraudster, the Court noted that sometimes a debtor may be liable for fraud that she did not personally commit. “For example, deceit practiced by a partner or an agent.” The question for the Court was whether the bar extends to this latter situation.

In 2005, Kate and David jointly purchased a house in San Francisco. Acting as business partners, they decided to remodel the house and sell it at a profit. David took charge of the project. Kate was largely uninvolved. Kate and David ultimately married and sold the house to Kieran Buckley. In connection with the sale, Kate and David attested that they had disclosed all material facts relating to the property. After closing, Buckley discovered several undisclosed defects. Buckley sued Kate and David and obtained a judgment in his favor. Kate and David were unable to pay Buckley and sought Chapter 7 bankruptcy protection. Buckley filed an adversary complaint alleging that the money owed on the state-court judgment fell within Section 523(a)(2)(A)’s exception to discharge for any debt for money obtained by fraud. The bankruptcy court ruled in Buckley’s favor holding that David’s fraudulent intent would be imputed to Kate because they had formed a legal partnership to execute the renovation and resale project. The Ninth Circuit bankruptcy appellate panel agreed as to David’s fraudulent intent but did not agree as to Kate. The panel concluded that the Code only barred her from receiving a discharge if she knew or had reason to know of David’s fraud. The Ninth Circuit reversed, holding that a debtor who is liable for her partner’s fraud cannot discharge that debt in bankruptcy, regardless of her own culpability. The Supreme Court granted certiorari to resolve confusion in the lower courts.

The Court began its analysis with the text of the Code. Justice Barrett wrote that “this text precludes Kate Bartenwerfer from discharging her liability for the state-court judgment.” There was no dispute that Kate was an individual debtor nor that the judgment was a debt. The focus of the Court’s analysis, and the arguments of the parties, revolved around whether the debt arose from money obtained by false pretenses, a false representation, or actual fraud. Kate disputed this last premise. She admitted that the statute was written in the passive voice, which does not specify a fraudulent actor. But she argued that the statute should be most naturally read to bar discharge of debts for money obtained by the debtor’s fraud. In other words, she argued that the passive voice hides the relevant actor in plain sight. The Court disagreed finding that the passive voice simply removes the actor from the equation.

By framing the statute to focus on an event without reference to the specific actor, the statute does not depend on the actor’s intent or culpability. The Court noted that this was consistent with the common law of fraud, which “has long maintained that fraud liability is not limited to the wrongdoer.” Both precedent and Congress’s response eliminated any doubt as to the propriety of the Court’s textual analysis. The Court had long ago held that the discharge exception was not limited to fraud by the debtor herself. Justice Barrett wrote that the Court must assume that Congress meant to incorporate the interpretations adopted by precedent when it reenacted the bankruptcy laws (without addressing the issue). In this case, the Congress went even further. Thirteen years after the Court’s decision Congress overhauled bankruptcy law and deleted “the strongest textual hook counseling against the outcome” reached by the Court. The Court concluded by noting that “innocent people are sometimes held liable for fraud they did not personally commit and, if they declare a bankruptcy, §523(a)(2)(A) bars discharge of that debt.” Justices Sotomayor and Jackson concurred noting that the Court did “not confront a situation involving fraud by a person bearing no agency or partnership relationship to the debtor.”

Lac Du Flambeau Band of Lake Superior Chippewa Indians v. Coughlin, 599 U.S. 382, 143 S. Ct. 1689 (2023). This case concerned whether the express abrogation of sovereign immunity found in Section 106(a) of the Bankruptcy Code extended to federally recognized Indian tribes. The Lac Du Flambeau Band of Lake Superior Chippewa Indians is a federally recognized Indian tribe, with several wholly owned businesses. One of those businesses loaned money to Brian Coughlin. Coughlin sought Chapter 13 bankruptcy protection before repaying the loan. Notwithstanding the automatic stay imposed by Section 362(a) of the Bankruptcy Code, the tribe’s lending entity, Lendgreen, continued its collection efforts notwithstanding. Ultimately, Coughlin filed a motion with the Bankruptcy court to enforce the automatic stay and sought damages for emotional distress along with costs and attorney’s fees. Lendgreen moved to dismiss arguing that the bankruptcy court lacked subject-matter jurisdiction as both the Tribe and its subsidiaries enjoyed tribal sovereign immunity. The bankruptcy court agreed with the Tribe and dismissed the case on sovereign immunity grounds. The First Circuit reversed, holding that the Bankruptcy Code “unequivocally strips tribes of their immunity.” The Supreme Court granted certiorari to resolve a circuit split (the Ninth Circuit had held that the Bankruptcy Code abrogates Tribal sovereign immunity, while the Sixth Circuit reached the opposite conclusion).

In her opinion for the Court, Justice Jackson began by noting that two provisions of the Bankruptcy Code apply. First, Section 106(a) abrogates the sovereign immunity of “governmental unit[s].” And Section 101(27) defines “governmental units” to mean a number of specified governmental entities and then concludes with a catchall: “or other foreign or domestic government.” In order to abrogate sovereign immunity, the Court had previously held that Congress must make its intent “unmistakably clear.” Because Indian tribes possess the “common-law immunity from suit traditionally enjoyed by sovereign powers,” this well-settled rule applies with equal force to federally recognized Tribes. Thus, if there is a plausible interpretation of the statute that preserves sovereign immunity, the Court will conclude that Congress has not unambiguously made its intent to abrogate clear. But the rule does not require magic words.

Given this rule, the majority concluded “that the Bankruptcy Code unequivocally abrogates the sovereign immunity of any and every government that possess the power to assert such immunity.” And this includes federally recognized tribes. The Court’s analysis began with the proposition that the term “governmental unit” was defined in such a way to exude comprehensiveness from beginning to end. Furthermore, the catchall phrase quoted above was notable. “Few phrases in the English language express all-inclusiveness more than the pairing of two extremes.” The pairing of foreign with domestic was such a construction. Thus, by coupling foreign and domestic together and placing that pair at the end of an extensive list, “Congress unmistakably intended to cover all governments in §101(27)’s definition, whatever their location, nature or type.” Carving out any government from the definition of “governmental unit” would have required the Court to upend the policy choice embodied in the Code. Because the Code unequivocally abrogates sovereign immunity of all governments and Tribes are undisputedly governments, §106(a) unmistakably abrogates Tribal sovereign immunity.

Justice Thomas concurred in the judgment but reiterated his longstanding position that “to the extent that Tribes possess sovereign immunity at all, that immunity does not extend to “suits arising out of a Tribe’s commercial activities conducted beyond its territory.” Justice Gorsuch dissented. He began by noting that there had not been a single example in all of history where the Court had found that Congress intended to abrogate Tribal sovereign immunity without an express mention that Indian Tribes in the statute. Moreover, Justice Gorsuch found that the phrase “other foreign or domestic governments” could mean what the Court concluded, but there was a plausible other meaning. That is, it could mean every other foreign government and every other domestic government, but Indian Tribes are neither. In his view, the Tribes enjoy unique status that requires specific mention.

MOAC Mall Holdings LLC v. Transform Holdco LLC, 598 U.S. 288, 143 S. Ct. 927 (2023). “[T]he Bankruptcy Code permits a debtor (or a trustee) to sell or lease the bankruptcy estate’s property outside of the ordinary course of the bankruptcy entity’s business … Interested parties may file an objection to such a sale or lease, and may appeal if the Court authorizes the sale or lease of the estate’s property over their objection. But §363(m) restricts the effect of such an appeal if successful.” Namely, it provides that “[t]he reversal or modification on appeal of an authorization … of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization of such sale or lease was stayed pending appeal.” Thus, “sometimes, a successful appeal of a judicial authorization to sell or lease estate property will not impugn the validity of a sale or lease made under that authorization.” In this case, the Supreme Court was asked to decide whether the statutory mootness of Section 363(m) was jurisdictional.

In 2018, Sears filed for Chapter 11 bankruptcy protection. In 2019, Sears sought to sell most of its assets to the respondent subject to bankruptcy court approval. As part of the sale, the respondent was given the right to designate to whom a lease between Sears and certain landlords would be assigned. The agreement did not designate an assignee; it simply meant that if the respondent designated one, Sears would be compelled to assign the lease to the designee. One of the leases in question was a lease with the petitioner MOAC, the owner of the Minnesota Mall of America.

Section 365 of the Code prohibits assignment of an unexpired lease absent adequate assurance of future performance by the assignee, generally. And it contains specific rules regarding adequate assurance applicable to shopping centers. Respondent designated the Mall of America lease for assignment to a wholly owned subsidiary. MOAC objected on the grounds that the respondents had not provided the requisite adequate assurance of future performance. The bankruptcy court disagreed and approved the assignment. MOAC sought a stay of that order. The bankruptcy court denied the request, reasoning that an appeal of the assignment order did not fall within the scope of Section 363(m). Thus, a stay was not necessary. The bankruptcy court further noted that the respondent had explicitly represented that it would not invoke Section 363(m) against MOAC. No stay was granted, the order became effective, and Sears assigned the lease. MOAC successfully appealed the order to the district court, which concluded that the respondent did not satisfy the requirements of adequate assurance. The district court, therefore, vacated the order. The respondent then sought rehearing and, for the first time, backed away from its previous commitments and argued that Section 363(m) deprived the district court of jurisdiction. While the district court was appalled by the gambit, it was bound by Second Circuit precedent holding that Section 363(m) is jurisdictional and not subject to waiver or judicial estoppel. The Second Circuit affirmed. The Supreme Court granted the Mall’s petition for certiorari to resolve a circuit split.

Before turning to the jurisdictional arguments, the Court first addressed the respondent’s argument that the case was moot because the lease had been transferred out of the estate via the assignment. The Court noted that “a case is only moot when it is impossible for the court to grant any effective relief.” The respondent argued that the only way for the Court to grant relief would be to avoid the transfer pursuant to Section 549 of the Code. As Section 549 could only be asserted by the debtor and the debtor had expressly waived any right to bring such an action, the transfer of the lease could not be undone.

The Court noted that its precedents disfavor these kinds of mootness arguments. MOAC simply sought typical appellate relief: the reversal of the lower courts’ decisions. In that regard, the Court would not conclude that the parties did not have a concrete interest in the relief sought. And the Supreme Court declined to act as the court of “first view” with regard to the respondent’s contention that no actual relief remains legally available.

The Court then turned to the question of jurisdiction. Whether Section 363(m) is jurisdictional is “significant because it carries with it unique and sometimes severe consequences.” Not only does a jurisdictional condition deprive the Court of the power to hear a case, but it is also impervious to excuses like waiver or forfeiture. If the statute is jurisdictional even the egregious conduct of the respondent would not permit application of judicial estoppel. Given these extreme consequences, the Court has previously held “that jurisdictional rules pertain to ‘“‘the power of the court rather than to the rights or obligations of the parties.’”’ And a provision will only be held to be jurisdictional if Congress clearly states its intent that it be applied in that fashion. But magic words are not required.

The Court found nothing in Section 363(m) that purported to govern the Court’s ability to adjudicate a dispute. To the contrary, Section 363(m) clearly anticipates that courts will exercise jurisdiction over a covered authorization, and it is, thus, permissible to read the text as merely cloaking certain good-faith purchasers with protection, even when jurisdiction exists. Moreover, Congress separated Section 363(m) from other provisions that actually limit a court’s jurisdiction, and Section 363(m) does not contain any clear connection to those plainly jurisdictional provisions. The Court further rejected the respondent’s argument that the transfer of a res to a good-faith purchaser removes it from the bankruptcy estate and from the court’s in rem jurisdiction. It found this argument to be a red herring. The important issue is the text of the statute where Congress did not clearly limit judicial power as opposed to merely restricting the effects of a valid exercise of that power. The Supreme Court vacated the Second Circuit’s judgment and remanded the case for further proceedings.

§ 1.1.2. First Circuit

Botelho v. Buscone (In re Buscone), 61 F.4th 10 (1st Cir. 2023). Although the Fifth, Sixth, Tenth, and Eleventh Circuits have all found an exception to judicial estoppel in circumstances where the failure to disclose a legal claim in bankruptcy was inadvertent, the First Circuit Court of Appeals seemingly indicated, in dicta, that it would not permit such an exception.

Neighbors Mary and Ann went into business together. When their business failed in 2014, Ann commenced chapter 7 proceedings that same year. In her bankruptcy schedules, Ann neglected to include any claims against Mary. Ann subsequently received a discharge. Approximately three years later, in 2018, Ann sued Mary in Massachusetts state court and secured a default judgment of $91,673.45 when Mary failed to respond to the suit. Shortly thereafter, Mary commenced her own chapter 7 proceeding in which she listed in her schedules Ann’s claim against her in the default judgment amount. Ann commenced an adversary proceeding in Mary’s bankruptcy, seeking a determination that her default judgment against Mary was non-dischargeable under sections 523(a)(2)(A) and 523(a)(4) of the Bankruptcy Code. Section 523(a) provides that:

A discharge under section 727 . . . does not discharge an individual debtor from any debt—

. . .

(2) for money, property, [or] services . . . to the extent obtained by—

(A) false pretenses, a false representation, or actual fraud . . . ; [or]

. . .

(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. . . .

11 U.S.C. § 523(a). Mary sought to dismiss Ann’s adversary complaint on the basis that Ann was foreclosed from asserting that her claim was non-dischargeable by reason of judicial estoppel because Ann failed to list in her bankruptcy schedules. After the bankruptcy court converted Mary’s motion to one for summary judgment, the parties proceeded to discovery. However, after Mary failed to comply with multiple discovery orders, the bankruptcy court ultimately granted Ann’s motion for sanctions, including an order finding default judgment in Ann’s favor. On Mary’s motion to reconsider both the sanctions order and Mary’s motion for summary judgment, the bankruptcy court re-affirmed its decisions. After the Bankruptcy Appellate Panel largely reiterated the bankruptcy court’s findings, Mary appealed (i) the bankruptcy court’s denial of her motion for summary judgment, (ii) the default judgment entered against her as a discovery sanction, and (iii) the bankruptcy court’s denial of her motion to reconsider to the First Circuit.

Turning to the question of Mary’s motion for summary judgment, the First Circuit took under consideration whether Ann should have been judicially estopped from pursuing the state court judgment. The court began with an overview of the judicially-created doctrine, noting its purpose “‘to protect the integrity of the judicial process,’ by ‘prohibiting parties from deliberately changing positions according to the exigencies of the moment.’” Id. at 21 (quoting New Hampshire v. Maine, 532 U.S. 742, 749–50 (2001)). The court highlighted “two baseline factors,” which—when met—afford a court the discretion to estop a party from asserting a legal position: (1) a party’s position must be “clearly inconsistent” with an earlier position; and (2) the party must have “succeeded in persuading a court to accept [their] earlier position.” Id. (quoting New Hampshire v. Maine, 532 U.S. 742, 750 (2001)) (emphasis original). But in the bankruptcy context, where judicial estoppel is often applied to prevent a debtor, who previously obtained a discharge on the representation that no claims exist, from resurrecting those claims, the First Circuit acknowledged that certain of its sister circuits had found an exception to judicial estoppel where the failure to disclose a legal claim in bankruptcy was inadvertent. Although the question before it was whether the bankruptcy court abused its discretion in denying Mary’s motion for summary judgment, the First Circuit seemingly indicated it would split from its sister circuits, reiterating from prior precedent that “a party is not automatically excused from judicial estoppel if the earlier statement was made in good faith.” Id. at 28 (quoting Thore v. Howe, 466 F.3d 173, 184 n.5 (1st Cir. 2006)); see also id. at 23 (“[w]e have never recognized such an exception and have noted that deliberate dishonesty is not a prerequisite to application of judicial estoppel.”) (quoting Guay v. Burack, 677 F.3d 10, 20 n.7 (1st Cir. 2012)). The court then affirmed the bankruptcy court’s denial of summary judgment, finding no error in its conclusion that a further factual record was required to determine if judicial estoppel foreclosed Ann’s non-dischargeability action.

The First Circuit went on to affirm the bankruptcy court on the latter two issues as well, finding that it was squarely within the bankruptcy court’s discretion to award default judgment as a discovery sanction in the face of Mary’s repeated failures to comply with the court’s prior orders and to deny Mary’s motion for reconsideration when she had primarily regurgitated her prior arguments.

Rodgers, Powers & Schwartz, LLP v. Minkina (In re Minkina), 79 F.4th 142 (1st Cir. 2023). In this case, the First Circuit examined whether the Butner principle created a conflict with the Bankruptcy Code in the context of a valuation dispute under section 522(f) of the Bankruptcy Code. Overturning the Bankruptcy Appellate Panel’s (the “BAP”) longstanding Snyder v. Rockland Tr. Co. (In re Snyder), 249 B.R. 40 (1st Cir. B.A.P. 2000) decision, the First Circuit concluded that a debtor’s interest in property held as a tenant by the entirety must be determined by the fair market value of such interest, notwithstanding that Massachusetts law defines a tenancy by the entirety as a “unitary title.”

At the time of Nataly Minkina’s chapter 13 bankruptcy filing in 2018, Minkina and her husband owned their Brookline, Massachusetts home as tenants by the entirety. The property was subject to (1) two mortgages totaling $177, 741, and (2) a judicial lien, solely on Minkina’s interest in the property, in favor of law firm Rodgers, Powers & Schwartz, LLP (“RPS”) for $250,094, resulting from a state court judgment ordering Minkina to reimburse RPS for the expenses incurred in defending against Minkina’s frivolous malpractice suit. Minkina was also entitled to a $500,000 homestead exemption. In 2019, Minkina moved to avoid the RPS judicial lien on the grounds that the lien impaired her homestead exemption pursuant to section 522(f). For the purposes of the lien avoidance, the parties agreed to value the property as a whole at $1.05 million. But the question then arose as to how the parties should value Minkina’s interest in the property as a tenant by the entirety. While RPS argued that the bankruptcy court was bound to follow the Snyder decision, in which the BAP ruled that a Massachusetts debtor’s interest in a tenancy by the entirety is equal to 100% of the value of the property for purposes of the section 522(f) formula, Minkina argued that her interest in the property should be appraised based on either an actuarial approach or a simple 50% interest in the value of the property. Following a preliminary ruling, in which the bankruptcy court indicated that it would not follow Snyder, the parties stipulated to a valuation of Minkina’s interest in the property, subject to her husband’s right of survivorship, of $525,000, while also preserving RPS’s right to pursue a valuation of Minkina’s interest at 100% of the property value. As previewed, the bankruptcy court granted Minkina’s motion to avoid RPS’s lien, rejecting Snyder. RPS petitioned for, and was granted, direct appeal to the First Circuit.

On appeal, RPS argued primarily that the Massachusetts Supreme Judicial Court’s decision in Coraccio v. Lowell Five Cents Sav. Bank, 415 Mass. 145 (1993), which determined that a tenancy by the entirety constitutes a “unitary title” under Massachusetts law, compels the conclusion that Minkina’s interest in the property should be valued at the full market value of the property. The First Circuit dispatched this argument easily, finding that Coraccio did not concern valuation, and therefore had no bearing on the requirement established under Snyder to value Minkina’s interest in the property as the full property value.

The First Circuit then examined whether the bankruptcy court erred in declining to follow Snyder’s approach to valuing a tenancy by the entirety at the full property value. Holding that the bankruptcy court had not erred when it accepted the stipulated 50% valuation, the First Circuit instead found that Snyder impermissibly deviated from the plain text of the Bankruptcy Code. The Bankruptcy Code defines the term “value,” as used in section 522(f), as “fair market value as of the date of the filing of the petition.” 11 U.S.C. § 522(a)(2). Snyder’s valuation of a tenancy by the entirety at 100% of the property value assumes that an interest in a tenancy by the entirety is equally as marketable as an interest in the property in fee simple, without accounting for the limitations of a tenancy by the entirety (i.e., the right of survivorship). By failing to establish a fair market value for an interest in a tenancy by the entirety, the First Circuit held, the BAP in Snyder failed to abide by the plain text of section 522.

§ 1.1.3. Second Circuit

ESL Invs., Inc. v. Sears Holdings Corp. (In re Sears Holdings Corp.), 51 F.4th 53 (2d Cir. 2022). In the context of a section 507(b) super-priority claim litigation, the Second Circuit was asked to determine how to value the assets of Sears Holding Corporation and its debtor-affiliates (collectively, “Sears”). Although the Second Circuit relied on the reasoning underlying the Supreme Court’s decision in Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997), it nonetheless found that the net orderly liquidation value (“NOLV”) was the appropriate measure for Sears’ assets, rather replacement value, as used by the Supreme Court.

Before the bankruptcy court, certain holders of Sears’ second-lien debt (the “second-lien claimholders”) asserted that they were entitled super-priority claims pursuant to section 507(b) of the Bankruptcy Code, for the diminution in value of their collateral during the course of Sears bankruptcy proceeding. The bankruptcy court was therefore required to determine whether the second-lien claimholders’ collateral had decreased in value after the October 15, 2018, commencement of the Sears bankruptcy proceeding (the “Petition Date”). The second-lien claimholders would only be able to assert their section 507(b) claim to the extent that the value of the collateral as of the Petition Date, less the obligations owed to the first-lien lenders, exceeded the $433.5 million credit bid that the second-lien claimholders had used to purchase Sears’ assets during the bankruptcy.

After hearing the evidence, including expert testimony, the bankruptcy court determined that the value of the second-lien claimholders’ collateral as of the Petition Date was $2.147 billion, based on the NOLV approach. Included in that determination was a zero-dollar valuation for a subset of inventory (the “NBB Inventory”) and a face-value valuation for $395 million in letters of credit Sears purchased, since—as the bankruptcy court held—the second-lien claimholders had not offered a reasonable valuation method for either category of asset. Because the bankruptcy court found that the first-lien lenders were owed $1.96 billion, the second-lien claimholders were therefore only secured to the extent of $187 million, which was less than the value they received via their $433.5 million credit bid. Accordingly, the bankruptcy court determined that the second-lien claimholders were not entitled to a super-priority claim under section 507(b). The district court affirmed.

On appeal to the Second Circuit, the second-lien claimholders argued that the bankruptcy court had erred in (1) valuing the inventory at its NOLV, rather than replacement value or retail value, (2) assigning zero value to the NBB Inventory, and (3) valuing the letters of credit at their full face value. First addressing the inventory valuation methodology argument, the Second Circuit began by examining the Supreme Court’s decision in Rash. The Rash Court was asked to determine the present value of collateral in accordance with section 506(a)(1) of the Bankruptcy Code, which provides that the value of collateral “shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property.” 11 U.S.C. § 506(a)(1). There, because the collateral was being used to continue the debtor’s business, the Supreme Court held that the proper value of the collateral was its replacement value. Although the second-lien claimholders argued that Rash required the bankruptcy court to apply the replacement value, the Second Circuit rejected this argument, instead interpreting Rash to stand for the proposition that, “when valuing collateral pursuant to section 506(a), the value of the property should be calculated ‘in light of the disposition or use in fact proposed, not the various dispositions or uses that might have been proposed.’” Id. at 63 (quoting Rash, 520 U.S. at 964). Because the only realistic outcomes contemplated—a going-concern sale or a forced liquidation—the Second Circuit concluded that the bankruptcy court had reasonably decided to assess the collateral according to the NOLV.

Turning next to the second-lien claimholders’ argument that the bankruptcy court should not have valued the NBB inventory at zero, the Second Circuit found that the second-lien claimholders had waived their argument that they did not have the burden of proving the value of the collateral. Accordingly, the bankruptcy court was entitled, in the absence of an acceptable valuation methodology establishing any other value, to value the NBB Inventory at zero. Similarly, because the second-lien claimholders failed to propose a valuation methodology that adequately addressed the contingent nature of the letters of credit, the bankruptcy court was entitled to apply face value.

TLA Claimholders Grp. v. LATAM Airlines Grp. S.A. (In re LATAM Airlines Grp. S.A.), 55 F.4th 377 (2d Cir. 2022). The Second Circuit joined the Third, Fifth, and Ninth Circuits in holding that an unsecured claim may be treated as unimpaired under a plan of reorganization even if the plan does not provide for the payment of postpetition interest, despite the debtor’s solvency.

Certain unsecured creditors of Tam Linhas Aéreas S.A. (“TLA”), an affiliate of LATAM Airlines Group S.A. (collectively, “LATAM”), opposed confirmation of the LATAM chapter 11 plan. The TLA creditors objected to the plan’s classification of their claims as “unimpaired” when, although the claims were being paid in full, the plan did not provide for payment of postpetition interest on their claims. The TLA creditors further argued that because TLA was solvent, based on both a waterfall analysis and a discounted cash flow analysis, they were entitled to interest payments on their claims during the pendency of the bankruptcy pursuant to the “solvent-debtor” exception to the general rule of bankruptcy that interest stops accruing upon a bankruptcy filing. However, the bankruptcy court disagreed with both arguments, confirming the plan over the TLA creditors’ objection. The bankruptcy court found that the definition of impairment contained in section 1124(1) did not supersede the limitation in section 502(b)(2) of the Bankruptcy Code prohibiting allowance of claims for unmatured interest. The bankruptcy court further found that TLA was insolvent, relying on the liquidation analysis and the balance sheet test put forward by LATAM, such that the solvent-debtor exception was inapplicable. After the district court confirmed the bankruptcy court’s findings, the TLA creditors appealed to the Second Circuit.

On appeal, the Second Circuit first addressed whether the TLA creditors’ claims were impaired under section 1124(1) of the Bankruptcy Code. Relying heavily on the precedents established in the Third, Fifth, and Ninth Circuits, the Second Circuit looked to the statutory language of section 1124(1), which provides that a class of claims or interests is impaired under a plan, unless the plan does not alter the legal, equitable, and contractual rights to which the claim holder is entitled. See 11 U.S.C. § 1124(1). Although the TLA creditors had a contractual right to collect interest on their claims outside of bankruptcy, section 502(b)(2) of the Bankruptcy Code cut off the TLA creditors’ claim to interest. And because the creditors’ rights were altered by operation of the Bankruptcy Code, rather than the chapter 11 plan itself, the Second Circuit held that the TLA creditors’ claims were unimpaired.

The Second Circuit then considered whether the bankruptcy court erred in determining that TLA was insolvent. The TLA creditors argued first that the solvent-debtor exception is derived from the absolute priority rule, and thus the solvent-debtor exception is triggered if a chapter 11 plan proposes to pay equity holders. The Second Circuit dismissed this argument, reasoning that, because the plan proposed to pay the TLA creditors the allowed amount of their claims, see 11 U.S.C. § 1129(b)(2)(B)(i), the TLA creditors could not invoke the absolutely priority rule as a measure of TLA’s solvency. Turning to the TLA creditors’ argument that the bankruptcy court should have applied the discounted cash flow analysis based on the precedent established in Consolidated Rock Products Company v. DuBois, 312 U.S. 510 (1941), the Second Circuit found that the Supreme Court’s holding in that case was limited to the common-law absolute priority rule such that it could not be “imported” to the absolute priority rule as codified in the current Bankruptcy Code. Accordingly, the Second Circuit found no error in the bankruptcy court’s ruling that TLA was insolvent and that the solvent-debtor exception was inapplicable.

Tutor Perini Building Corp. v. NYC Regional Cntr. George Washington Bridge Bus Station & Infrastructure Dev. Fund, LLC (In re George Washington Bridge Bus Station Dev. Venture, LLC, 65 F.4th 43 (2d Cir. 2023). The Second Circuit Court of Appeals narrowly construed who may assert a cure claim under section 365(b)(1)(A) of the Bankruptcy Code, holding that a party “must have some right to pursue a breach of contract claim under the executory contract or unexpired lease a debtor assumes under § 365(a)” to receive a right to payment to payment in full. Id. at 51.

In 2011, the debtor, a redevelopment company, entered into a lease agreement (the “Lease”) with the Port Authority of New York and New Jersey (“Port Authority”). The Lease provided that the debtor would renovate the George Washington Bridge Bus Station in Manhattan and receive a 99-year lease to operate a retail mall to be built on the property. The Lease further required the debtor to pay all claims against it by its contractors, subcontractors, material-men, and workmen in full. The debtor subsequently entered into a contract (the “Construction Contract”) to engage Tutor Perini Building Corp. (“Tutor Perini”) as the general contractor for the project. In 2015, the relationship between the debtor and Tutor Perini soured when Tutor Perini commenced arbitration proceedings against the debtor, claiming that it was owed approximately $113 million in damages for the debtor’s failure to pay amounts due under the Construction Contract.

When the debtor filed chapter 11 proceedings in 2019, it sought to sell substantially all of its assets, including its rights under the Lease. Tutor Perini opposed the sale, arguing that the debtor was obligated to pay Tutor Perini’s $113 million claim under the Construction Contract in full to cure the default of the Lease provision requiring the debtor to pay its contractors and subcontractors. Both the bankruptcy court and the district court rejected Tutor Perini’s two main arguments in support of its cure claim: (1) that section 365(b)(1)(A) does not limit who may assert a cure claim; and (2) that, if section 365(b)(1)(A) did limit who may assert a cure claim, Tutor Perini was entitled to assert a cure claim as a third-party beneficiary to the Lease.

The Second Circuit affirmed on both arguments. First, the court held that administrative priority under section 365(b)(1)(A) should be limited to those whose claims arise from the contract to be assumed under section 365(a). The purpose of section 365, the court reasoned, is to preserve the benefit of the bargain struck between the parties to fairly compensate the non-debtor contracting party who is obligated, under the Bankruptcy Code, to continue performing under the contract to be assumed. Where no bargain had been struck as between the debtor and Tutor Perini, the court was unwilling to alter the narrowly-construed statutory priorities established under the Bankruptcy Code. Furthermore, the court found unpersuasive Tutor Perini’s argument that the text of section 365(b)(1)(A) did not explicitly limit cure claims to those with rights under the subject contract. Looking to both sections 365(b)(1)(B) and 365(g), the Second Circuit concluded that “Congress clearly contemplated the rules of priority for creditors with claims actually arising under contracts, and not just for any party who claims some tangential interest in a contract short of a legal right to sue under it.” Id. at 53. In addition, the court posited that section 365(g), which entitles parties to rejected executory contracts to treatment as general unsecured creditors, would be rendered meaningless if Tutor Perini’s $113 million claim, arising under the rejected Construction Contract, somehow became entitled to payment in full on the basis of a tenuous relationship to the assumed Lease.

The Second Circuit then easily dispatched Tutor Perini’s second argument by holding that Tutor Perini was not a third-party beneficiary of the Lease. Accordingly, the court was not required to address whether a third-party beneficiary is entitled to seek administrative priority pursuant to section 365(b). However, in dicta, the court noted that, because “a third-party beneficiary is one who has a ‘right to performance’ under a contract because ‘the intention of the parties’ to that contract was to afford the third party such right, … protecting the non-debtor contracting party’s bargain reasonably includes allowing the intended third-party beneficiary to be made whole as well.” Id. at 54 n.6 (quoting Restatement (Second) of Contracts § 302 (1981)).

§ 1.1.4. Third Circuit

In re Delloso, 72 F.4th 532 (3d Cir. 2022). In a precedential opinion, the Third Circuit affirmed the ruling of the Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) denying a motion of Strategic Funding Source, Inc. d/b/a Kapitus (“Kapitus”), a creditor of Louis N. Delloso (the “Debtor”), to reopen the bankruptcy case because (i) Kapitus’s request for relief was time-barred, and (ii) Kapitus had an alternative forum in which to seek relief.

In 2011, several years prior to the Debtor’s bankruptcy filing, Kapitus and Greenville Concrete, a company partially owned by the Debtor, entered into an agreement whereby Kapitus would purchase receivables from Greenville Concrete, and Greenville Concrete would deposit the receivables into an account on behalf of Kapitus. On March 6, 2013, Greenville Concrete failed to deposit certain receivables, and Kapitus issued a notice of default.

After out-of-court resolution efforts stalled, Kapitus sued Greenville Concrete in New York state court alleging breach of contract. This suit ended in a settlement under which Greenville Concrete was to make weekly payments until it had reached an agreed-upon amount. The settlement agreement provided that if Greenville Concrete failed to make such payments, Kapitus could enter a default judgment against Greenville Concrete. Greenville Concrete later defaulted, and Kapitus received a judgment against the Debtor and Greenville Concrete in the amount of $776,600.25.

On March 31, 2016 (the “Petition Date”), the Debtor filed a case under chapter 7 of title 11 of the U.S. Code (the “Bankruptcy Code”). The Debtor listed the debt owed to Kapitus in his schedules and disclosed that his sole employer for the three years prior to the Petition Date was “Bari Concrete Construction” (“Bari Concrete”). Following the filing of the bankruptcy case, the Bankruptcy Court notified creditors that the final day to oppose the Debtor’s discharge or the dischargeability of certain debts was July 5, 2016. Having received no responses, on July 6, 2016, the Bankruptcy Court granted a discharge of the Debtor’s debts and on August 5, 2016, the case was closed.

On November 15, 2021, over five years after the case was closed, Kapitus moved to reopen the case, asserting that Bari Concrete appeared to operate as a mere continuation of Greenville Concrete. Kapitus separately sued Bari Concrete in state court seeking satisfaction of its debt against Greenville Concrete, among other causes of action. In the Bankruptcy Court, Kapitus requested that the case be reopened (i) so that it could seek a determination of non-dischargeability of its scheduled claim of $776,600.25; or (ii) so that a chapter 7 trustee could administer a purported ownership interest of the Debtor in Bari Concrete, an asset which was not disclosed at the time of the bankruptcy filing. In the alternative, Kapitus asked that the Court revoke the Debtor’s discharge because the discharge was obtained through fraud, and Kapitus did not know of the fraud until after the discharge.

Following oral argument, the Bankruptcy Court declined to reopen the case. The Bankruptcy Court based its decision on two of the factors listed in the case of In re New Century TRS Holdings, Inc., No. 07-10416 (BLS), 2021 WL 4767924, at *6–7 (Bankr. D. Del. Oct. 12, 2021): (i) Kapitus would not be able to obtain the relief it sought even if the case were reopened, as Kapitus’s claims were time-barred, and the Bankruptcy Court was precluded from modifying the applicable time period by, among other things, Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) 4007(c) and 9006(b) and Supreme Court precedent in Nutraceutical Corp. v. Lambert, 139 S. Ct. 710 (2019) (providing guidance on the application of rules regarding time limitations); and (ii) Kapitus could obtain the relief it sought in the state court action it had previously commenced against Bari Concrete. Following the Bankruptcy Court’s decision, Kapitus requested an immediate appeal to the Third Circuit, which the Third Circuit granted.

On appeal, Kapitus argued that (i) the case should be reopened to allow for pursuit of “potentially viable theories of relief,” Delloso, 72 F.4th at 536, and that (ii) the presence of its state court action against Bari Concrete should not preclude reopening the bankruptcy case for purposes of administering a previously undisclosed asset.

Kapitus argued that Bankruptcy Rules 4007(c) and 9006(b), which set the time periods during which Kapitus was required to file its claims, are each subject to doctrines such as equitable tolling, as well as Bankruptcy Code section 105(a). Kapitus further argued that the Bankruptcy Court’s application of Supreme Court precedent was in error. The application of these doctrines, according to Kapitus, would allow it to pursue its claims in the reopened bankruptcy case.

The Third Circuit disagreed, noting that the cited Supreme Court precedent applied to the Bankruptcy Court’s analysis, and adopting the reasoning of the Bankruptcy Court that Bankruptcy Rule 4007(c) precludes equitable tolling, explaining that, among other reasons, Bankruptcy Rule 9006 “singles out Rule 4007(c) for inflexible treatment.” Delloso, 72 F.4th at 540 (internal quotations omitted). Therefore, the Third Circuit concluded, the Bankruptcy Court properly reasoned that Kapitus’s claims were time-barred.

Kapitus also argued that the existence of its state court action against Bari Concrete should not preclude reopening of the bankruptcy case. The Third Circuit was unconvinced by this argument, explaining that the Bankruptcy Court had considered this fact and weighed reopening the case to administer the previously undisclosed asset against the cost of reopening a case that had been closed for over five years. The Bankruptcy Court concluded that state court remedies would provide adequate value if any remedy was warranted. The Third Circuit decided that this was not an abuse of the Bankruptcy Court’s discretion.

Because Kapitus’s claims were time-barred, Kapitus had an adequate remedy in the form of its state court action against Bari Concrete, and the Bankruptcy Court did not abuse its discretion in deciding so, the Third Circuit affirmed the order of the Bankruptcy Court denying Kapitus’s motion to reopen the bankruptcy case.

In re National Medical Imaging, LLC, No. 22-1727 (3rd Cir. 2023). In this non-precedential opinion, the Third Circuit vacated and remanded the Bankruptcy Court for the Eastern District of Pennsylvania’s decision to disallow U.S. Bank’s right to setoff under 11 U.S.C. § 553(a).

This case arises from years of litigation between National Medical Imaging (“NMI”) and U.S. Bank. In 2008, U.S. Bank and others filed an involuntary bankruptcy petition against NMI. The bankruptcy court later dismissed the involuntary petition. The dismissals caused NMI to sue U.S. Bank for costs and attorneys’ fees under 11 U.S.C. § 303(i)(1) as well as proximate and punitive damages under section 303(i)(2) for an alleged bad-faith involuntary petition. The bankruptcy court stayed that case, on and off, until 2021.

In the interim, U.S. Bank obtained a judgment against NMI for $12 million plus post-judgment interest. U.S. Bank sought to execute on those judgments by moving a Florida state court to force NMI to sell its section 303(i)(2) causes of action. Presumably, U.S. Bank would then credit bid and acquire the claims against itself to nix them. The Florida court granted U.S. Bank’s motion.

Shortly thereafter, NMI voluntarily filed for bankruptcy, declaring its section 303(i) claims to be its only significant assets. NMI then sought two declaratory judgments in an adversary proceeding against U.S. Bank. First, it requested a declaration that U.S. Bank may not set off its money judgment against NMI’s section 303(i) award. Second, NMI asked the bankruptcy court to declare that “U.S. Bank is prohibited from taking any action to interfere with the Debtors’ prosecution of their claims under Section 303(i)” other than defending against those claims.

The bankruptcy court entered judgment in favor of NMI as to the setoff request, reasoning that, “as a matter of public policy,” section 303(i)(1) remedies are not subject to setoff. As to NMI’s second request, the bankruptcy court initially dismissed the claim as unripe because the automatic stay “precludes any action U.S. Bank might wish to take…that might impair or extinguish [NMI’s] § 303(i) claims,” but later sua sponte reversed and entered judgment for NMI. U.S. Bank timely appealed.

The Third Circuit rejected the bankruptcy court’s ruling that U.S. Bank may not set off its judgments against its section 303(i)(1) liability “as a matter of public policy.” The Third Circuit held that public policy cannot displace a statute that is directly on point, as is the case with section 553(a), which governs a creditor’s ability to set off debt owing to reorganizing debtors. Section 553(a) provides:

[T]his title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case.

Section 553 does not create a right of setoff; rather, it preserves whatever setoff rights that may exist outside of bankruptcy. Accordingly, for a creditor to assert a right to setoff under section 553(a), the creditor must demonstrate (i) a right to setoff exists under applicable state law, (ii) the debts are “mutual,” and (iii) that the debts “arose before the commencement of the case.”

In the case at hand, under governing Pennsylvania law, setoff “is an inherent power of the courts, regulated by equitable principles.” The Third Circuit found that the bankruptcy court did not assume the posture of a court sitting in equity, nor did it reference Pennsylvania law in analyzing the circumstances of NMI’s case. The Third Circuit held that the bankruptcy court should have considered whether a right to setoff existed under Pennsylvania law (the threshold question in a section 553 analysis) instead of prematurely barring setoff on public policy grounds. The Court then found that the debts at issue were mutual and arose prior to the petition date, satisfying the statutory requirements of section 553(a). The Court concluded that U.S. Bank is not barred from setting off its section 303(i)(1) liability as a matter of law and remanded to the bankruptcy court to decide whether setoff was available under Pennsylvania law.

In re TE Holdcorp, LLC, No. 22-1807 (3d Cir. 2023). In this opinion, the Third Circuit held that the Bankruptcy Court had jurisdiction to interpret its own orders and properly held that its orders did not preserve any claims by a disgruntled contract counter-party, Spitfire Energy Group, LLC (“Spitfire”) of the debtor TE Holdcorp LLC (“Templar”) against the successful purchaser, Presidio Petroleum LLC (“Presidio”).

Templar filed for Chapter 11 in June of 2020 and also sought to sell substantially all of its assets under section 363 of the Bankruptcy Code and pursue a plan of liquidation. Spitfire raised several objections to Templar’s proposed plan, which Templar resolved by entering into a stipulation that preserved Spitfire’s claims resulting from any rejection of its contract with Templar. As part of the stipulation, Spitfire opted out of the plan’s third-party releases, of which included releases of the successful purchaser.

Presidio was the successful purchaser of Templar’s assets, and the Bankruptcy Court entered an order approving the sale free and clear of all liens, claims, and encumbrances, including contracts not designated for assumption. Spitfire’s contract was not assumed through the sale and Spitfire did not object to the sale. The sale also provided for the deemed consent of any interest-holder who did not object to the Sale.

The Bankruptcy Court entered the confirmation order, which included Spitfire’s opt-out as well as a representation that Spitfire would not file any additional documents or appeal the Chapter 11 cases beyond filing general unsecured claims. Thereafter, Spitfire sued Presidio in state court over the contract Presidio decided not to assume. Believing that the Sale Order and Confirmation Order foreclosed Spitfire’s suit, Presidio moved the Bankruptcy Court to enforce both, which the Bankruptcy Court did, and the District Court affirmed.

On appeal, Spitfire contested two issues: (1) the Bankruptcy Court’s jurisdiction over the enforcement proceedings, and (2) the Bankruptcy Court’s interpretation of its Sale and Confirmation Orders.

The Court noted that the Bankruptcy Court had core jurisdiction over the enforcement motion because it had jurisdiction to interpret and enforce those prior orders, notwithstanding that the Bankruptcy Court’s jurisdiction wanes post-confirmation. In particular, sale and confirmation orders are core bankruptcy proceedings.

With respect to the interpretation of the provisions themselves, the sale order unambiguously provided that any interest holder who fails to object to the “free and clear” sale is deemed to consent. Spitfire participated in the sale hearing, but did not object, so it was deemed to consent to Templar’s asset sale free and clear of any Spitfire’s contractual obligations to Presidio. Likewise, the opt-out provision in the confirmation order did not represent a separate agreement between Spitfire and Presidio, and the stipulation Spitfire entered into with Templar could not be enforced against Presidio. Accordingly, the Third Circuit agreed with the lower courts in enforcing the sale order and confirmation order against Spitfire.

§ 1.1.5. Fourth Circuit

Kiviti v. Bhatt, 80 F.4th 520 (4th Cir. 2023). The Fourth Circuit Court of Appeals sent a strongly worded reminder to bankruptcy litigants that a final bankruptcy order cannot be manufactured for purposes of an appeal. In so doing, the Fourth Circuit differentiated bankruptcy courts’ jurisdiction from that of Article III courts, finding that bankruptcy courts can adjudicate matters that would be found “moot” if put before an Article III court.

A husband and wife (the “Kivitis”) hired a contractor to renovate their Washington, D.C. home. However, the contractor was not properly licensed. D.C. law therefore entitled the Kivitis to recover what they had paid the contractor. However, the Kivitis could prevail in their suit to recover their money, the contractor commenced chapter 7 proceedings. To continue pursuing their claims, the Kivitis filed a proof of claim for their damages, but also commenced an adversary proceeding seeking both a determination that they were entitled to repayment (“Count I”) as well as a determination that their right to repayment was non-dischargeable (“Count II”). When the bankruptcy court dismissed Count II without resolving Count I, finding that the claim—if it existed—was dischargeable, both parties agreed to voluntarily dismiss Count I (without prejudice) so that the bankruptcy court’s dismissal order resolved all of the Kivitis’ claims against the contractor. The Kivitis then appealed the bankruptcy court’s dismissal to the district court, which affirmed without addressing the “finality” of the bankruptcy court’s order.

On appeal, the Fourth Circuit refused to address the underlying substance of the dismissal, instead finding that the district court lacked jurisdiction over the appeal under 28 U.S.C. § 158(a). 28 U.S.C. § 158(a)(1) grants district courts jurisdiction to hear appeals “from final judgments, orders, and decrees” of bankruptcy courts. Focusing on the fact that the parties had voluntarily dismissed Count I to engineer their desired outcome, the Fourth Circuit held that the bankruptcy court’s dismissal of Count II was not a final order when it was entered, because it did not dispose of all claims against the contractor. See Fed. R. Bankr. P. 7054(a) (incorporating Fed. R. Civ. P. 54(a)-(c) into adversary proceeding); Fed. R. Civ. P. 54(b) (“any order or other decision, however designated, that adjudicates fewer than all the claims . . . does not end the action”). Accordingly, the district court did not have jurisdiction to hear the appeal.

In response, the Kivitis argued that Affinity Living Group, LLC v. StarStone Specialty Insurance Co.,959 F.3d 634 (4th Cir. 2020) establishes an exception wherein a partial dismissal may be considered final and appealable after the parties dismiss the remaining claims. They argued that, because the surviving Count I was essentially the same as their proof of claim, the bankruptcy court’s dismissal order had mooted the adversary proceeding. The Fourth Circuit rejected this argument, finding that mootness, which arises from Article III’s “case-or-controversy” requirement, does not constrain bankruptcy courts’ authority to act. Accordingly, because the bankruptcy court was capable of adjudicating a constitutionally moot matter, such as the remaining Count I, the dismissal of Count II did not give rise to a final order.

§ 1.1.6. Fifth Circuit

RDNJ Trowbridge v. Chesapeake Energy Corp. (In re Chesapeake Energy Corp.), 70 F.4th 273 (5th Cir. 2023). After it emerged from Chapter 11, Chesapeake Energy Corporation tested the limits of post-confirmation jurisdiction by asking the bankruptcy court to approve settlements of certain purported class actions that had been filed before the bankruptcy case. The problem was that no proof of claim was filed by most of the class members. And certain features of the settlement conflicted with the plan and disclosure statement. The Fifth Circuit concluded that attempting to handle these cases within the bankruptcy court exceeded post-confirmation jurisdiction and remanded with instructions to dismiss.

The underlying lawsuits were two federal class actions filed in Pennsylvania and a third state-court proceeding brought by the Pennsylvania Attorney General. All three lawsuits involved the underpayment of royalties. In the case of one class action, the district court preliminarily approved a settlement, but a large number of putative class members opted out. In the other class action, a preliminary settlement was reached but preliminary approval had not been granted. The state-court litigation was pending before the Supreme Court of Pennsylvania at the time Chesapeake filed for bankruptcy. The bankruptcy filing stayed all three of these aforementioned non-bankruptcy cases.

Following the filing of the bankruptcy case, the Bankruptcy court set a claims bar date of October 30, 2020. None of the named plaintiffs in federal the class actions filed proofs of claim nor did the vast majority of landowners within the putative classes. The Attorney General did file a timely proof of claim as did the individual lease holders within the two putative classes. Ultimately, the bankruptcy court confirmed Chesapeake’s plan of reorganization and approved its disclosure statement. The disclosure statement provided that the landowners’ claims for nonpayment of royalties would be included in the class of general unsecured claims. And holders of allowed claims within this class were estimated to receive 0.1% of the amount owed. The plan, and the disclosure statement, assured Chesapeake’s creditors that the mineral leases in question would remain in full force and effect and that no royalty interest would be compromised or discharged by the plaintiff. But prepetition rights to royalty payments would be treated as a claim under the plan and subject to discharge. The plan further stated that late-filed proofs of claim would be deemed disallowed and expunged, absent an order of the court deeming the claim timely filed. The plan further rejected the pending, pre-petition class settlement agreements. While the plan did authorize certain late filing of proofs of claim, none were filed by any of the class plaintiffs. Thus, only the Attorney General and the 161 individual leaseholders were eligible to vote or receive any distribution of account of their damage plans. The leases rode through the bankruptcy unimpaired.

On the effective date, the Attorney General’s claims were settled. But a month after the effective date, Chesapeake reached new settlement agreements with the two class action plaintiffs, which purportedly resolved all of Chesapeake’s remaining Pennsylvania royalty-related litigation disputes. The two settlements called for Chesapeake to pay a combined $6.25 million dollars and resolved the claims of approximately 23,000 Pennsylvania landowners. Chesapeake sought preliminary approval of the settlements from the bankruptcy court. The lessors who had filed proofs of claim opposed the motion. The bankruptcy court concluded that it had “core” jurisdiction over the settlements pursuant to 28 U.S.C. §1334(a). Ultimately, the Court overruled the objections and preliminarily approved the settlements, preliminarily certified the settlement classes, and approved the form and manner of notice. The Bankruptcy court further concluded that an Article III court would need to make the final determination regarding class certification and settlement approval. On appeal, the district court affirmed the bankruptcy court’s preliminary approval. The district court disagreed with the bankruptcy court’s determination of core jurisdiction. While core jurisdiction was lacking, the district court nonetheless found jurisdiction existed to adjudicate the settlements because they related to the confirmed Chapter 11 plan.

These decisions were ultimately appealed to the Fifth Circuit. Finding that the jurisdictional issue was determinative, the appellate court limited its review to that issue. The court initially rejected the contention that there was core bankruptcy jurisdiction. The settlements were not within the ordinary claims adjudication process. Thousands of leaseholders who were potential class members never filed proofs of claim, nor did Chesapeake file a proof of claim of any sort referencing Pennsylvania royalty claims. The plan emphatically provides that late filed proofs of claim would be deemed disallowed and expunged. And because no proofs of claim were ever filed, they cannot now be deemed timely filed. Moreover, neither court below had held that the claims were timely filed.

Treating the class actions as if they had been the subject of timely filed proofs of claim would simply disregard the reorganization process. The requirement of filing a proof of claim is more than a technicality. “Proofs of claim are the touchstone for plan approval and proper distribution of the debtor’s assets allotted to each creditor class.” Notwithstanding the fact that these claims were classified as general unsecured claims to be paid only 0.1% of their pre-petition amount, the settlements would result in the leaseholders obtaining well over 20% of the amount they negotiated in their pre-petition settlement agreements. The Court found this to be an enormous windfall when compared with the treatment of other general unsecured creditors. This approach “thwarted the transparency of the reorganization process.” And the 161 leaseholders who did file timely proofs of claim could not be the basis for class settlements to fall within core jurisdiction. The Fifth Circuit found this to be an “audacious attempt to bootstrap a few objectors’ preserved rights into a basis for ‘fundamental reset’ between the debtor and nearly 23,000 other Pennsylvania lessors who did not preserve their rights.”

The court then turned to the question of “related-to jurisdiction.” The Court acknowledged that this sort of jurisdiction presented a closer question. In the post-confirmation context, the question is whether the dispute concerns the effectuation of the plan.” In that context, the Court has identified three factors that constitute a “useful heuristic”:

• First, do the claims at issue principally deal with post-confirmation relations between the parties?
• Second, was there an antagonism or a claim pending between the parties as of the date of the reorganization?
• Third, are there any facts or laws deriving from the reorganization of the plan necessary to the claim?

The Court addressed each of these factors in turn.

Because the settlements in question predated the bankruptcy, they do not principally deal with post-confirmation business. The vast majority of the class action claimants would have no recourse in bankruptcy court for their pre-petition monetary claims as the debts owed to them were discharged and expunged. The class action plaintiffs cannot resurrect those claims, use them to invoke bankruptcy jurisdiction, and then lay them to rest via class settlements. Moreover, the settlement agreements purported to modify the terms of the lease going forward for all the class members, even those who originally opted out of the settlements. This is contrary to the plan which stated that the leases would ride through unaffected. Accordingly, the Fifth Circuit found that this first factor weighed against jurisdiction.

In regard to whether there was antagonism pending at the date of reorganization, the Court agreed that that antagonism predated confirmation. But the class action against Chesapeake did not survive confirmation. Post-confirmation, the class members could not pursue their discharged claims and the plan did not adversely affect or modify their pre-petition royalty provisions. Thus, this factor did not warrant the exercise of related-to jurisdiction.

The third factor also worked against the class plaintiffs. Nothing in the plan is necessary to the disposition of the claims or the settlement agreements. Those agreements have nothing to do with any obligation created by the plan nor did Chesapeake contend that modifying the leases going forward would affect its distribution to creditors under the plan. To the contrary, the settlements contradict the plan. Thus, far from merely enforcing the plan, the settlement effects a fundamental reset of the relationship. The effect of this reset concerns the future, not the consummated reorganization. Thus, the approval of the settlements did not pertain to the implementation or execution of the plan. Because these were voluntary arrangements paying off claims that were already discharged, it would make little sense to hold that post-confirmation jurisdiction extended to them. Thus, the bankruptcy and district courts lacked jurisdiction, the judgments were vacated, and the proceedings were remanded with instructions to dismiss for lack of jurisdiction.

§ 1.1.7. Sixth Circuit

Hall v. Meisner, 51 F.4th 185 (6th Cir. 2022). The Sixth Circuit Court of Appeals held that a Michigan law permitting the county to take absolute title to real property for failure to pay certain property taxes violated the Takings Clause of the Fifth Amendment, overturning the district court’s dismissal of the claim. In so holding, the Sixth Circuit conducted a deep historical analysis of longstanding principles affording property owners equitable title in their property and disfavoring strict foreclosure.

The Michigan General Property Tax Act afforded either the county or the state to foreclose on real property in the event that property taxes remained unpaid for more than twelve months. Under the law, upon foreclosure, “absolute title” would vest in the governmental unit exercising its foreclosure right. The statute then afforded first the state, and then the city or town the right to buy the property from the foreclosing governmental unit for the amount of the tax delinquency. At that point, the property could then be sold at public auction. However, the statute did not afford the former property owner the right to receive any surplus from the auction.

Plaintiffs in the case at hand owed tax liabilities of $22,642, $30,547, and $43,350, respectively. Oakland County foreclosed under the General Property Tax Act and subsequently transferred the properties to the City of Southfield for the amount of the tax deficiencies. Southfield, in turn, sold the properties to the Southfield Neighborhood Revitalization Initiative, a for-profit entity, for $1. The Initiative then sold the first two properties for $308,000 and $155,000, respectively; the third property had not yet been sold at the time of the Sixth Circuit’s decision. The plaintiffs brought suit against the County, Southfield, the Initiative, and certain officers of each under 42 U.S.C. § 1983, alleging, among other things, that the County impermissibly deprived them of the equity in their homes without just compensation, in violation of the Takings Clause of the Fifth Amendment. The district court, however, dismissed the claim, finding that there was no surplus from the County’s disposition of the properties. The plaintiffs appealed the dismissal to the Sixth Circuit.

The Sixth Circuit disagreed with the district court’s approach, finding that the district court’s scope of review—which focused only on the question of whether there was a surplus, and therefore equity available to the property owners—was too limited. Looking instead to the mechanics of the Michigan General Property Tax Act, the Sixth Circuit considered whether Michigan had, ipse dixit, effected a taking “merely by defining [the property owners’ equity in their homes] away,” contravening longstanding principles of traditional property interests. Id. at 190. After a lengthy survey of a mortgagor’s equitable interests in property, covering 12^th century English case law through 19^th century American case law, the Sixth Circuit established that both English and American courts have consistently held strict foreclosure—whereby a property owner’s equitable interest in their property is entirely extinguished and given to the foreclosing in fee simple—to be an “unconscionable” and impermissible abrogation of debtor-property-owner’s rights. Both the English and American legal systems recognized that, although a creditor has a right to his security, that right only exists to the extent of the debts he is owed. The debtor has an equitable right to any value realized above the value of the debt. Because the Michigan General Property Tax Act did not contain a mechanism to afford property owners of their equitable right to any amounts above the tax deficiency amount, the Sixth Circuit held that the law effected an unconstitutional taking, reversing the district court.

§1.1.8. Seventh Circuit

Mann v. LSQ Funding Group, LLC, 71 F.4th 640 (7th Cir. 2023). The Seventh Circuit Court of Appeals had occasion to evaluate the Bankruptcy Code’s requirement for there to be a transfer of “an interest of the debtor in property” in connection with a voidable preferential or fraudulent transfer. See 11 U.S.C. §§ 547(b), 548(a)(1). The Seventh Circuit’s decision—that a transfer sought to be avoided under either sections 547 or 548 of the Bankruptcy Code must, at least, have had some diminutive effect on the debtor’s estate—aligns with decisions from other circuits that have held or suggested that the presence of a fraud is not sufficient to render a transaction voidable under the Bankruptcy Code. See id. at 648 (collecting cases).

Prior to its bankruptcy filing, Engstrom, Inc. engaged in a factoring agreement with LSQ Funding Group, L.C. (“LSQ”), pursuant to which LSQ agreed to provide upfront payments to Engstrom on the basis of its future receivables. Pursuant to the arrangement, LSQ took a security interest in Engstrom’s receivables. However, when LSQ discovered that the receivables were fictitious, it terminated the arrangement, creating a $10.3 million payable for Engstrom. Engstrom’s CEO then allegedly hatched a plan whereby she arranged for a new lender, Millennium Funding (“Millennium”), to buy Engstrom’s $10.3 million payable from LSQ, replacing LSQ as creditor. In connection with the transfer, LSQ transferred its interest in the Engstrom’s receivables to Millennium. After Engstrom commenced chapter 7 proceedings, however, the trustee sought to avoid the transfer between LSQ and Millennium as a payoff of Engstrom’s debt. The bankruptcy court disagreed and awarded summary judgment to LSQ based on the doctrine of “earmarking,” pursuant to which one creditor may provide a debtor “earmarked” funds to pay off a specific debt in full, thereby assuming the original creditor’s position, without being subject to a preference action. Accordingly, the bankruptcy court found that Millennium’s payment to LSQ was not a transfer of an “interest of the debtor in property.” The district court affirmed.

On appeal, the Seventh Circuit disposed of any analysis of the earmarking doctrine, instead relying only on an analysis of whether the transfer between LSQ and Millennium constituted a transfer of “an interest of the debtor in property.” In so doing, the Seventh Circuit considered both “(1) whether the debtor c[ould] exercise control over the funds transferred; and (2) whether the transfer diminishe[d] the property of the estate.” Id. at 645 (citing Matter of Smith, 966 F.2d 1527, 1535 (7th Cir. 1992)). Looking first to the question of Engstrom’s control, the Seventh Circuit found insufficient evidence to conclude that Engstrom had, in fact, controlled the payoff between LSQ and Millennium. But regardless of the infirmities in the factual record in connection with the first question, the panel found that, because there was no diminution to the estate resulting from the transaction, there was definitively no transfer of “an interest of the debtor in property” for both purposes of section 547 and section 548. As such, the issue of fraud remained solely between LSQ and Millennium.

Warsco v. Creditmax Collection Agency, Inc. (In re Harris), 56 F.4th 1134 (7th Cir. 2023). The Seventh Circuit heard and decided a direct appeal in a preference action in order to overturn its own precedent established in In re Coppie, 728 F.2d 951 (7th Cir. 1984). The Seventh Circuit panel determined that Coppie was in direct conflict with the Supreme Court’s decision in Barnhill v. Johnson, 503 U.S. 393 (1992).

A chapter 7 trustee commenced an adversary seeking to avoid approximately $3,700 in payments made by the debtor to creditor Creditmax in the ninety days prior to the debtor’s bankruptcy proceeding. The payments were made pursuant to a garnishment order that Creditmax had obtained from an Indiana state court more than ninety days before the bankruptcy proceeding commenced. In defense of the payments, Creditmax argued that Coppie, which held that (1) the definition of a “transfer” for purposes of section 547 of the Bankruptcy Code depended on state law, and (2) that, under Indiana law, the date of a transfer with respect to a garnishment occurs when the garnishment order is entered, required dismissal of the trustee’s claims. The bankruptcy court agreed, nevertheless noting that it thought Coppie was wrongly decided, but stating that only the Seventh Circuit could overrule its decision.

After accepting the case on direct appeal, the Seventh Circuit reversed the bankruptcy court to find that the garnished payments were voidable preferential transfers. In so holding, the panel acknowledged that the Supreme Court’s decision in Barnhill abrogated Coppie. Barnhill held that the meaning of “transfer,” for the purpose of section 547, was defined by federal—rather than state—law. Furthermore, the Court in Barnhill determined that, for purposes of a preference claim, the transfer is made as of the date money passes to the creditor. Although the instrument at issue in Barnhill was a check, rather than a garnishment, the Seventh Circuit applied the same reasoning in its holding that the garnished payments arose within the ninety-day preference window, and therefore remanded the case back to the bankruptcy court for further proceedings on the merits of the trustee’s claim.

§1.1.9. Eighth Circuit

Pitman Farms v. ARKK Food Co., LLC (In re Simply Essentials, LLC), 78 F.4th 1006 (8th Cir. 2023). The Eighth Circuit definitively held that avoidance actions can be sold as property of the estate under section 541(a).

The debtor operated a chicken production and processing facility in Iowa. It was forced into an involuntary chapter 7 proceeding by disgruntled creditors. Upon his appointment, the chapter 7 trustee determined that the estate did not have sufficient funds to pursue certain avoidance actions it had against creditor Pitman Farms (“Pitman”). After soliciting bids, the trustee selected another creditor, AARK Food Company (“AARK”), as the winning bidder, over Pitman’s competing bid. The bankruptcy court then approved the trustee’s sale to AARK over Pitman’s objection. Pitman appealed.

On appeal, Pitman argued that avoidance actions are not property of the estate and instead belong to the trustee or other creditors. Looking first to the plain language of section 541(a) of the Bankruptcy Code, the Eighth Circuit disagreed, finding that avoidance actions fit within the broad ambit of “property of the estate.” Not only does a debtor have an interest in avoidance actions that becomes property of the estate pursuant to section 541(a)(7), but the Eighth Circuit also found that, prior to the commencement of a bankruptcy proceeding, a debtor has an inchoate interest in avoidance actions that becomes property of the estate under section 541(a)(1). The Eighth Circuit was also not convinced by Pitman’s argument that including avoidance actions as property of the estate would render language in section 541(a)(3) and (4) redundant to section 541(a)(6). Noting that the “canon against surplusage is not an absolute rule,” the panel determined that the “the possibility of our interpretation creating surplusage does not alter our conclusion that avoidance actions are part of the estate under the plain language of § 541(a).” Id. at 1009–10. Finally, the Eighth Circuit found persuasive the consensus among other circuits—namely, the First, Fifth, and Seventh Circuits—that avoidance actions constitute property of the estate. Although the Third Circuit had held that avoidance actions were not “assets” of the estate, In re Cybergenics Corp., 226 F.3d 227 (3d Cir. 2000), the opinion distinguished “property of the estate” from “assets,” and so would not deter the Eighth Circuit from its holding. Accordingly, the Eighth Circuit affirmed the bankruptcy court’s ruling that the avoidance actions were property of the estate that the trustee could sell.

§ 1.1.10. Ninth Circuit

A&D Prop. Consultants, LLC v. A&S Lending, LLC (In re Groves), 652 B.R. 104 (9th Cir. BAP 2023). In affirming the bankruptcy court’s ruling, the Ninth Circuit Bankruptcy Appellate Panel (the “BAP”) held that section 363(f) of the Bankruptcy Code does not allow for the sale of property free and clear of a lien that encumbers a non-debtor co-owner’s interest in the property. This provides much needed clarity on the interplay between sections 363(f) and 363(h), which is an area where there is little caselaw.

As tenants in common, a debtor and her wholly owned limited liability company (the “LLC”) jointly owned two parcels of real property: one was the debtor’s residence (the “Residence”), while the other was an investment property (the “Investment Property”). The debtor and the LLC subsequently took out a loan secured by a deed of trust covering both properties. However, due to a clerical error, the deed of trust only encumbered the debtor’s interest in the Residence and the LLC’s interest in the Investment Property (such that the debtor’s interest in the Investment Property and the LLC’s interest in the residence were unencumbered). After filing a chapter 13 petition, the debtor initiated an adversary proceeding against the current holder of the promissory note and deed of trust (the “Secured Creditor”), seeking a declaratory judgment that the deed of trust only encumbered the debtor’s interest in the Residence and the LLC’s interest in the Investment Property. In its amended answer, the Secured Creditor asserted a counterclaim against the debtor and the LLC for reformation of the deed of trust to reflect that it encumbered the interests of the debtor and the LLC in both properties. After a two-day trial, the bankruptcy court ruled in favor of the debtor and the LLC, dismissing the Secured Creditor’s reformation claim.

After the conclusion of the adversary proceeding, the debtor moved to sell the Investment Property under section 363(h) of the Bankruptcy Code, which allows the sale of property that is co-owned by a debtor. The debtor also sought to sell the Investment Property free and clear of all liens, including the Secured Creditor’s lien on the non-debtor LLC’s interest in the Investment Property, under section 363(f)(4). The Secured Creditor objected to the sale, arguing that it still maintained a lien on the LLC’s interest in the Investment Property. The debtor argued that the Secured Creditor had waived its lien by failing to assert the lien as a compulsory counterclaim in the adversary proceeding. The bankruptcy court ultimately approved the sale free and clear of any liens on the debtor’s interest in the Investment Property, but upheld the Secured Creditor’s lien on the LLC’s interest in the property, and required that any net proceeds from the LLC’s interest in the property to be paid to the Secured Creditor in partial satisfaction of its lien. The LLC appealed as to the bankruptcy court’s ruling that the Secured Creditor maintained its lien on the LLC’s interest in the Investment Property.

In its decision, the BAP addressed the following question, among others: did the bankruptcy court err when it determined that the debtor and the LLC could not sell the Investment Property free and clear of the Secured Creditor’s lien on the LLC’s interest in the property? To answer this question, the BAP examined two cases addressing the intersection of sections 363(f) and 363(h): the first, Hull v. Bishop (In re Bishop), 554 B.R. 558 (Bankr. D. Me. 2016), permitted a sale free and clear of a lien on the non-debtor’s interest in the property, while the second, in re Marko, No. 11-31287, 2014 WL 948492 (Bankr. W.D.N.C. Mar. 11, 2014), held that it would risk overextending the Bankruptcy Code to enable a non-debtor to obtain relief from its liens under section 363(f). The BAP found the reasoning in Marko more persuasive, noting in addition that sections 363(b) and 363(f) are limited to sales of estate property. Because the LLC’s interest in the Investment Property was not part of the bankruptcy estate, it could not be sold free and clear.

Clifton Capital Group, LLC v. Sharp (In re East Coast Foods, Inc.), 66 F.4th 1214 (9th Cir. 2023). Unlike the Fourth Circuit in Kiviti v. Bhatt, 80 F.4th 520 (4th Cir. 2023), above, the Ninth Circuit “returned emphasis” to the requirement that a party must have Article III standing, in addition to “person aggrieved” standing, to appeal a bankruptcy court order. See id. at 906.

In 2016, East Coast Foods, Inc. (“ECF”), manager of four locations of Roscoe’s House of Chicken & Waffles, filed for chapter 11 bankruptcy. An official committee of unsecured creditors (the “Committee”) was appointed. In addition, the bankruptcy court determined it was necessary to appoint a chapter 11 trustee to make business decisions for ECF. Later, the Committee and ECF’s founder, Herb Hudson, put forward a plan that guaranteed creditors payment in full, plus interest. Payments under the plan were secured by a “collateral package,” which included up to a $10 million contribution from Hudson. The plan also provided a set hourly rate of $450, plus expenses, for the chapter 11 trustee.

After the plan was confirmed and became effective, the chapter 11 trustee sought final compensation in the amount of $1,155,844.71, representing the maximum allowable under the fee cap in 11 U.S.C. § 326(a). The amount represented the lodestar (i.e., 1,692.2 hours at a rate of $450 per hour) plus a roughly 65% enhancement for “exceptional services.” A creditor, Clifton Capital Group, LLC (“Clifton”), objected to the fee application, arguing that the case did not merit an enhancement beyond the lodestar. When the bankruptcy court approved the fees, Clifton appealed to the district court. On appeal to the district court, the trustee argued that Clifton lacked standing to appeal because it was not a “party aggrieved.” Finding that Clifton was adversely affected by the fee order because it further subordinated its claim, and therefore “aggrieved,” the district court then agreed with Clifton on the merits, remanding the matter to the bankruptcy court with instructions either to reduce the fees to the lodestar or make detailed findings justifying the enhancement. On remand, the bankruptcy court again approved the trustee’s full fees, including the enhancement. This time, when Clifton appealed, the district court affirmed the bankruptcy court’s order approving the fees.

On appeal before the Ninth Circuit, the panel reconsidered whether Clifton had sufficiently established an actual and imminent injury for purposes of Article III standing. Reviewing the district court’s decision, the Ninth Circuit found that the district court had relied on precedent wherein the existence of a finite pool of assets to pay claims had previously conferred appellate standing on a party whose share of the asset pool was under threat. In this particular case, however, the Ninth Circuit found that ECF’s plan did not establish such a limited fund, but rather provided for the payment in full from the reorganized debtor’s future income, guaranteed by the “collateral package” and Hudson’s $10 million contribution. In light of these circumstances, the Ninth Circuit determined that the district court had erroneously concluded that payment of the chapter 11 trustee’s fees put Clifton at risk for non-payment. The Ninth Circuit also rejected Clifton’s argument that it was harmed because payment of the trustee’s fees would prolong payment of its subordinated claim. The Ninth Circuit found that delayed payment was too conjectural to sustain an injury for the purpose of Article III standing because the plan explicitly stated that the timing of creditor distributions was uncertain. In addition, Clifton was not harmed by any delay in distribution because the plan entitled it to postpetition interest. Accordingly, Clifton had failed to establish an actual injury, and thus did not have standing under Article III to appeal the bankruptcy court’s fee order.

Sony Music Publishing (US) LLC v. Priddis (In re Priddis), No. 22-15457, 2023 WL 2203562 (9th Cir. Feb. 24, 2023). In a split decision, the Ninth Circuit held that an involuntary filing by fourteen creditors, who each had a right to a portion of a $3 million judgment, satisfied the numerosity requirement under section 303(b)(1) of the Bankruptcy Code. Reversing the bankruptcy court’s dismissal and the district court’s affirmation, the majority held that each creditor had an individual claim, notwithstanding that the debt arose from a single judgment.

In 2016, twenty-one publishers sued the debtor for copyright infringement. The debtor entered into a settlement agreement with the publishers, under which the debtor was obligated to make payments to the publishers, who could seek a judgment of $3 million if the debtor failed to make any payments. After the debtor stopped making the settlement payments, fourteen of those publishers sued the debtor and ultimately obtained a stipulated judgment in their favor in the amount of $3 million. These publishers then filed an involuntary bankruptcy against the debtor. The debtor contested the involuntary filing, and the bankruptcy court dismissed it on summary judgement holding that the petitioning creditors failed to satisfy section 303(b)(1)’s numerosity requirement as the stipulated judgment constituted a single, joint claim. On appeal, the district court affirmed, and the debtor appealed to the Ninth Circuit.

On appeal, the Ninth Circuit held that the petitioning creditors did in fact satisfy section 303(b)(1)’s numerosity requirement. The court reasoned that the judgement was easily divisible because the petitioning creditors had stipulated to statutory damages in the underlying suit and, under the Copyright Act, the petitioning creditors would receive damages strictly according to their ownership interests. The court concluded that because each petitioning creditor had an enforceable right to payment in the judgment, they also necessarily each held an individual claim.

The dissent rejected the majority’s finding that the numerosity requirement of section 303(b)(1) had been met for two primary reasons. First, the dissent agreed with the district court that the stipulated judgment merged the petitioning creditors’ claims together. Second, the dissent was troubled by the judgment’s lack of specificity as to how the $3 million figure should be allocated among the publishers. Because the publishers could have reserved their individual rights to payment, but failed to do so, it found that the numerosity requirement of section 303(b)(1) had not been met.

§ 1.1.11. Tenth Circuit

Byrnes v. Byrnes (In re Byrnes), No. 22-2049, 2022 WL 19693003 (10th Cir. Dec. 21, 2022). In an unpublished decision, the Tenth Circuit held that it lacked appellate jurisdiction over the denial of a motion to withdraw the refence of an adversary proceeding to the bankruptcy court. The Tenth Circuit panel held that such a denial is interlocutory, and accordingly that the court did not have appellate jurisdiction.

Shortly after the debtor commenced her chapter 7 proceedings, the debtor’s former spouse, Mr. Byrnes, filed two adversary proceedings against her, which were eventually consolidated. Mr. Byrnes demanded a jury trial and did not consent to the bankruptcy court’s entry of a final order on his claims. While the adversary proceeding was pending, Mr. Byrnes moved to withdraw the reference to the bankruptcy court. The district court then referred the motion to a magistrate, who recommended denial of Mr. Byrnes’ motion to withdraw the reference. Over Mr. Byrnes’ objections, the district court adopted the magistrate’s recommendation. While Mr. Byrnes sought reconsideration of the denial of the motion to withdraw the reference, the bankruptcy court entered a final order dismissing the adversary proceeding. The district court then denied Mr. Byrnes’ motion for reconsideration as moot.

The district court referred the Motion to a magistrate judge, who subsequently issued proposed findings and a recommended disposition denying the Motion (the “PFRD”). In overruling Mr. Byrnes’ objection to the PFRD, the district court denied the Motion and “dismissed the case without prejudice, and entered judgment by separate order.” Id. Mr. Byrnes then moved for reconsideration of the district court’s decision, but the bankruptcy court dismissed the underlying adversary proceeding before the district court reached a decision on the motion for reconsideration, which Mr. Byrnes appealed. The district court then denied the motion for reconsideration “as moot and, alternatively, as lacking a basis in fact or law.” Id.

Because an order to withdraw the reference is an interlocutory matter, which does not dispose of the matter, but merely determines which forum shall hear the matter, the Tenth Circuit dismissed the appeal for lack of appellate jurisdiction.

Miller v. United States, 71 F.4th 1247 (10th Cir. 2023). The Tenth Circuit joins the majority in a circuit split, holding that the waiver of sovereign immunity in section 106(a) of the Bankruptcy Code permits a bankruptcy trustee to pursue avoidance actions against the government under section 544(b)(1), notwithstanding the fact that an actual creditor could not have maintained a suit against the government outside of bankruptcy. In so holding, the Tenth Circuit sided with Ninth and Fourth Circuits against the Seventh Circuit as to how to address the interplay between sections 106(a) and 544(b)(1) of the Code. Compare In re Equip. Acquisition Res., Inc., 742 F.3d 743 (7th Cir. 2014) (holding that section 106(a)’s waiver did not extend to an Illinois state law cause of action under section 544(b)(1)), with In re DBSI, Inc., 869 F.3d 1004 (9th Cir. 2017) (holding that section 106(a)’s waiver extended to an Idaho state law cause of action under section 544(b)(1)), and In re Yahweh Ctr., Inc., 27 F.4th 960 (4th Cir. 2022) (holding in the alterative that section 106(a)’s waiver extended to a North Carolina state law cause of action under section 544(b)(1)).

In 2014, All Resorts Group, Inc. (“All Resorts”) paid the Internal Revenue Service (the “IRS”) $145,138.78 to satisfy the personal tax debts of two of its principals. When All Resorts filed for bankruptcy in 2017, the chapter 7 trustee who was ultimately appointed commenced an adversary proceeding, pursuant to Utah’s Uniform Voidable Transactions Act and section 544(b)(1) of the Bankruptcy Code, against the IRS to recover the payments. In opposition, the government argued not that the transfers did not occur, but instead that the trustee could not meet the requirement, under section 544(b)(1), for there to be an “actual creditor” who could bring suit under state law. In response, the trustee pointed to section 106(a) of the Bankruptcy Code, which abrogates sovereign immunity as to a governmental unit for several purposes, including with respect to section 544 of the Bankruptcy Code. Although no creditor could bring an avoidance action under Utah law in the absence of bankruptcy, the trustee argued that the bankruptcy filing made section 106(a)’s abrogation of sovereign immunity applicable to the underlying Utah state law. The bankruptcy court agreed with the trustee, holding that section 106(a) “unequivocally waives the federal government’s sovereign immunity with respect to the underlying state law cause of action incorporated through [section] 544(b).” Id. at 1251 (quoting In re All Resorts Grp., Inc., 617 B.R. 375, 394 (Bankr. D. Utah 2020)). The district court adopted the bankruptcy court’s decision and affirmed its judgment, and an appeal to the Tenth Circuit followed.

The Tenth Circuit affirmed, finding that section 106(a)’s abrogation of sovereign immunity reached the underlying state law cause of action through section 544(b)(1)’s authority. First looking to the language of section 106(a), the Tenth Circuit held that, in accordance with Supreme Court precedent, the phrase “with respect to” must be construed broadly and “clearly expresses Congress’s intent to abolish the [IRS’s] sovereign immunity in an avoidance proceeding arising under § 544(b)(1), regardless of the context in which the defense arises.” Id. at 1253. The Tenth Circuit then noted that the broad language of section 106(a)(2), authorizing bankruptcy courts “to hear and determine any issue with respect to the application” of section 544, among others, presumes that bankruptcy courts have subject matter jurisdiction, which would not be the case if the government were immune from suit.

§ 1.1.12. Eleventh Circuit

Braun v. America-CV Station Grp., Inc. (In re America-CV Station Grp. Inc.), 56 F.4th 1302 (11th Cir. 2023). The Eleventh Circuit required that a debtor provide a new disclosure statement and opportunity to vote whenever a Chapter 11 plan’s amendment causes a class of creditors to be materially and adversely affected.

The case arose out of an amendment to chapter 11 reorganization plans for Caribevision Holdings, Inc. and Caribevision TV Network, LLC. The initial plans provided that equity in the reorganized debtor would be split among those creditors providing new equity in the reorganized company in proportion to the amount of capital each shareholder contributed. Effectively, equity in the reorganized debtor would be split up among four shareholders. The same day as the deadline for voting on the plan, the debtor informed three out of the four shareholders (the “Pegaso Equity Holders”) that any financing that they would be providing was needed in the next ten days. The Pegaso Equity Holders missed the new deadline, at which point the remaining of shareholder (“Vasallo”) seized the opportunity to fund the entire equity contribution, resulting in Vasallo receiving all equity in the reorganized holding companies. The other creditors disputed the transaction, arguing that they were entitled to additional disclosure and voting.

The Eleventh Circuit explained that modifying a chapter 11 plan of reorganization is permissible under section 1127(a), provided that the plan remains in compliance with all ordinary substantive requirements necessary for any other chapter 11 plan. The Eleventh Circuit highlighted the requirement of section 1123(a)(4) of the Bankruptcy Code that a modified plan must “‘provide the same treatment for each claim or interest of a particular class,’” absent that class’s consent. 56 F.4th at 1308 (quoting 11 U.S.C. § 1123(a)(4)). The court stated that a modification requires the debtor to “provide a new disclosure statement and call for another round of voting” where the amended plan materially and adversely affects that class. Id. at 1309 (citing In re New Power Co., 438 F.3d 1113, 1117–18 (11th Cir. 2006)).

The Eleventh Circuit first found that the bankruptcy court improperly narrowed Bankruptcy Rule 3019(a) when it required new disclosure and voting only where a materially affected claimholder had previously voted to accept the plan. Bankruptcy Rule 3019(a) provides that if the court finds that “‘the proposed modification does not adversely change the treatment of the claim of any creditor. . . who has not accepted . . . the modification, it shall be deemed accepted by all . . . who have previously accepted the plan.’” Id. at 1311 (quoting Bankr. Rule 3019(a)). The circuit court read Bankruptcy Rule 3019(a) expansively, explaining that the use of the word “any” indicated the requirement that a class of creditors receive additional disclosure and voting, even if the class previously voted to reject the plan. Id.

The Eleventh Circuit then explained why the failure to provide additional disclosure was harmful to the Pegaso Equity Holders. The court explained that, because the only notice the appellants actually received was one day’s notice of a contemplated modification, they were denied the opportunity to vote and reject the modified plans and present their objections to the court. The court emphasized the actual notice arrived too close to the confirmation hearing and provided insufficient detail surrounding the terms of the modification.

Esteva v. UBS Fin. Servs. Inc. (In re Esteva), 60 F.4th 664 (11th Cir. 2023). In this case, the Eleventh Circuit further shed light on the ability of parties to convert an interlocutory order into a final order by holding that a stipulation of dismissal under rule 41(a)(1)(A) of the Federal Rules of Civil Procedure (“Rule 41(a)(1)(A)”) with respect to the last remaining claim of an action cannot transform an order granting partial summary judgment into an appealable final order.

A debtor in a converted chapter 11 individual bankruptcy case and his spouse (the “Plaintiffs”) commenced an adversary proceeding against UBS Financial Services and UBS Credit Corp. (together, “UBS”) to recover funds from a frozen account at UBS jointly held by the Plaintiffs (the “Account”). Prior to the bankruptcy, the debtor provided financial services to UBS and, in connection with his recruitment, entered into several agreements with UBS that provided for a $2 million loan to the debtor (the “Promissory Notes”). UBS eventually terminated the debtor on suspicions of fraudulent activity, thereby triggering a provision under the Promissory Notes making any outstanding principal immediately due and payable with interest. To secure repayment of the Promissory Notes, UBS restricted and froze the Account pursuant to a client relationship agreement that governed the Account. Subsequently, the debtor filed for chapter 7 bankruptcy and later converted his case to a proceeding under chapter 11 of the Bankruptcy Code.

During the bankruptcy case, the Plaintiffs filed a complaint against UBS seeking (1) a determination that the debtor’s tenancy-by-the-entirety renders the account exempt, (2) a determination that UBS does not have an enforceable security interest in the Account, (3) the turnover of funds in the account, and (4) restitution based on UBS’ unjust enrichment from the retention of the debtor’s book of business following his termination. UBS then filed counterclaims and the Plaintiffs moved for summary judgment on all claims except for their unjust enrichment claim. After the bankruptcy court entered an order for partial summary judgment but before trial on the remaining claim, UBS appealed the bankruptcy court’s decision without a grant of certification for immediate appeal under Bankruptcy Rule 7054, which incorporates rule 54 of the Federal Rules of Civil Procedure. The district court affirmed the bankruptcy court’s ruling and dismissed the appeal with prejudice.

UBS then appealed to the Eleventh Circuit, which directed the parties to brief the issue of whether the court had jurisdiction as the unjust enrichment claim was still pending. Before oral argument, the parties entered into a stipulation of dismissal under Rule 41(a)(1)(A) with respect to the remaining claim. In its analysis, the court first addressed whether the parties’ argument that the partial summary judgment ruling can be considered a final order because it resolved the discrete dispute over the validity of UBS’ lien against the Account. The court rejected this argument as the court had previously held in Dzikowski v. Boomer’s Sports & Recreation Center, Inc. (In re Boca), 184 F.3d 1285 (11th Cir. 1999) that an order entered in an adversary proceeding must dismiss all claims against all parties to be considered final.

The court also examined whether there were any applicable exceptions to the finality of orders that would grant jurisdiction over the appeal. The court found that the collateral order doctrine, which allows an appeal of an interlocutory order of a separable claim that is collateral to the merits and too important to delay review, did not apply because the bankruptcy court’s partial summary judgement was not separate from the underlying adversary proceeding. Next, the court held that the marginal finality doctrine did not apply because this doctrine only applies to issues of national significance and the bankruptcy suit did not rise to such a level of importance. The court also considered the applicability of the practical finality doctrine, which permits review of an interlocutory order deciding the transfer of property if delaying the appeal would cause irreparable harm. As any harm suffered by UBS here could be remedied with money damages and the debtor did not lack an ability to repay, the court found that UBS would not be subjected to irreparable harm and therefore held this exception did not apply.

Finally, the court addressed whether the stipulation of dismissal cured the court’s lack of jurisdiction under the doctrine of cumulative finality. Under this doctrine, appellate review of an interlocutory order is permitted if the appeal is filed from an order dismissing a claim and followed by a subsequent final judgment without the filing of a new notice of appeal. In analyzing voluntary dismissal pursuant to Rule 41(a)(1)(A), the court found that, pursuant to its previous holding in Perry v. Schumacher Group of Louisiana (In re Perry), 891 F.3d 954 (11th Cir. 2018), voluntary dismissal must be with respect to the entire action and not to individual claims. The stipulation of dismissal between the parties was therefore invalid because it applied to a single claim, and thus the bankruptcy court still had jurisdiction over the action. The court also briefly noted that there were alternative paths available that the parties could have taken to establish appellate jurisdiction, such as certification under Bankruptcy Rule 54(b) or moving to amend under Bankruptcy Rule 15(a), which incorporates rule 15(a) of the Federal Rules of Civil Procedure.

§ 1.1.13. D.C. Circuit

FTC v. Endo Pharms. Inc., 82 F.4th 1196 (D.C. Cir. 2023). The D.C. Circuit ultimately affirmed the district court’s decision dismissing the Federal Trade Commission’s (“FTC”) lawsuit for injunctive and other equitable relief under the Sherman Act and the Federal Trade Commission Act. In doing so, the D.C. Circuit ruled that the lawsuit fell under an exception to the automatic stay as a governmental unit’s regulatory power.

The appellee (“Endo”), a pharmaceutical company, began selling an extended-release oxymorphone, which it held several patents to, under the brand name Opana ER. A third-party (“Impax”) later began to market its own generic version of the drug. In response, Endo filed a patent infringement action in 2008, and the parties settled their dispute in 2010 (the “2010 Agreement”). Under the 2010 Agreement: (1) Impax would not sell its generic version of Opana ER until 2013; (2) Endo would convey a license to Impax to cover all of Endo’s patents regarding Opana ER; and (3) the parties would “negotiate in good faith an amendment to the terms of the License to any patents which issue[d] from any Pending Applications.” Id. at 1201 (internal citations omitted).

In 2012, acquired additional patents related to Opana ER. Pursuant to the 2010 Agreement, Impax began selling its generic version of Opana ER in 2013. Two years later in 2015, Endo asked Impax to pay an eighty-five percent royalty on the license for the additional Opana ER patents, which Impax refused, leading to Endo suing Impax for breach of the 2010 Agreement. The parties reached another settlement (the “2017 Agreement”), through which: (1) Impax was granted a license to all of Endo’s Opana ER patents for payment and royalties from Impax’s Opana ER profits; and (2) Impax’s obligation to pay royalties would terminate if Endo used its own patents to enter the market. As a result of the 2017 Agreement, Endo exited the oxymorphone market, which led to an increase in price of the drug.

The Federal Trade Commission determined that the 2017 Agreement was anticompetitive and filed a complaint for injunctive and other equitable relief against Endo. The FTC alleged that: “(1) [Endo’s] 2017 Agreement violated § 1 of the Sherman Act and it constituted an unfair method of competition in violation of § 5(a) of the FTC Act; and that (2) Amneal [the parent company of Impax] exercised monopoly power in violation of § 2 of the Sherman Act and § 5(a) of the FTC Act.” Id. at 1201–02 (internal citations omitted). Endo moved to dismiss the FTC’s complaint for failure to state a claim and lack of personal jurisdiction. The district court dismissed the action and the FTC appealed. While the appeal was pending, Endo filed for bankruptcy in 2022.

The D.C. Circuit first had to determine whether it had jurisdiction over the FTC’s action against Endo because a “party’s filing for bankruptcy generally triggers an automatic stay of any commencement or continuation of a judicial proceeding against the debtor.” Id. at 1202 (quoting 11 U.S.C. § 362(a)(1)) (internal quotation marks and alterations omitted). If the automatic stay applied, it would “strip[] [the D.C. Circuit] of jurisdiction.” Id. (citing In re Kupperstein, 994 F.3d 673, 677 (1st Cir. 2021)). The D.C. Circuit would have jurisdiction only if the case fell under one of the exceptions to the automatic stay.

One exception includes “actions by a governmental unit intended to enforce such governmental unit’s police and regulatory power.” Id. (quoting Wallaesa v. FAA, 824 F.3d 1071, 1076 n.3 (D.C. Cir. 2016)) (internal quotation marks and alterations omitted). The governmental action will be excepted from the automatic stay if it is “designed primarily to protect the public safety and welfare [and not] for a pecuniary purpose, that is, [recovering] property from the estate.” Id. (quoting In re Kupperstein, 994 F.3d at 677) (internal quotation marks omitted). Here, the FTC commenced the action “to prevent unfair methods of competition, which it is authorized to do if the competition is against public policy.” Id. (internal citations omitted). Thus the D.C. Circuit ruled that the regulatory power exception to the automatic stay applied, and the case could be adjudicated.

As to whether the district court erred in dismissing the FTC’s claims, the D.C. Circuit ruled that it did not, citing to cases that established that “a single patentee may set conditions in granting a single licensee the right to use its valid patents,” which is what the 2017 Agreement did. Id. at 1204 (citing FTC v. Actavis, Inc., 570 U.S. 136, 150 (2013)). Additionally, the “Patent Act expressly authorizes behavior that closely resembles the 2017 Agreement.” Id. The FTC argued that the 2017 Agreement was actually an agreement not to compete because the “2010 Agreement had already given Impax a license to Endo’s present and future patents.” Id. at 1205. However, the D.C. Circuit stated that the FTC “fail[ed] to explain how the 2017 Agreement . . . meaningfully differ[ed] from a standard exclusive license [and that the FTC] admitted that its challenge to the 2017 Agreement would remain the same even if the . . . 2010 Agreement never existed.” Id. The D.C. Circuit also found that there was no basis for Sherman Act liability, and so the district court’s decision to dismiss the case was affirmed.

Letter of Credit Basics

A letter of credit (LC) is an independent undertaking, typically of a bank and issued at the bank’s customer’s request, to pay another against the timely presentation of documents conforming to the LC’s terms. When a seller, lessor, or lender is uncomfortable extending credit to the other party, the buyer, lessee, or borrower may apply to a bank for an LC. With an LC, the issuer’s credit is on the line in addition to the applicant’s, and there are few defenses to payment on an LC. LCs can be divided into two categories: commercial LCs, which are payment mechanisms for the sale of goods, and standby LCs, which support financial obligations.

LC transactions consist of three relationships: (1) the underlying transaction between a buyer and seller of goods, borrower and lender, lessor and lessee, etc.; (2) the reimbursement agreement between the buyer/borrower (applicant) and the bank (issuer); and (3) the LC issued for the benefit of the seller/lessor (beneficiary).

LCs are “independent,” meaning the issuer’s undertaking is not subject to suretyship defenses, and “documentary,” meaning payment is based on documents, not performance or default on the underlying transaction.

Uniform Commercial Code (UCC) Article 5 is the source of LC law in the United States. LCs are also subject to practice rules published by the International Chamber of Commerce (ICC): UCP600 – Uniform Customs and Practice for Documentary Credits, 2007 revision, ICC Pub. No. 600, and ISP98 – International Standby Practices 1998, ICC Pub. No. 590.

LCs fit uneasily with the US Bankruptcy Code; the Bankruptcy Code does not have special rules for LCs, and UCP600 and ISP98 do not address bankruptcy. Additionally, issuing bank insolvency, governed by the National Bank Act and bank regulatory rules, can raise LC issues.

Applicant Bankruptcy

Automatic Stay

LC draw proceeds are the issuing bank’s funds and not the bankrupt applicant’s, so they are not subject to the automatic stay. However, relief from the stay may be required if the beneficiary must notify the applicant of a default, declare a default, terminate a lease, etc., before drawing. Still, such notices may be informational only or not relevant to whether the LC draw should be honored.

Ipso Facto Clause

The Bankruptcy Code prohibits enforcement of ipso facto clauses in executory contracts and unexpired leases. However, notwithstanding such a clause, even when payments are made timely on the underlying agreement, a beneficiary may still be able to draw on an LC posted by its bankrupt debtor based on the wording of the LC and the underlying agreement.

LC Proceeds as Preference

If the drawing triggers an “indirect” preference, the amount of the drawing may have to be returned to the bankrupt’s estate. A preference is not created if an LC is issued at the same time as the debt it supports is incurred, or if the LC is issued to secure an antecedent debt before the preference period commences.

Avoiding Preferences

If the debtor’s reimbursement obligation is fully secured, the beneficiary can argue that by receiving payment outside the LC, the debtor’s collateral is, in effect, released. If the reimbursement obligation is unsecured at the time of the debtor’s bankruptcy, the beneficiary received payments in the preference period directly from the debtor instead of from the LC, and no other exception to preference applies, the debtor’s estate may recover those payments as a preference.

Expiring LCs

A bankruptcy court may determine that the automatic stay prevents the beneficiary from enforcing a pre-bankruptcy covenant against the bankrupt applicant-debtor, requiring the debtor or its trustee to extend the LC.

Issuing Bank’s Reimbursement

If the reimbursement obligation is fully secured and perfected contemporaneously with the LC’s issuance, the issuing bank’s liens should not be subject to a preference action. If the LC is drawn after bankruptcy, the lender needs relief from the automatic stay to realize on its collateral or seek adequate protection of it.

Consequences of Section 363 Sale

If an asset purchase agreement and the bankruptcy court order approving it do not ensure the LC is replaced or fully collateralized, the issuer may lose its collateral.

Beneficiary Bankruptcy

Drawing on Bankrupt Beneficiary’s Nontransferable LC

The beneficiary’s rights under an LC are transferable by operation of law. A trustee in bankruptcy or court-appointed receiver is a transferee by operation of law.

Beneficiary’s Insolvency Being Used Against It

If the applicant can file an action to enjoin the draw, it must show not only material fraud but also the procedural requirements for injunctive relief.

Perfected Security Interest

A creditor’s security interest in the beneficiary’s LC rights is effective if it timely (i) perfects a security interest in the account, chattel paper, instrument, or general intangible the LC supports; or (ii) obtains an assignment of proceeds from the beneficiary that the LC issuer acknowledges.

Assignment of Proceeds as Preferential

If the assignment of proceeds is perfected before the preference period or contemporaneously with the applicant-debtor creating the debt to the assignee, the assignment should not be considered preferential.

Transferee Beneficiary

In some cases, the secured party may become the transferee beneficiary or even direct beneficiary of the LC issued for its debtor’s benefit.

Issuer Insolvency

Traditional LC Issuers

Banks and other depository institutions issue most LCs.

FDIC’s Role and Authority as to LCs Issued by Insolvent Banks

The Federal Deposit Insurance Act gives the Federal Deposit Insurance Corporation (FDIC) broad authority over failed banks, including broad authority to repudiate contracts, including LCs, that the FDIC deems burdensome, at its sole discretion. This is similar to, but broader than, the power of a debtor-in-possession or trustee appointed by the bankruptcy court to reject unwanted executory contracts. The FDIC can repudiate the contract by sending a letter to the counterparty without court approval and without prior notice.

FDIC Approach to LCs Issued by Insolvent Banks

The FDIC traditionally repudiated most LCs issued by failed banks. However, recently, the FDIC established “bridge” banks in the failures of Silicon Valley Bank and Signature Bank, indicating in a financial institution letter (FIL-10-2023) that each “bridge bank is performing under all failed bank contracts and expects all counterparties to similarly fulfill their contractual obligations.” It further indicated that “[a]ll obligations of the bridge [banks] are backed by the FDIC and the Deposit Insurance Fund.”

Going Forward

The FDIC responded to the SVB and Signature failures by putting the banks put into receivership under the Dodd-Frank Act’s systemic risk exception. These seem to be unique cases of the FDIC stepping in and establishing bridge banks to take over all the bank’s assets and liabilities to stem a more systemic risk to the financial system, which has not typically occurred. It is unclear to what extent the FDIC will retreat to its prior practice in handling LCs issued by banks that enter receivership or stand behind the contracts (or some subset of them) in future bank receiverships.

This article is related to a CLE program titled “Disaster Preparedness: Letters of Credit and Bankruptcy” that was presented during the ABA Business Law Section’s 2023 Fall Meeting. To learn more about this topic, listen to a recording of the program and read its in-depth materials, free for members.

What is a spurned seller’s recourse when a buyer walks away from a deal in breach of the purchase agreement? In private M&A, the answer is reasonably straightforward: sue the buyer to close the deal or to recover damages. In public M&A, however, the answer is murky at best.

The problem arises from the manner in which public deals are typically structured. When negotiating with a potential acquirer, the board of a public target company functions effectively as the bargaining agent for its numerous and dispersed shareholders, who cannot feasibly participate in the negotiations or sign the purchase agreement. As a consequence, the target (not its shareholders) is party to the purchase agreement and is, absent any special provisions to the contrary, the only party that can sue the buyer for a breach. Where specific performance (usually the preferred remedy) is unavailable to the target, it must seek redress against the buyer through a damages claim.

If a buyer walks away from a deal, however, the target’s damages would not be expected to include the premium that was otherwise payable to its shareholders since only the shareholders (not the target) were entitled to receive the deal proceeds. In fact, until the Ontario Superior Court’s surprising ruling in Cineplex. v Cineworld (December 12, 2021) that a target company may recover lost-synergy damages from a failed deal, in Canada, most buyers facing such a lawsuit could have credibly argued that the only damages recoverable by a target would be the target’s out-of-pocket costs for the failed transaction. As a consequence, a target may rightly be concerned that the merger agreement it inked with the buyer is nothing more than an option for the latter to walk away from the agreement, where the monetary cost for doing so is a potential damages award of a magnitude far less than that of the premium the buyer avoided paying.

To respond to this low-price “option problem,” a target may insist that the purchase agreement require the buyer to be liable for lost shareholder premium if the buyer wrongly exits the deal—a so-called Con Ed provision, named after the 2005 decision of the US Court of Appeals for the Second Circuit in Consolidated Edison, Inc. v Northeast Utilities. The enforceability of such a provision, however, is unclear. Cineplex hinted at an endorsement of a form of Con Ed provision, but the Ontario Superior Court ultimately held back from issuing firm guidance. More recently, in a first for Delaware, the Court of Chancery addressed the enforceability of a Con Ed provision head-on in Crispo, a case that may prove instructive for Canadian boards seeking to solve the option problem.

Crispo v. Musk

Background

Crispo was a side story to the Twitter–Elon Musk merger saga in which Musk’s holding companies agreed to acquire Twitter, Inc., and then refused to close the deal. In proceedings brought by Twitter shareholder Luigi Crispo seeking specific performance or damages in the alternative, the Court held that Crispo lacked standing to seek specific performance but left open the possibility that Crispo had standing to sue Musk for lost-premium damages on the basis of the lost-premium provision contained in the merger agreement (described below). The Court permitted supplemental briefings on the lost-premium point and held Crispo’s damages claim in abeyance.

Subsequently, Musk agreed to close the merger, rendering Crispo’s lost-premium claim irrelevant. Crispo then filed a “mootness fee” petition in which he argued that his stockholder litigation to recover the lost premium helped sway Musk to ultimately close the deal. On a petition for a mootness fee, the plaintiff must demonstrate that its claim was “meritorious when filed.” In Crispo, the Court of Chancery was asked to consider whether Crispo, a non-party to the merger agreement, asserted a valid claim for lost-premium damages.

Lost-premium provisions are unenforceable by a target under Delaware law

The Musk-Twitter merger agreement included a relatively common formulation of a Con Ed lost-premium provision, providing that if the agreement was terminated because of the buyer’s intentional breach, the target’s damages “would include the benefits of the transactions contemplated by this Agreement lost by the Company’s stockholders . . . (taking into consideration all relevant matters, including lost stockholder premium, other combination opportunities and the time value of money).”

Notwithstanding the clear language entitling the target to lost-premium damages, the Court held that Twitter had no right or expectation to receive the merger consideration—the merger agreement contemplated that the deal consideration would be payable at closing directly to Twitter stockholders (“no stock or cash passes to or through the target”). Where a target has no entitlement to the premium on consummation of the deal, the Court continued, it “has no entitlement to lost-premium damages in the event of a busted deal.” Accordingly, a lost-premium provision that defines a buyer’s damages to include lost premium cannot be enforced by the target. However, the Court noted, such a provision could be enforceable if the parties intended to convey third-party beneficiary status to stockholders for purposes of seeking lost-premium damages.

A lost-premium provision may (or may not) confer third-party rights on stockholders

The Twitter merger agreement expressly excluded third-party rights in favor of shareholders except in limited circumstances not relevant to the analysis. For the Court, this suggested that the parties did not intend to confer third-party beneficiary rights on shareholders for the purpose of recovering lost shareholder premium. However, the Court also noted that another “objectively reasonable interpretation[]” of the agreement was that, by expressly referring to lost-premium damages in the contract, the parties did intend to confer third-party beneficiary rights on shareholders for such damages. However, even if they did, under the merger agreement a claim for lost-premium damages would not “vest” until Twitter’s right to seek specific performance was unavailable.

Ultimately, the Court did not have to conclude which of these two interpretations was correct because it needed to determine only whether Crispo’s claim for lost premium was meritorious when filed. Either Crispo “did not have third-party beneficiary status or his third-party beneficiary rights had not yet vested”—either way his claim lacked merit.

The Law in Canada

Cineplex remains the law in Canada. When Cineworld Group plc wrongfully terminated its agreement to acquire Cineplex Inc., Cineplex argued that it was entitled to seek as compensatory damages the value of the premium that would have been paid to its shareholders had the deal closed. The Ontario Superior Court rejected this claim on the basis of the expectancy principle: “Quite simply, the losses that Cineplex seeks to recover are those of the shareholders, not Cineplex.” The parties’ arrangement agreement did not contain a clause that resembled a lost-premium provision purporting to provide for damages equivalent to lost shareholder value or any other form of Con Ed provision.

The Court also considered whether Cineplex’s shareholders were granted third-party beneficiary status under the arrangement agreement. The agreement had a third-party beneficiaries clause similar to the one at issue in Crispo, which disclaimed the Cineplex shareholders as third-party beneficiaries under the agreement except for the purpose of receiving the deal consideration on closing. On a plain reading of the third-party beneficiary provision, the Court held that the contracting parties had not intended to confer third-party rights on Cineplex’s shareholders for the purpose of enforcing payment of lost shareholder premium.

Lost-Synergy Damages as an Alternative to Lost-Premium Damages?

Although the Court in Cineplex did not award lost-premium damages, it did find that Cineplex was entitled to damages as compensation for loss of synergies that Cineworld projected to be realized in Cineplex following the acquisition. The Court found that, unlike lost premium, Cineplex was entitled to expect such synergies and could therefore use them as a basis for compensatory damages. The Court awarded Cineplex $1.2366 billion in lost-synergy damages as a present-value calculation of Cineworld’s projected annual synergies, an amount that was notably close to the quantum of Cineplex’s lost-premium claim. An appeal of the decision was expected; however, Cineworld subsequently commenced Chapter 11 proceedings, putting an end to the litigation and Cineplex’s damages award. Whether lost-synergy damages will be readily available to a spurned target remains an open question.

Takeaways for Con Ed Provisions in Canadian Public M&A Agreements

1. An Ontario court might enforce a contractual claim for lost premium (a Con Ed provision)

The Cineplex decision hints at a possible means by which a target could contract for a right to recover lost-premium damages: “There is nothing in the agreement that entitled Cineplex, as the contracting party, to recover the loss of the consideration to shareholders if the Transaction was not completed” (emphasis added). This statement suggests that an Ontario court might take a different view from Crispo and give effect to a provision entitling a target to recover damages based on lost shareholder premium. However, given that both Cineplex and Crispo are rooted in the same principle that a target cannot claim in damages an award for lost consideration that it was never entitled to receive under the transaction, it is also possible that a Canadian court could find that a lost-premium provision, without the conferral of third-party rights on shareholders, is unenforceable by a target.

2. A target might consider appointing itself shareholders’ agent or trustee to enforce rights

In Cineplex, the Court noted that the target was named as the agent of its shareholders for the purpose of enforcing their right to receive the deal consideration on closing. Cineplex, however, “was not appointed as agent for the purpose of enforcing their rights against Cineworld if it failed to close” (emphasis added). The contrast was significant for the Court: “If the parties had wanted to appoint Cineplex as the shareholders’ agent to enforce their rights on Cineworld’s failure to close, they could have done so.” In contrast, the Court in Crispo suggested that such an arrangement rests on “shaky ground” because “there is no legal basis for allowing one contracting party to unilaterally and irrevocably appoint itself as an agent for a non-party for the purpose of controlling that party’s rights.” In the Canadian context, possible workarounds to potential agency issues might be to formally appoint the target as shareholder agent by way of the court-approved interim order (if the transaction is structured as an arrangement) or to establish a trust relationship between the target (as trustee) and its shareholders (as beneficiaries).

Whichever way a target company obtains control over lost-premium litigation, certain features of the relationship between the target and its shareholders should be addressed in the agreement. Should the target retain discretion to proceed with the lost-premium litigation? Should the target retain discretion to determine whether settlement or litigation proceeds should be retained by the company or distributed to shareholders? If the proceeds are to be distributed to shareholders, should the right to receive the proceeds trade with the shares or be fixed in advance? Ironing out these details in the agreement and ensuring adequate proxy disclosure will be critical to insulate the target from potential shareholder claims based on the exercise of its discretion. Examples of these arrangements can be found in some US and Canadian public acquisition agreements.

3. Consider other means of recourse against a buyer if Con Ed damages are resisted, such as a reverse-termination fee

Con Ed provisions are often resisted by buyers in Canadian public M&A and are accordingly rarely seen in Canada (reportedly only 2 percent of all public deals in a recent American Bar Association study of Canadian transactions [available to ABA Business Law Section members] included such a provision). In the absence of a Con Ed provision and a viable means to a specific-performance remedy, a reverse-termination fee of sufficient magnitude might be a suitable, negotiable alternative. A reverse-termination fee should be appropriately estimated to align with the principles of compensatory damages to minimize the risk that it is rejected as an unenforceable punitive damages claim. Tying the fee to lost-opportunity cost or a similar measure may prove a reasonable basis to set the amount. While a reverse-termination fee may reduce the agreement to an option on the target, Cineplex suggests that a Canadian court is unlikely to grant an award for lost premium in the absence of a properly constructed Con Ed provision. Put simply, a termination fee may be better than nothing.

This information and comments herein are for the general information of the reader and are not intended as advice or opinions to be relied upon in relation to any particular circumstances. For particular applications of the law to specific situations the reader should seek professional advice.

Tornetta v. Musk, C.A. No. 2018-0408-KSJM, 2024 WL 343699 (Del. Ch. Jan. 30, 2024). ^[1]

In both 2009 and 2012, Tesla, Inc. and its founder and Chief Executive Officer Elon Musk agreed to compensation plans with significant stock option grants that would vest in tranches if Tesla achieved certain operational and financial milestones. Although the 2012 grant had a ten-year term, by 2017, Tesla already was nearing completion of those milestones. Tesla’s board of directors and its stockholders other than Musk then approved a new compensation plan with up to $55.8 billion in total value, comprised of twelve option tranches. Each tranche would vest in the event Tesla’s market capitalization grew by at least $50 billion and Tesla met either an adjusted EBITDA or revenue target in four consecutive fiscal quarters. As the Delaware Court of Chancery described, this was the largest compensation plan the parties could identify “in the history of public markets.” Indeed, it represented over thirty-three times the total value of the next closest plan, which was Musk’s and Tesla’s 2012 plan. In this post-trial decision, the Court examined Tesla’s decision to adopt the compensation plan and held that Musk and the other defendants failed to prove that decision was entirely fair to Tesla.

The stockholder-plaintiffs argued that Musk was Tesla’s controlling stockholder, and therefore that the adoption of the compensation plan should be subject to entire fairness review, rather than deferential review under the business judgment rule. The Court found that at a minimum Musk exercised control in connection with this specific transaction. The Court reasoned, inter alia, that Musk owned 21.9% of Tesla’s outstanding stock, and he was the paradigmatic “Superstar CEO” regarded as critical to a company’s management and its business operations. He also made the initial compensation plan proposal, and he dictated the timing of the process leading up to the transaction. Further, Musk was the impetus for the few changes to the plan that were made after he first proposed it.

Relatedly, the Court found that the compensation plan was not approved by a majority of independent directors, which similarly prevented deferential review under the business judgment rule. The Court pointed to Musk’s long-standing friendships and business relationships with Tesla’s outside directors, who attained great personal wealth due to their ownership of shares in Tesla or other Musk-backed ventures. The Court also found that the record supported that the outside directors in fact acted with a “controlled mindset.” They approached the process leading up to the plan’s adoption “as a form of collaboration” intended to reach a result that would seem fair to Musk—as opposed to an arm’s-length negotiation between parties with adverse interests. The Court emphasized the “absence of any evidence of adversarial negotiations” concerning the size of the plan or its other material terms. Indeed, Musk testified that a change to reduce the number of Tesla shares issuable to him was the result of “me negotiating against myself.”

The compensation plan was approved by an affirmative vote of a majority of disinterested stockholders (i.e., excluding Musk and his affiliates). The defendants argued that approval by Tesla’s stockholders supported that the transaction was fair. The Court disagreed, reasoning that the stockholder vote was not fully informed because Tesla’s proxy statement omitted material information. Tesla referred to its outside directors as “independent,” and it did not disclose the directors’ long-standing, lucrative relationships with Musk that gave rise to their potential conflicts of interest in considering his compensation. The Court further reasoned that the proxy statement should have disclosed Musk’s initial conversations with Tesla regarding the compensation plan, in which Musk proposed the material terms of the plan. The Court observed a description of that conversation was included in four drafts of the proxy statement, but it was omitted from the final version. The Court rejected the defendants’ argument that accurately disclosing the transaction’s economic terms was sufficient, particularly given that the omitted information was important to the accuracy of the proxy statement’s other disclosures concerning the transaction.

Regarding the substance of the plan, the defendants argued the plan was “all upside” for Tesla and its stockholders other than Musk. Specifically, for Musk to be able to acquire all of the shares under the twelve tranches, Tesla’s market capitalization had to increase to an amazing extent—from roughly $50 billion at the time of the plan to $650 billion—which it ultimately did. The Court reasoned, however, that in virtue of his 21.9% ownership, Musk already had “every incentive to push Tesla to levels of transformative growth.” The record evidence did not support that the plan was necessary to keep Musk as CEO. The plan did not require Musk to devote any particular amount of time to Tesla, as opposed to other projects. The Court also questioned whether the plan’s milestones were ambitious, because Tesla’s roughly contemporaneous projections supported that Tesla would probably meet most of the milestones if it successfully executed on its business plan.

The Court also rejected what it called a “hindsight defense”—that the fact Tesla had grown immensely and achieved the milestones supported that the plan worked. The Court stated the defendants “failed to prove that Musk’s less-than-full time efforts for Tesla were solely or directly responsible for Tesla’s recent growth, or that the [compensation plan] was solely or directly responsible for Musk’s efforts.” The Court reasoned this post hoc argument could not make up for the absence of contemporaneous evidence supporting the fairness of the compensation plan.

Because Musk’s compensation plan was not entirely fair to Tesla, the Court ordered that it be rescinded. The Court rejected Musk’s arguments that rescission would leave him uncompensated, because “Musk’s preexisting equity stake provided him tens of billions of dollars for his efforts.” The Court also reasoned that the defendants had not offered a viable alternative remedy short of leaving the entire compensation plan intact, and that any uncertainty as to the appropriate remedy could be resolved against them as the parties who breached fiduciary duties. The Court accordingly entered judgment in the plaintiff’s favor and directed the parties to confer on an order addressing the issue of attorneys’ fees payable to the plaintiff’s counsel.

1. Tyler O’Connell is a Partner at Morris James LLP in Wilmington, Delaware. Any views expressed herein are not necessarily those of the firm or any of its clients. ↑

On February 14, 2024, the British Columbia Civil Resolution Tribunal (the “Tribunal”) found Air Canada liable for misinformation given to a consumer through the use of artificial intelligence chatbots (“AI chatbot”).^[1]

The decision, Moffatt v. Air Canada, generated international headlines, with reports spanning from the Washington Post in the United States to the BBC in the United Kingdom.^[2] While AI comes with economical and functional benefits, companies clearly remain liable if inaccurate information is provided to consumers through use of an AI tool.

Background

AI chatbots are automated programs that use AI and other potential tools like natural language processing to simulate a conversation and provide information in response to a person’s prompts and input. Common virtual assistants such as Alexa and Siri are all examples of AI chatbots.^[3]

Increasingly, AI chatbots are used in commerce. According to a 2024 report from AI Multiple Research,^[4] AI chatbots have saved organizations around $0.70 USD per interaction. By 2025, the predicted revenue of the chatbot industry is estimated to reach around $1.3 billion USD. Today, around half of all large companies are considering investing in these tools. Air Canada’s AI chatbot is one example of their use in a commercial setting. However, as the Tribunal’s decision shows, they do not come without risks.

The Tribunal’s Decision in Moffatt

The Tribunal’s decision came after a complaint was made by Jake Moffatt. Moffatt wanted to purchase an Air Canada plane ticket to fly to Ontario, where his grandmother had recently passed away. On the airline’s website, Moffatt engaged with an AI chatbot, which responded that there is a discount if the buyer is traveling because of a death in the family and using reduced bereavement fares. Anyone seeking a reduced fare could allegedly submit their ticket within ninety days of issuance through an online form and receive the lower bereavement rate.^[5]

Unfortunately, the AI chatbot’s answer was incorrect. The reference to “bereavement fares” was hyperlinked to a separate Air Canada webpage titled “Bereavement travel” that contained additional information regarding Air Canada’s bereavement policy. The webpage indicated that the bereavement policy does not apply to requests for bereavement consideration after travel was completed. Accordingly, when Moffatt submitted his application to receive a partial refund of his fare, Air Canada refused. After a series of interactions, Air Canada admitted that the chatbot had provided “misleading words.” The representative pointed out the chatbot’s link to the bereavement travel webpage and said Air Canada had noted the issue so it could update the chatbot.

Moffatt then sued Air Canada for having relied on its chatbot, which the Tribunal determined was an allegation of negligent misrepresentation. Air Canada alleged that the correct information could have been found elsewhere on its website and argued that it could not be liable for the AI chatbot’s responses.^[6] Strangely, Air Canada endeavored to argue that the chatbot was a separate legal entity that is responsible for its own actions.

The Tribunal ultimately found in favor of Moffatt. While a chatbot has an interactive component, the Tribunal found that the program was just a part of Air Canada’s website and Air Canada still bore responsibility for all the information on its website, whether it came from a static page or a chatbot. As a service provider, Air Canada owed Moffatt a duty of care that was breached by the misrepresentation. Air Canada could not separate itself from the AI chatbot, which was integrated in its own website. Negligence existed as Air Canada did not take reasonable care to ensure that its chatbot provided accurate information. It did not matter if the correct information existed elsewhere. A consumer cannot be expected to double-check information it finds on one part of the website with another.^[7]

The Tribunal ultimately awarded Moffat approximately $650 CAD in damages, plus pre-judgement interest and filing fees with the Tribunal.

Takeaways

While admittedly this is not a court decision, the Tribunal’s decision in Moffatt serves as a helpful reminder that companies remain liable for the actions of their AI tools. Additionally, any company that intends to use AI tools should also ensure that they also put into place adequate internal policies that protect consumer privacy, warn consumers of any limitations, and train the AI system to deliver accurate results.

1. Moffatt v. Air Canada, 2024 BCCRT 149. ↑

2. Kyle Melnick, “Air Canada chatbot promised a discount. Now the airline has to pay it.,” Washington Post, February 18, 2024; Maria Yagoda, “Airline held liable for its chatbot giving passenger bad advice – what this means for travellers,” BBC, February 23, 2024. ↑

3. “What is a chatbot?,” IBM, accessed February 27, 2024. ↑

4. Cem Dilmegani, “90+ Chatbot/Conversational AI Statistics in 2024,” AIMultiple, last modified February 5, 2024. ↑

5. Moffatt, supra note 1, at paras. 13-16. ↑

6. Id. at paras. 18–25. ↑

7. Id. at paras. 26–32. ↑

The new year brings with it four new jurisdictions to watch regarding proposed true lender legislation and Depository Institutions Deregulation and Monetary Control Act (DIDMCA) opt-outs. The District of Columbia, Florida, Maryland, and Washington are the most recent jurisdictions to have introduced true lender legislation in 2024 and towards the tail end of 2023. Uniquely, the District introduced a bill that couples true lender legislation with a DIDMCA opt-out, taking a very hard stance on restricting interest rates imposed on loans made to residents of the District.

District of Columbia

On November 30, 2023, District of Columbia Councilmember Kenyan R. McDuffie introduced B 25-0609, entitled the Protecting Affordable Loans Amendment Act of 2023 (PALs Act), which proposes to opt the District out of sections 521–523 of the DIDMCA. The PALs Act is intended to strengthen consumer protection and limit the interest that out-of-state lenders can charge to the District’s 24 percent maximum usury amount. If the bill passes and the PALs Act is enacted, the District will join Iowa, Puerto Rico, and most recently, Colorado (effective July 1, 2024) in the list of jurisdictions that have opted out of DIDMCA.

Sections 521–523 of DIDMCA empower states by allowing state-chartered banks and credit unions insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration to contract for the interest rate permitted by the state where the bank is located and export that interest rate into other states pursuant to its home state’s interest-rate authority. Conversely, section 525 of DIDMCA permits states to opt out of sections 521–523 via legislation. Opting out would then require application of the state law where the loan is “made.”

If the PALs Act were to be enacted, out-of-state, state-chartered banks and credit unions would ostensibly be required to follow the District’s interest rate and fee restrictions on consumer loans to the District’s residents if the loans are deemed to be made in the District. However, the effectiveness of this legislation is unclear. Federal interpretations of DIDMCA Section 521 establish where a loan is made based on the parties’ contractual choice-of-law provision and the location where certain nonministerial lending functions are performed, such as where the credit decision is made, where the decision to grant credit is communicated from, and where the funds are disbursed. This guidance creates a question as to whether an opt-out actually impacts loans made in other states.

Additionally, the District legislation contains amended definitions of “lender” and other terms, including a predominant economic interest standard that would apply the provisions of the law to entities other than the immediate lender, including certain bank agents and servicers, and a totality of the circumstances test to determine the “true lender” of a “loan.” The proposed definition of “lender” includes any person that offers, makes, arranges, or facilitates a loan or acts as an agent for a third party in making or servicing a loan. This includes “any person engaged in a transaction that is in substance a disguised loan or a subterfuge for the purpose of avoiding this chapter, regardless of whether or not the entity or person is subject to licensing,” and that

1. holds “directly or indirectly, the whole, predominant, or partial economic interest, risk or reward” in a loan,
2. markets or brokers the loan and has a right to acquire an interest in the loan, or
3. based on the “totality of the circumstances” should be considered a lender.

The proposed definition of “loan” includes “money or credit provided to a consumer in exchange for the consumer’s agreement to a certain set of terms, including, but not limited to, any finance charges, interest, or other payments, closed-end and open-end credit, retail installment sales contracts, motor vehicle retail installment sales contracts, and any deferred deposit transactions.”

We note that B 25-0609 was introduced in the District of Columbia Council on November 30, 2023, and on December 5, 2023, the legislation was referred to the Council’s Committee on Business and Economic Development. A public hearing is scheduled for March 13, 2024.

Florida

On October 9, 2023, Florida State Senator Lori Berman introduced SB 146 to add a new section to the Florida Consumer Finance Act (FL-CFA), section 516.181. The new section is aimed at “bank model” lending programs, in which a nonbank partners with a bank to originate loans through it, that focus on making, offering, assisting, or arranging a consumer finance loan with a higher rate or amount than is authorized under Florida law or receiving interest, fees, charges, or other payments in excess of those authorized under Florida law, regardless of whether the payment purports to be voluntary. This could potentially capture “tips” lenders give consumers an option to provide and Earned Wage Access (EWA) products as well, since the definition of “consumer finance loan” includes both loans and extensions of credit.

SB 146 also introduces a “true lender” test with language similar to other recent legislation, including the predominant economic interest standard, the prohibition applicable to bank agents and servicers, and a totality of the circumstances test. SB 146 also provides that if a loan exceeds the consumer usury limit, a person is deemed to be a lender if any of the tests are met.

SB 146 was filed in the Florida Senate on October 9, 2023, referred to committees on October 17, 2023, and introduced to the Florida Senate on January 9, 2024.

Maryland

On January 10, 2024, Maryland legislators introduced two credit regulation bills, HB 254 and HB 246. Through HB 254, Maryland intends to create a new subtitle to the Maryland Commercial Law, the “True Lender Act,” that will impose a true lender test on extensions of credit made to Maryland residents. The law would apply to national bank associations, state-chartered banks, state-chartered credit unions, and any person that extends loans or credit to Maryland residents. As the subtitle is named, HB 254 incorporates true lender principles, including a predominant economic interest standard, a totality of circumstances test, a provision regarding marketing or facilitating the loan or extension of credit, and anti-evasion provisions. HB 254 would also seek to void any loan or extension of credit that violates its provisions.

HB 246, entitled Earned Wage Access and Credit Modernization, proposes to amend Title 12 of the Maryland Commercial Law to govern EWA products by adding a new subtitle. A person providing direct-to-consumer earned wage access will require a license, and employer-integrated earned wage access will require a registration with the Office of Financial Regulation through the Nationwide Mortgage Licensing System (NMLS). Further, HB 246 restricts the acceptance of “tips,” as defined by certain lenders, and tips are included in the definition of “interest.” A consumer loan lender that gives consumers an option to provide the lender a tip is required to set the default tip at zero. A consumer loan lender that receives a tip that would otherwise create a rate of interest above that allowed is not in violation of the law if the lender returns the exceeding amount within thirty calendar days after receiving the tip.

Hearings were held on January 23, 2024, for both HB 254 and 246.

Washington

On December 5, 2023, HB 1874 was pre-filed for introduction to amend the Washington Consumer Loan Act (WA-CLA). The Washington bill, like the Florida bill discussed above, is aimed at “bank model” lending programs that are making, offering, assisting, or arranging loans with rates that exceed those permitted by the WA-CLA, addressing such programs by codifying both a predominant economic interest test and a totality of the circumstances test.

HB 1874 proposes a new definition of “loan” as “money or credit provided to a borrower in exchange for the borrower’s agreement to a certain set of terms including, but not limited to, any finance charges, interest, or other charges, conditions, or considerations.” Also, the proposed law governs whether the lender has legal recourse against the borrower in the event of nonpayment and whether the transaction carries required charges or payments. HB 1874 amends the applicability of the WA-CLA from a “resident” of Washington to any loan made to a person “physically located in Washington.” Additionally, on January 2, 2024, SB 5930 was also pre-filed, following the same concepts.

On December 11, 2023, HB 1918 was pre-filed to propose amendments to the laws that govern small loans under payday loan lending laws and also include true lender principles for small loans. These are loans of $700 or 30 percent of the borrower’s gross monthly income, whichever lower. The legislation also proposes an annual percentage rate cap of 36 percent on such loans. On January 2, 2024, HB 2083 was pre-filed and contains the same proposed amendments as HB 1918 except for adding an emergency declaration and providing an immediate effective date if passed.

HB 1874 and HB 2083 are both in the House Committee on Consumer Protection & Business, and a public hearing was held on January 10, 2024. On January 8, 2024, HB 1918 was referred to the House Committee on Consumer Protection & Business, and SB 5930 was referred to the Senate Committee on Business, Financial Services, Gaming & Trade.

Takeaways

These early proposed bills, like the bill proposed in the District, indicate that we will see more jurisdictions explore whether to follow Colorado’s lead on opting out of DIDMCA, even though the law is nearing forty-four years old. Jurisdictions are also continuing to explore adopting true lender legislation that mirrors legislation in Illinois, Maine, Minnesota, and New Mexico. These legislative proposals appear to be gaining steam as bank partner programs have grown and expanded across the United States.

The District’s PALs Act is interesting, however, in that it seeks to adopt both a DIDMCA opt-out and a true lender test, whereas prior legislation elected one or the other. We would expect that other jurisdictions will continue these trends and explore similar legislation and that the regulatory scrutiny and the potential for enforcement and litigation would be greater where such legislation has been enacted or is in the pipeline.

While there is still some question about the effectiveness of the DIDMCA opt-outs, financial services companies should be aware of the changing landscape as products, services, and programs are developed and maintained.

Following the English High Court’s written reasons for sanctioning the Adler Group restructuring plan on April 21, 2023 (you can read our deep dive on this decision here), the English Court of Appeal overturned the High Court’s decision and sent a strong message regarding future Part 26A restructuring plans and, in particular, the cross-class cramdown regime. The Court of Appeal’s decision, which was handed down on January 23, 2024, represents the maiden voyage of Part 26A restructuring plans in the UK through the appellate process since the introduction of the device in 2020 (Bondco PLC v. Strategic Value Capital Solutions [2024] EWCA (Civ) 24).

Summary of the Adler Group Restructuring Plan

The Adler Group, a prominent German property group owning a rental property portfolio valued at approximately €8 billion, faced a myriad of liquidity challenges following the impact of ratings downgrades, regulatory/bondholder scrutiny, and short-selling pressure. The Adler Group had six series of unsecured notes maturing in 2024, 2025, 2026, 2027, 2028, and 2029 (“Notes”). The proposal (“Plan”), initially sanctioned by the High Court, included

• introducing €937 million of new senior secured debt to repay the Notes maturing on April 27, 2023, and the 2024 Notes, in exchange for a super-senior first-ranking lien and a 22.5 percent equity interest post-restructure;
• extending the maturity date of the 2024 Notes until July 31, 2025, in exchange for priority over other noteholders in terms of repayment (maturity of all other Notes to remain the same); and
• amending the remaining Notes to allow refinancing and receive a paid-in-kind (“PIK”) interest and a subordinated security interest.

An ad hoc group of 2029 noteholders (“AHG”) opposed the Plan, but the Plan was approved by five out of six classes of creditors (37.72 percent of the AHG voting against), and the High Court sanctioned the Plan, including a cross-class cramdown against the AHG. An appeal by the AHG was allowed on the basis of the following arguments:

• Pari passu principle. The first-instance judge failed to recognize the Plan’s departure from the pari passu principle that would apply in the relevant alternative.
• Rationality test. The rationality test used was derived from schemes of arrangement that did not require further investigations regarding improvements to the Plan.
• Incorrect weighting of factors. Too much weight was given to the “no worse off” test and the simple majority of the AHG approving the Plan.

Main Takeaways of the Court of Appeal’s Decision

Further Scrutiny of and Commentary on the Pari Passu Principle

The Court of Appeal’s finding that the restructuring plan violated the pari passu principle sends a loud message about the nonnegotiable nature of equitable creditor treatment and underscores the centrality of proportionate distributions. The Court of Appeal made clear that adherence to the pari passu principle is paramount to eliminate risks associated with sequential payments to creditors from an inadequate common fund of money, and that if the pari passu principle is applied in an alternative scenario to the restructuring plan, then it must also apply to the restructuring plan itself. Departure from this principle requires a robust justification, introducing a nuanced perspective on creditor treatment.

The Court of Appeal declared the Plan to be in violation of the pari passu principle, as it did not treat the AHG in the same way as the secured creditors and other noteholders. The Court of Appeal was not convinced that the reasons argued in favor of the Plan outweighed the inequality of the Plan. In particular, the Court of Appeal was concerned by the nature of the sequential payments under the Plan, which did not align with the essence of pari passu distribution.

This position by the Court of Appeal underscores the importance of equitable creditor treatment in the cross-class cramdown scenario and the importance of providing persuasive reasoning for any deviation from equal treatment.

The Horizontal Comparator Test over the Rationality Test

The Court of Appeal deviated from the “rationality test” used in schemes of arrangement and instead introduced the “horizontal comparator test,” while emphasizing the need for a more sophisticated comparison between dissenting and assenting classes of creditors in a restructuring context.

The horizontal comparator test demands a meticulous evaluation of how different classes should be treated relative to each other in the relevant alternative scenario. This shifts the focus from a broad rationality check, which entails a broad evaluation of creditors’ commercial judgment, to a more nuanced analysis focusing on the actual positioning of creditors. The Court of Appeal, in applying this test, considered whether a proposed plan is the “best” plan, evaluating whether a different formulation could be “fairer.” For instance, if a plan offers enhanced benefits to one class over another without a justifiable reason, it might be deemed inequitable.

The Court of Appeal’s move away from the rationality test shows that courts expect a much more thorough assessment of the treatment of each class of creditor to be undertaken, with the focus being on equality. This may, however, increase the scope for challenges on these grounds in future cases. This uncertainty may result in more secured creditors proposing solutions in a legal framework outside of the UK’s Part 26A regime in order to seek certainty and liquidity.

Other Takeaways

The Court of Appeal decision in the Adler Group case emphasizes the need for a fair court process, comprehensive evidence exchange, and sufficient time for valuation considerations. Genuine urgency is going to be accommodated, but the Court of Appeal decision underscores the need for a robust and transparent process nonetheless. As part of this, the Court of Appeal stressed the importance of comprehensive valuation evidence, signaling a potential move toward longer periods between convening and sanctions hearings.

The Court of Appeal also noted that a restructuring plan can impose a “haircut” on creditors, while also permitting shareholders to retain equity. The Court of Appeal clarified that, in an insolvency scenario, shareholders not being paid until creditors are paid in full is not necessarily a departure from the pari passu principle.

Conclusion

Beyond the specifics of the Adler Group case, this decision provides guidance that may be applied to other scenarios and across jurisdictions. What some readers may view as a useful framework for the approach to other complex restructuring proceedings, others may see as a treacherous shift away from what many commentators considered to be the more “commercial” and expedient position advocated for by the High Court in April 2023.

This article is not intended to be a substitute for legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a brief overview and give general information.

On August 31, 2022, significant amendments to Part V of the Cayman Islands Companies Act (“Act”) took effect to revamp the Cayman Islands restructuring regime. These amendments introduced the new role of a court-appointed “Restructuring Officer” and a dedicated “Restructuring Petition.” The Cayman Islands restructuring officer regime (“RO Regime”) shares certain features with the Chapter 11 bankruptcy procedure in the US and Canada’s Companies’ Creditors Arrangement Act.

Now that the RO Regime is approaching its two-year anniversary, we take the opportunity to provide a brief overview of the RO Regime and an update on how it is working in practice based on the first decisions such as Re Oriente Group Limited, Re Aubit International, and Re Holt Fund SPC.^[1]

The RO Regime has been developed over a number of years with extensive consultation between the Cayman Islands government, the local judiciary, and a number of financial services industry participants (including attorneys and insolvency practitioners). The introduction of the RO Regime has been welcomed by the financial services industry as a useful tool for companies in distress (and their stakeholders) to assist with the protection of a distressed company’s value and a way to provide “breathing space” while a restructuring is carried out.

One benefit of the RO Regime is that there is now a clear distinction between winding-up processes and rescue or recovery paths. Before enactment of the RO Regime, a winding-up petition was required to be presented prior to any application to appoint officeholders (including for the purpose of promoting a restructuring). The filing of a winding-up petition was often the precise act that a distressed company (and/or its stakeholders) was trying to avoid, particularly where such a filing might trigger a corresponding public announcement on a stock exchange or an event of default on the company’s debts. Given the global reach of many Cayman Islands companies, it is understandable that stakeholders in other jurisdictions would often have an instinctive negative reaction to terms such as “winding-up petition” and “liquidator.”

It is now possible to initiate restructuring efforts using a bespoke method with the benefit of a statutory moratorium effective from the time of filing a restructuring petition that is similar to the US Chapter 11 stay (while avoiding the negative connotations associated with the winding-up petition process).

Key features

• A company may seek the appointment of restructuring officers on the grounds that (i) the company is or is likely to become unable to pay its debts; and (ii) intends to present a compromise or arrangement to its creditors.
• The petition seeking the appointment of a restructuring officer may be presented by the directors of a company: (i) without a shareholder resolution and/or an express power to present a petition in its articles of association; and (ii) without the need to present a winding-up petition. This addresses longstanding issues related to the rule in Re Emmadart Ltd [1979], which prevented directors of Cayman Islands companies from presenting a petition to wind up a company (in order to restructure or otherwise) unless expressly authorized by the articles of association.
• The moratorium will arise on presenting the petition seeking the appointment of restructuring officers, rather than from the date of the appointment of officeholders, and it will have extraterritorial effect as a matter of Cayman Islands law. This was aimed at tackling the uncertainty in the interim period where a winding-up petition had been filed with a view to restructuring, which might have triggered events of default, but a stay on claims only occurred after officeholders were appointed.
• The default position is that this will be an inter partes process with adequate notice to be given to all stakeholders.
• The powers of restructuring officers are flexible. The extent to which the directors will continue to manage the affairs of the relevant company will be defined by the order and will depend on the facts of the particular case.
• During the restructuring proceedings, the company will be able to seek sanction of a scheme of arrangement, a parallel process in a foreign jurisdiction, or a consensual compromise.
• Secured creditors with security over the whole or part of the assets of the company will still be entitled to enforce their security without the leave of the court and without reference to the restructuring officers. Unsecured creditors and other stakeholders must seek leave to initiate proceedings and circumvent the stay.

Re Oriente Group Limited, December 8, 2022 (FSD 231 of 2022) (IKJ)

Justice Kawaley handed down the first written judgment on the RO Regime. Re Oriente Group Limited provided a number of important clarifications on the law, including the following:

• Given that the RO Regime expanded the scope of the stay under the previous regime (discussed above), the Court commented that the statutory stay on proceedings under the RO Regime “might be said to turbo charge the degree of protection filing a restructuring petition affords to the petitioning company.” Accordingly, in Re Oriente, the Court found that following the presentation of a winding-up petition against a company, there is no prohibition on a company presenting a restructuring petition and such filing triggering the automatic stay under the RO Regime.
• The Court emphasized that the “jurisdiction to appoint restructuring officers is a broad discretionary jurisdiction” to be exercised where the Grand Court is satisfied that, among other things:
  • The statutory precondition of insolvency or likely insolvency of the company is met by credible evidence from the company or some other independent source;
  • the statutory precondition of an intention to present a restructuring proposal to creditors or any class thereof is met by credible evidence of a “rational proposal with reasonable prospects of success”; and
  • the proposal has or will potentially attract the support of a majority of creditors as a “more favourable commercial alternative to a winding up of the company.”
• The Court indicated that the previous body of case law on restructuring under the former rescue regime would continue to be applicable to the new RO Regime.

Re Aubit International, October 4, 2023 (FSD 240 of 2023) (DDJ)

In the second notable decision on the RO Regime, Justice Doyle reviewed the established jurisprudence and set out a nonexhaustive list of twenty-five factors to be considered in future restructuring applications under the RO Regime, such as the importance of demonstrating that the company was insolvent or likely to be insolvent, and whether a proposed restructuring will have a real prospect of being beneficial to creditors as a whole. Justice Doyle also emphasized that the Court will be wary to avoid abuse of the restructuring officer regime by companies with no intention of restructuring and permitting hopelessly insolvent companies to continue trading.

In this case, Justice Doyle found that the petitioning company did not meet the statutory requirements to appoint restructuring officers, as although it was unable to pay its debts (i.e., insolvent), it failed to meet the second requirement because there was “extremely limited information concerning the proposed ‘restructuring plan.’”

Justice Doyle indicated that although the Court did not go so far as to require that the petitioning company presently had a restructuring plan or that one would be implemented in short order, it was still incumbent on the Court to scrutinize whether there was, on the evidence before it, a genuine and realistic intention to present a credible restructuring plan.

Re Holt Fund SPC, January 26, 2024 (FSD 0309 OF 2023) (IKJ)

In a recent development, Justice Kawaley ordered the first appointment of restructuring officers over one or more portfolios of a segregated portfolio company (“SPC”). SPCs are different from typical Cayman companies in that the assets and liabilities of each segregated portfolio are segregated from each other during the life of the SPC and in liquidation, which is known as the segregation principle. Typically, where a particular portfolio has insufficient assets to meet claims of creditors, a receiver may be appointed for the purpose of an orderly closing down of the business of that portfolio.

Until this judgment, it was not clear that restructuring officers could be appointed in relation to specific portfolios given that each portfolio is not a separate legal entity.

This decision illustrates the flexibility of the SPC regime compared with both traditional companies and corresponding segregated portfolio regimes elsewhere. However, the application to appoint restructuring officers was unopposed in this case, so it will be interesting to see if such appointments are subject to challenge in future.

Takeaway

While not appropriate for all circumstances, the RO Regime will be a sensible and effective method by which large, multinational groups may seek to restructure their debt obligations and other affairs for the benefit of their stakeholders.

The Cayman Courts have provided helpful clarification on a number of aspects of the RO Regime, including the breadth of the automatic stay, the applicability of the RO Regime to SPCs, and the importance of a clear restructuring plan before asking the Court to engage its jurisdiction to appoint restructuring officers. It is clear that the Court is concerned with avoiding abuse of the new restructuring regime while also promoting consistency and certainty, albeit under a turbocharged framework.

This clarification will be especially important for foreign courts in considering whether to recognize and assist Cayman Islands restructuring officers in future. Foreign courts can take comfort in the fact that the Cayman Islands Court remains astute to guard against any abuse of the new regime by carefully analyzing whether the statutory preconditions for appointment are met in the circumstances of each case.

The key to a successful restructuring, through the Cayman RO Regime or otherwise, will always be timely action, with the right advisor team to guide the process.

This article is not intended to be a substitute for legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a brief overview and give general information.

1. Restructuring officers were also appointed subsequently by Chief Justice Ramsay-Hale on February 14, 2023, in Re Rockley Photonics Holdings Limited (FSD 16 of 2023), albeit without a written judgment. ↑