1. Courts: Trial: Mental Competency. The question of competency to represent oneself at trial is one of fact to be determined by the court, and the means employed in resolving the question are discretionary with the court. The trial court's determination of competency will not be disturbed unless there is insufficient evidence to support the finding.
2. Convictions: Evidence: Appeal and Error. Regardless of whether the evidence is direct, circumstantial, or a combination thereof, and regardless of whether the issue is labeled as a failure to direct a verdict, insufficiency of the evidence, or failure to prove a prima facie case, the standard is the same: In reviewing a criminal conviction, an appellate court does not resolve conflicts in the evidence, pass on the credibility of witnesses, or reweigh the evidence; such matters are for the finder of fact, and a conviction will be affirmed, in the absence of prejudicial error, if the evidence admitted at trial, viewed and construed most favorably to the State, is sufficient to support the conviction.
3. Constitutional Law: Right to Counsel: Waiver. Under U.S. Const. amend. VI and Neb. Const. art. I, § 11, a criminal defendant has the right to waive the assistance of counsel and conduct his or her own defense.
4. Constitutional Law: Right to Counsel: Mental Competency. The U.S. Constitution permits states to insist upon representation by counsel for those competent enough to stand trial but who still suffer from severe mental illness to the point where they are not competent to conduct trial proceedings by themselves.
5. ____:____:____. Under Neb. Const. art. I, § 11, a criminal defendant's right to conduct his or her own defense is not violated when the court determines that a defendant competent to stand trial nevertheless suffers from severe mental illness to the point where he or she is not competent to conduct trial proceedings without counsel.
6. Criminal Law: Evidence: Intent. When the sufficiency of the evidence as to criminal intent is questioned, independent evidence of specific intent is not required. Rather, the intent with which an act is committed is a mental process and may be inferred from the words and acts of the defendant and from the circumstances surrounding the incident.
PER CURIAM.
NATURE OF CASE
Eric F. Lewis appeals his conviction for second degree murder. Lewis claims that the district court for Lancaster County deprived him of his constitutional right to self-representation when it found that he was not competent to represent himself at trial and appointed trial counsel. Lewis also claims that there was not sufficient evidence of the intent necessary to support his conviction for second degree murder. We affirm Lewis' conviction.
STATEMENT OF FACTS
In July 2007, Lewis had been committed to the Lincoln Regional Center (LRC) for observation in connection with criminal charges not related to the present case. Dr. Louis Martin was a forensic psychiatrist who worked at LRC. On July 16, Dr. Martin testified on behalf of the State at a hearing in Lewis' criminal case. The purpose of the hearing was to consider Dr. Martin's request for an order allowing him and his staff at LRC to force Lewis to take medication he had refused to take. Lewis appeared surprised and angry to see Dr. Martin at the hearing, and he yelled some comments at Dr. Martin to the effect that he would not have medication forced on him. Throughout Dr. Martin's testimony, Lewis interrupted and directed angry comments toward Dr. Martin. At the end of the hearing, the court stated its ruling that it would allow forced medication. Lewis became disruptive, yelled that he would not take the medication, and had to be escorted out of the courtroom.
On July 23, 2007, two doctors met with Lewis at LRC to inform him that pursuant to the court's order, they had been directed to administer medication to Lewis whether or not he was willing to take the medication. Lewis became angry, said he would not take the medication, and left the meeting room. After Lewis returned to the room, the doctors attempted to discuss the order with Lewis, and Lewis referred angrily to Dr. Martin's testimony at the July 16 hearing.
Lewis left the meeting and returned to his room. A short time later, he came out of his room with a box of his belongings. Lewis was still angry and said that they could not force medication on him and that he intended to return to prison. He sat down at a table near the main door of the area where his room was located. A few minutes later, Dr. Martin came through the door, and Lewis walked toward him. When he got near Dr. Martin, Lewis lunged at him and said, "I'm gonna get you, old man,'" and struck him twice in the face. Dr. Martin fell against a wall and slid to the ground; he was bleeding from the head and struggling to breathe. Security personnel restrained Lewis. Witnesses testified that after hitting Dr. Martin, Lewis said things such as, `"There. Now what you gonna do? I told you I'd get you'"; "I told him I would get him. . . . He shouldn't have testified"; and `"I hope that motherfucker dies.'"
Dr. Martin was taken to a hospital, where he died on August 2, 2007. An autopsy determined the cause of death to be severe blunt force trauma to the head with extensive cerebral cranial injuries.
The State charged Lewis with second degree murder in connection with Dr. Martin's death. These charges give rise to the present case. On November 7, 2007, the district court, on the State's motion, ordered a determination of Lewis' competency to stand trial. Lewis initially refused to participate in the evaluation, but after a psychiatric evaluation was completed, the court, on February 8, 2008, found Lewis to be competent to stand trial.
Lewis subsequently filed a waiver of his right to counsel and requested to be allowed to represent himself in this case pertaining to Dr. Martin's death. On June 2, 2008, the district court entered an order finding that Lewis was competent to waive his right to counsel, that he had exercised his right to waive counsel, and that his waiver, "although perhaps not prudent or in his best interest," was freely, voluntarily, knowingly, and intelligently made. The court therefore granted the waiver of counsel and appointed Lewis' prior counsel as standby counsel.
In its June 2, 2008, order, the court stated that in the psychiatric evaluation, the doctor had noted that Lewis had the `"potential to be disruptive, agitated and combative, including becoming assaultive.'" The court noted that its experience with Lewis during court proceedings was consistent with the doctor's notation. The record indicates that at various proceedings in this case, Lewis became disruptive, and the court ordered him removed from the courtroom.
On June 19, 2008, the U.S. Supreme Court decided the case of Indiana v. Edwards, ___U.S. ___, 128 S. Ct. 2379, 171 L. Ed. 2d 345 (2008). The district court thereafter set a hearing to consider the applicability of Edwards and, specifically, whether the decision affected Lewis' right to continue representing himself. Following the hearing, the court entered an order dated October 10, 2008, in which it found that although Lewis was mentally competent to stand trial, he was not mentally competent to conduct trial proceedings by himself. The court noted Lewis' "conduct during prior proceedings, his assertions in pleadings and his `. . . uncertain mental state'" and cited Edwards to conclude that if Lewis were allowed to represent himself a `"spectacle . . . could well result'" and would undercut `"the most basic of the Constitutional criminal law objectives, providing a fair trial.'" The court vacated and set aside its prior order allowing Lewis to waive counsel and represent himself, and the court appointed counsel over Lewis' objection.
At trial, Lewis moved to dismiss at the close of the State's case based on the State's purported failure to establish a prima facie case. The court overruled the motion to dismiss. The jury found Lewis guilty of second degree murder. The court later found Lewis to be a habitual criminal and sentenced him to imprisonment for life.
Lewis appeals his conviction.
ASSIGNMENTS OF ERROR
Lewis claims that the district court erred when it found that he was not competent to represent himself at trial and therefore denied him his constitutional right of self-representation. He also claims that there was not sufficient evidence of the intent necessary to convict him of second degree murder.
STANDARD OF REVIEW
We have held that the question of competency to stand trial is one of fact to be determined by the court, that the means employed in resolving the question are discretionary with the court, and that the trial court's determination of competency will not be disturbed unless there is insufficient evidence to support the finding. See State v. Walker, 272 Neb. 725, 724 N.W.2d 552 (2006). We logically extend the standard in Walker to the issue of competency to represent oneself and hold that the question of competency to represent oneself at trial is one of fact to be determined by the court and that the means employed in resolving the question are discretionary with the court. The trial court's determination of competency will not be disturbed unless there is insufficient evidence to support the finding.
Regardless of whether the evidence is direct, circumstantial, or a combination thereof, and regardless of whether the issue is labeled as a failure to direct a verdict, insufficiency of the evidence, or failure to prove a prima facie case, the standard is the same: In reviewing a criminal conviction, an appellate court does not resolve conflicts in the evidence, pass on the credibility of witnesses, or reweigh the evidence; such matters are for the finder of fact, and a conviction will be affirmed, in the absence of prejudicial error, if the evidence admitted at trial, viewed and construed most favorably to the State, is sufficient to support the conviction. State v. Banks, 278 Neb. 342, 771 N.W.2d 75 (2009).
ANALYSIS
The Court Did Not Err When It Determined That Lewis Was Not Competent to Represent Himself at Trial.
Lewis first claims that the district court erred when it found that he was not competent to represent himself at trial, denying him his constitutional right of self-representation. Because there was sufficient evidence to support the district court's finding that although Lewis was competent to stand trial, he was not competent to represent himself, we conclude that Lewis was not denied his constitutional right to represent himself.
We have recognized that under U.S. Const. amend. VI and Neb. Const. art. I, § 11, a criminal defendant has the right to waive the assistance of counsel and conduct his or her own defense. State v. Gunther, 271 Neb. 874, 716 N.W.2d 691 (2006). See, also, Faretta v. California, 422 U.S. 806, 95 S. Ct. 2525, 45 L. Ed. 2d 562 (1975). In Faretta, the U.S. Supreme Court recognized a constitutional right of self-representation in a criminal case and noted that it was a violation of the Sixth Amendment to "thrust counsel upon the accused, against his considered wish." 422 U.S. at 820. Because a defendant who chooses self-representation "relinquishes . . . many of the traditional benefits associated with the right to counsel," the Court held that a waiver of the right to counsel must be made `"knowingly and intelligently'" by the defendant. 422 U.S. at 835. The Court in Faretta recognized the right of self-representation was not absolute when it noted that a "trial judge may terminate self-representation by a defendant who deliberately engages in serious and obstructionist misconduct" or that a court may appoint standby counsel to aid the defendant if and when the defendant so chooses. 422 U.S. at 834 n. 46.
Recognizing that under Faretta, a defendant's right to self-representation is not absolute, in Indiana v. Edwards,___U.S. ___, 128 S. Ct. 2379, 2381, 171 L. Ed. 2d 345 (2008), the Court considered whether "the Constitution forbids a State from insisting that the defendant proceed to trial with counsel, the State thereby denying the defendant the right to represent himself" where the defendant has been "found mentally competent to stand trial if represented by counsel but not mentally competent to conduct that trial himself."
The Court noted in Edwards that the constitutional standard for mental competence to stand trial was set forth in Dusky v. United States, 362 U.S. 402, 80 S. Ct. 788, 4 L. Ed. 2d 824 (1960). In Dusky, the Court held that the test for competency to stand trial is whether the defendant `"has sufficient present ability to consult with his lawyer with a reasonable degree of rational understanding — and whether he has a rational as well as factual understanding of the proceedings against him.'" 362 U.S. at 402.
In Edwards, the Court further noted the case of Godinez v. Moran, 509 U.S. 389, 113 S. Ct. 2680, 125 L. Ed. 2d 321 (1993), which "considered mental competence and self-representation together." 128 S. Ct. at 2384. In Godinez, the Court held that the presence of mental illness did not necessarily preclude a defendant's ability to waive his or her right to counsel, so long as the defendant's waiver of the right to counsel was knowing and voluntary. The Court further held in Godinez that the standard to be applied for determining competency to stand trial under Dusky was the same standard to be applied for competency to waive the right to counsel. The Court noted, however, that "the competence that is required of a defendant seeking to waive his right to counsel is the competence to waive the right, not [necessarily to be equated with] the competence to represent himself." 509 U.S. at 399 (emphasis in original). The contours of a defendant's competence to represent himself or herself left open in Godinez were addressed in Edwards.
In addressing whether a different standard applied to determine whether a defendant was competent to represent himself or herself, the Court in Edwards, noted that the Dusky standard regarding competence to stand trial assumed the representation of counsel and therefore suggested that going to trial without counsel presented "a very different set of circumstances" and called for a different standard. 128 S. Ct. at 2386. The Court rejected the use of a single mental competency standard for determining whether a defendant may stand trial when represented by counsel as distinguished from whether a defendant may represent himself or herself at trial. The Court noted in this respect that mental illness "is not a unitary concept" and may vary in degree and over time. Id. The Court therefore concluded in Edwards that
the Constitution permits judges to take realistic account of the particular defendant's mental capacities by asking whether a defendant who seeks to conduct his own defense at trial is mentally competent to do so. That is to say, the Constitution permits States to insist upon representation by counsel for those competent enough to stand trial under
Dusky but who still suffer from severe mental illness to the point where they are not competent to conduct trial proceedings by themselves.
128 S. Ct. at 2387-88.
Although urged to do so by the State of Indiana, the Court in Indiana v. Edwards,___U.S.___, 128 S. Ct. 2379, 171 L. Ed. 2d 345 (2008), declined to adopt a more specific standard to determine whether a defendant is competent to conduct trial proceedings. And although similarly urged to do so by the parties herein, because the present case falls within the standard set forth in Edwards, we also find it unnecessary to elaborate on the standard.
Consistent with the Court's holding in Edwards, decided under the Sixth Amendment to the U.S. Constitution, we now hold that under Neb. Const. art. I, § 11, a criminal defendant's right to conduct his or her own defense is not violated when the court determines that a defendant competent to stand trial nevertheless suffers from severe mental illness to the point where he or she is not competent to conduct trial proceedings without counsel.
Having determined that it would not be a constitutional violation to insist on representation for a person who suffers from severe mental illness and is not competent to conduct trial proceedings without counsel, we must consider whether the district court erred in this case when it found that Lewis was not competent to conduct trial proceedings for himself. We conclude that the facts of the present case clearly fall within the standard articulated by the Court in Edwards, supra, and that the district court did not err when it found that Lewis was not competent to conduct trial proceedings in his own behalf.
The record shows that Lewis suffered from severe mental illness. The report resulting from a psychiatric evaluation conducted in this case to determine Lewis' mental competency to stand trial indicates that Lewis has been "diagnosed with a psychotic disorder, Schizophrenia, paranoid type." Although the psychiatrist concluded that Lewis was competent to stand trial, the psychiatrist warned that Lewis' "mood, anger and agitation may become an issue" and suggested that medication be considered to control "his disruptive behavior." The psychiatrist expressed concerns that Lewis' "agitation, periods of decreased attention and concentration will limit his ability to follow testimony reasonably well"; that Lewis "has the potential to be disruptive, agitated and combative, including becoming assaultive"; and that although Lewis could control his anger at times, it was doubtful that "he would be able to continue this for a long time without getting very angry and agitated and perhaps disruptive." The psychiatrist further stated that "anytime [Lewis] feels like he is being forced to do something, he will retaliate with anger, agitation and disruptive behavior," and the psychiatrist expressed concern "about [Lewis'] ability to maintain his temper and anger consistently, to not become agitated whenever he is asked something he does not want to talk about."
In determining whether Lewis was competent to represent himself, the district court also considered Lewis' "conduct during prior proceedings" in this case. As the State notes, the record of proceedings in this case prior to the court's determination that Lewis was not competent to represent himself indicates that Lewis had a history of becoming disruptive during hearings to the point that the court ordered Lewis removed from the courtroom. At hearings held on December 21, 2007, and February 13, 2008, the court ordered Lewis removed from the courtroom for being disruptive by interrupting the court, refusing to follow courtroom procedure, and using abusive language. At a hearing held May 7, the court noted that Lewis was refusing to come into the courtroom and that the court had been informed by court staff that if the court required Lewis' presence in the courtroom "they would need to get another four or five officers to transport him into the courtroom."
We note with respect to such evidence of Lewis' past disruptive behavior that in Indiana v. Edwards,___U.S.___, 128 S. Ct. 2379, 171 L. Ed. 2d 345 (2008), the U.S. Supreme Court stated that while the dignity and autonomy of the defendant underlies the right of self-representation, allowing a defendant who lacks the mental capacity to conduct his defense without assistance of counsel would not affirm the dignity of the defendant. Instead, the Court stated that "given [such] defendant's uncertain mental state, the spectacle that could well result from his self-representation at trial is at least as likely to prove humiliating as ennobling." 128 S. Ct. at 2387. The Court also noted that "insofar as a defendant's lack of capacity threatens an improper conviction or sentence, selfrepresentation in that exceptional context undercuts the most basic of the Constitution's criminal law objectives, providing a fair trial." Id. There is sufficient evidence of Lewis' past disruptive behavior that the district court could properly have found that his self-representation would create an unacceptable risk that a spectacle would result that would endanger a fair trial.
Based on the evidence that Lewis suffered severe mental illness and the evidence of past behavior by Lewis which indicated he would be disruptive and unable to conduct trial proceedings, we determine that this is a case that is clearly within the category the U.S. Supreme Court contemplated in Edwards where it would not be error for the trial court to insist on representation by counsel. We conclude that the district court did not err when it found that Lewis was not competent to represent himself and therefore required him to be represented by counsel.
Lewis' Conviction Was Supported by Sufficient Evidence of the Intent Required for Second Degree Murder.
Lewis next claims that there was not sufficient evidence to support his conviction for second degree murder. In particular, he asserts that there was not sufficient evidence of the necessary intent. Because we determine that there was sufficient evidence to support Lewis' conviction, we reject this assignment of error.
Lewis was convicted under Neb. Rev. Stat. § 28-304(1) (Reissue 2008), which provides, "A person commits murder in the second degree if he causes the death of a person intentionally, but without premeditation." Lewis notes that the distinction between second degree murder and manslaughter is the presence or absence of intent to kill. See State v. Jackson, 258 Neb. 24, 601 N.W.2d 741 (1999). Although Lewis concedes that the evidence may have supported a conviction for manslaughter, he argues that there was not sufficient evidence of the intent necessary for a conviction for second degree murder. We find this argument to be without merit and reject this assignment of error.
When the sufficiency of the evidence as to criminal intent is questioned, independent evidence of specific intent is not required. Rather, the intent with which an act is committed is a mental process and may be inferred from the words and acts of the defendant and from the circumstances surrounding the incident. State v. Sing, 275 Neb. 391, 746 N.W.2d 690 (2008).
In the present case, there was sufficient evidence from which the jury could properly have inferred that Lewis had the intent to kill Dr. Martin. We note that there was evidence that on the day he attacked Dr. Martin, Lewis was agitated that he was being forced to take medication and he was angry at Dr. Martin in particular because of Dr. Martin's testimony at a hearing held a week earlier in another case regarding a court order to medicate Lewis. Lewis struck Dr. Martin twice in the face with his fist. Before Lewis struck Dr. Martin, he said, "`I'm gonna get you, old man,'" and after Lewis struck Dr. Martin, he said things such as, `"There. Now what you gonna do? I told you I'd get you'"; "I told him I would get him. . . . He shouldn't have testified"; and `"I hope that motherfucker dies.'" The jury could properly have inferred that Lewis had the intent to kill Dr. Martin.
Because we conclude that there was sufficient evidence of intent to support Lewis' conviction for second degree murder, the court did not err when it denied his motion to dismiss made on this basis. We reject this assignment of error.
CONCLUSION
We conclude that it is not a constitutional violation for a court to insist on representation for a person who suffers from severe mental illness to the point where he or she is not competent to conduct trial proceedings without counsel. We further conclude that there was sufficient evidence to support the court's finding in this case that Lewis was not competent to represent himself and that the court did not deny Lewis his right to self-representation when it required that he be represented by counsel. We finally conclude that there was sufficient evidence of intent to support a conviction for second degree murder. We therefore affirm Lewis' conviction.
AFFIRMED.
HEAVICAN, C.J., and GERRARD, J., not participating.
unjust enrichment. In his breach of fiduciary duty claims, Shandler alleges the individual Insilco directors breached their fiduciary duties by causing Insilco to pay excessive fees to the DLJ Advisors, selling ThermaSys for less than fair value, and delaying Insilco's bankruptcy filing to benefit DLJ at Insilco's expense.
Shandler alleges that all the DLJ entities acted together as Insilco's controlling stockholder and in that capacity breached their fiduciary duties by causing DLJ's designees on the Insilco to engage in the same alleged misconduct.
Alternatively, Shandler alleges that DLJ and the DLJ Advisors are liable for aiding and abetting the fiduciary wrongdoing of the Insilco director defendants.
Compl. ¶ 44.
Id. ¶¶ 120-26 (Count I).
Id. 127-130 (Count II), 131-33 (Count III), 134-139 (Count IV).
Id. ¶¶ 149-160, 162 (Count VII). Not content with these fiduciary duty-based counts, Shandler also throws in a count for unjust enrichment against the DLJ Funds, seeking the disgorgement of any benefits they received in any form from Insilco at any time. Id. ¶¶ 145-48 (Count VI). I dismissed Shandler's unjust enrichment claim at the oral argument on these motions to dismiss. See Shandler v. DLJ Merchant Banking, Inc. et al, C.A. No. 4797-VCS, at 73-74 (Del. Ch. Apr. 27, 2010) (TRANSCRIPT).
As to the DLJ Advisors, the complaint alleges, without any fact pleading, that these advisors to Insilco engaged in professional malpractice.
Compl. ¶¶ 140-144 (Count V).
With much more specificity, the complaint alleges that KeyBanc aided and abetted the breaches of fiduciary duty that occurred in connection with the ThermaSys Transaction by knowingly placing too low of a value on ThermaSys and thereby painting the patina of fairness on an allegedly unfair transaction. Alternatively, the complaint alleges that KeyBanc at the least committed professional malpractice by giving Ashton, the oxymoronic single man special committee, deficient advice.
Id. ¶¶ 149-156, 161-62 (Count VII).
Id. ¶¶ 163-67 (Count VIII).
KeyBanc, DLJ, the DLJ Advisors, and directors Dawson, Dean, Peinado, and Palumbo filed motions to dismiss the complaint on October 30, 2009. Defendant directors Ashton and Fort joined in the DLJ defendants' motion to dismiss, but filed a separate reply brief (hereafter, Dawson, Dean, Peinado, Palumbo, Ashton, Fort are referred to as the "Moving Directors" and, with DLJ and the DLJ Advisors, as the "Moving Defendants").
I use the terms "Moving Defendants" and "Moving Directors" to differentiate these defendants from directors Curran and Howe, who have not moved to dismiss or otherwise entered an appearance. I note that Shandler filed default judgment motions against Curran and Howe on December 12, 2009, but has failed to press those motions.
The Moving Defendants argue that the complaint should be dismissed because: (1) the claims based on events before December 16, 1999 are time-barred; (2) the breach of fiduciary duty claims are barred by res judicata; (3) a § 102(b)(7) provision in Insilco's charter bars any due care claims against the Insilco directors; and (4) the complaint otherwise fails to state a claim under Court of Chancery Rule 12(b)(6).
KeyBanc argues that Count VII for aiding and abetting the Insilco directors' breaches of fiduciary duty must be dismissed against KeyBanc because: (1) the claim is time-barred; and (2) Ohio substantive law applies to the aiding and abetting claim and Ohio does not recognize such a claim.
III. Legal Analysis
Motions to dismiss for failure to state a claim are governed by Court of Chancery Rule 12(b)(6). In considering a motion to dismiss, I must accept as true all well-pled allegations, drawing all reasonable inferences in favor of the plaintiffs. Dismissal will be granted where a plaintiff fails to "plead enough facts to plausibly suggest that the plaintiff will ultimately be entitled to the relief she seeks."
Savor, Inc. v. FMR Corp., 812 A.2d 894, 897 (Del. 2002) (quoting Kofron v. Amoco Chems. Corp., 441 A.2d 226, 227 (Del. 1982)).
Desimone v. Barrows, 924 A.2d 908, 929 (Del. Ch. 2007).
A. Portions Of Shandler's Claims Are Outside The Statute Of Limitations
The Moving Defendants point out that Shandler's claims rely, in part, on events that occurred beyond the statute of limitations. The parties agree that each of Shandler's claims is subject to a three-year statute of limitations, plus a two-year extension for those claims that remained timely when Insilco filed for bankruptcy. That is, the parties agree Shandler can only bring claims that were timely on December 16, 2002 — when Insilco filed for Chapter 11 reorganization. Shandler does not dispute the Moving Defendants' reading of the statute of limitations, nor their argument that conduct occurring on or before December 16, 1999 cannot form the basis for a claim. Instead, in his answering brief, Shandler states that "facts alleged prior to December 16, 1999 are relevant to describe the foundation for the wrongful conduct that occurred after December 16, 1999, none of which is time-barred."
Under Delaware law, claims for breach of fiduciary duty, professional malpractice, and unjust enrichment are covered by a three year statute of limitations. See 10 Del. C. § 8106; see also, Vichi v. Koninklijke Philips Elecs. N.V., 2009 WL 4345724, at *5 (Del. Ch. Dec. 1, 2009) (explaining that "Delaware law sets a three year statute of limitations for claims for unjust enrichment . . . and breach of fiduciary duty"). The Bankruptcy Code "extends the time period for filing [timely] claims by two years. . . ." In re Fruehauf Trailer Corp, 250 B.R. 168, 185 (Bankr. D. Del. 2000); see also 11 U.S.C. § 108(a).
Pl. Ans. Br. to the DLJ Def.'s Mot. to Dismiss at 18-19.
Due to the statute of limitations, Shandler now admits that he cannot base a claim for relief on events that occurred on or before December 16, 1999. This constraint includes Shandler's allegations that:
• The Insilco board failed to disclose that Fort was a DLJ insider;
• The DLJ Advisors were hired to serve as the arranger and underwriter for $300 million in amended credit facilities on October 31, 1998;
• The DLJ Advisors were hired and received fees for serving as the financial advisor on seven transactions occurring from January 1999 to October 1999;
• DLJ caused Insilco to engage in a number of M A transactions, including the sale of its Publishing Business, called Taylor Publishing Company.
Thus, to the extent that the complaint as written seeks relief for this conduct, the claims are time-barred and dismissed. With that limitation in mind, I now proceed to address whether the allegations of the complaint relating to conduct occurring after December 16, 1999 are sufficient to withstand the dismissal motion.
B. The Breach Of Fiduciary Claim Can Proceed, In Part, Against All But Two Of The Moving Directors
The Moving Defendants argue that Shandler's breach of fiduciary duty claim against the Moving Directors should be dismissed because: (1) it is barred by res judicata as to certain of Insilco's directors; and (2) the complaint fails to state a claim for breach of fiduciary duty at all, or at best states only a due care claim that is barred by an exculpatory provision in Insilco's charter.
1. Res Judicata Does Not Bar Shandler's Fiduciary Duty Claim Against The DLJ Directors
First, certain of the Moving Defendants argue that Shandler's breach of fiduciary duty claim against Moving Directors Dawson, Dean, Palumbo, and Peinado (for purposes of this section, the "DLJ Directors") is barred by res judicata. The DLJ Directors were parties to an indemnification stipulation, which was entered in the bankruptcy proceeding (the "Indemnification Stipulation"). The DLJ Directors now argue that Shandler cannot sue them for breach of fiduciary duty because he is "bound by the Indemnification [Stipulation], which provides that the DLJ Directors are entitled to indemnification regarding any claim for liability. . . ." That is, the DLJ Directors claim that Shandler cannot bring breach of fiduciary duty claims against them because he agreed that they were entitled to indemnification, and that therefore he agreed that they had acted in good faith and were entitled to be indemnified by Insilco for any judgment against them.
Brauerman Aff. Ex. 7 (Stipulation Regarding Withdrawal of Creditor Trustee's Seventh Substantive Omnibus Objection to Former Insilco Directors' Claims) at 1.
DLJ Def.'s Op. Br. at 13.
During the proceedings in Bankruptcy Court, the DLJ Directors sought to have Insilco and its insurers pay for their costs in defending claims which included the same breach of fiduciary duty claims that Shandler now brings in this court. In a negotiated settlement, Shandler entered into the Indemnification Stipulation, stipulating to the fact that the DLJ Directors were entitled to so-called indemnification, so long as those claims were limited to the amount of Insilco's insurance coverage. By agreeing to the Indemnification Stipulation, the DLJ Directors argue, Shandler was acknowledging that the DLJ Directors had acted in good faith, because § 145(b) of the Delaware General Corporation Law extends indemnification only to those directors who have acted "in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation." Thus, the Moving Defendants claim, by agreeing to indemnify the DLJ Directors, Shandler effectively agreed that the DLJ Directors had not acted in bad faith or contrary to the best interests of Insilco.
8 Del. C. § 145(b). Insilco's certificate provides that Insilco will indemnify its directors to the fullest extent permitted by Delaware law. See Brauerman Aff. Ex. 6 (Restated Certificate of Incorporation of Insilco Corporation) at Art. V.
This creative idea is silly. Sometimes creative ideas that are silly can have social merit. This is certainly true in comedy — think of Monty Python. But not so much in law.
Here, this argument is not only silly, it is frivolous. When the Indemnification Stipulation was entered — on April 13, 2006 — the Bankruptcy Court had not yet dismissed the non-core breach of fiduciary duty claims that are now at issue in this court. Instead, by entering the Stipulation, the Bankruptcy Court recognized that the directors could receive such indemnification "as may be available to them under applicable Insilco insurance policies. . . ." As counsel for the Moving Defendants who negotiated the Indemnification Stipulation admitted, the DLJ Directors were seeking so-called indemnification largely in order to cover the costs of defending themselves against Shandler's fiduciary duty claims. The settlement with Shandler was designed to allow them to do that, so long as they limited their claims to using the company's existing D O policies. As counsel for the Moving Defendants also admitted, she never told Shandler that by using the variegated word indemnification in a loose way in the Stipulation, he was agreeing to release the DLJ Directors from liability for the very claims for which they were seeking defense costs. Apparently, though, counsel believes she can now do an end zone dance because she snuck past Shandler into the end zone by silently obtaining an order barring any consideration of Shandler's fiduciary duty claims.
According to the Complaint, the Bankruptcy Court dismissed the claims against the DLJ Defendants for lack of subject matter jurisdiction on September 27, 2005.
Brauerman Aff. Ex. 7 (Stipulation Regarding Withdrawal of Creditor Trustee's Seventh Substantive Omnibus Objection to Former Insilco Directors' Claims) ("Indemnification Stipulation").
See Shandler, C.A. No. 4797-VCS, at 13-14 (Del. Ch. Apr. 27, 2010) (TRANSCRIPT).
Id. at 15-16.
Id. at 19-20.
This argument lacks any merit and any equity. The Indemnification Stipulation was not based on any determination of whether the defendants had acted in bad faith or were liable for the conduct in the underlying litigation, and no such determination had been made at the time that the Stipulation was agreed to. All the Stipulation did was ensure that the DLJ Directors could have their legal fees for defending Shandler's claims covered by Insilco's D O insurance coverage, and seek ultimate indemnification if that was consistent with the policy and so long as the policy had sufficient funds for that purpose.
Indemnification Stipulation § 2; see Majkowski v. Am. Imaging Mgmt. Servs., LLC, 913 A.2d 572, 592 (Del. Ch. 2006) (discussing some of the historical complexities associated with the word indemnification); see also LOU R. KLING EILEEN T. NUGENT, NEGOTIATED ACQUISITIONS OF COMPANIES, SUBSIDIARIES, AND DIVISIONS § 1.05[5] at 1-39 (2001) (discussing the use of so-called "indemnification" provisions that address the right of a contractual party to seek relief for certain contractual breaches of the occurrence of certain events).
Thus, the Indemnification Stipulation does not bar Shandler's breach of fiduciary duty claim because an element of res judicata — a final prior adjudication — is not present. The Bankruptcy Court never intended to and never did make a final ruling on whether the DLJ Directors had acted in bad faith or breached their fiduciary duties. Rather, the Bankruptcy Court dismissed the claims against the DLJ Directors for lack of subject matter jurisdiction and allowed them to be pursued in a court with jurisdiction. Indeed, in an earlier decision in the bankruptcy proceeding, the U.S. Court of Appeals for the Third Circuit expressly recognized that the claims for breach of fiduciary duty could be pursued in state court. All that the Bankruptcy Court intended when it approved the Indemnification Stipulation was to approve the parties' agreement that the DLJ Directors could receive attorneys' fees under Insilco's D O insurance policy to defend against Shandler's claims. Therefore, Shandler's claims against the DLJ Directors are not barred by res judicata.
Res judicata bars a party from re-litigating claims where a final judgment has been reached in an earlier suit, and where five elements are present: (1) the prior court had jurisdiction; (2) the parties in both actions are the same, or are in privity with one another; (3) the cause of action in both cases is the same; (4) the issues in the prior case must have been decided adversely to the contentions in the present case; and (5) the prior adjudication was final. See Aveta Inc. v. Bengoa, 986 A.2d 1166, 1184-85 (Del. Ch. 2009) (quoting Bailey v. City of Wilmington, 766 A.2d 477, 481 (Del. 2001)).
In re Insilco Techs., Inc., 280 F.3d 212, 219 n. 13 (3d Cir. 2007) (observing that claims for breach of fiduciary duty relating to the management of Insilco could be pursued under Delaware law and outside of Bankruptcy Court).
2. The Complaint States A Non-Exculpated Claim For Breach Of Fiduciary Duty Against Four Of The Moving Directors As To The ThermaSys Transaction, But Otherwise Fails To Do So The Moving Defendants also argue that the complaint fails to state a non-exculpated claim for relief against all of the Moving Directors. Their argument has two components. The Moving Defendants argue that: (1) the complaint fails to state a claim at all under Rule 12(b)(6); and that (2) if it does state a claim, it is at best one for a breach of the duty of care which is exculpated by Insilco's Restated Certificate of Incorporation.
Brauerman Aff. Ex. 6 (Insilco Restated Certificate of Incorporation) at Art. VI.
The most efficient way to address these related arguments is to do so in tandem, addressing the three categories on which Shandler bases his claims. I start with the easiest one, the allegation that the ThermaSys Transaction was unfair and the product of fiduciary misconduct. As the Moving Directors must admit, they are not protected by the exculpatory provision if the complaint states a claim against them for breach of the duty of loyalty.
See, e.g., McMillan v. Intercargo Corp., 768 A.2d 492, 501 (Del. Ch. 2000).
The complaint contains well-pled allegations that the ThermaSys Transaction was substantively unfair and implemented through an unfair process. With one exception, the complaint also contains well-pled allegations that the DLJ Directors — defendants Dawson, Dean, Palumbo, and Peinado — derived their primary source of income from working for DLJ. The complaint pleads facts that support a rational inference that these defendants supported the ThermaSys Transaction to benefit DLJ at the unfair expense of Insilco. Palumbo, however, was not on the board when the ThermaSys Transaction was firmed up and consummated. Thus, the ThermaSys Transaction cannot form the basis for keeping Palumbo in the case.
Compl. ¶¶ 31, 32, 34, 35.
In their papers, the Moving Defendants present a number of arguments about why the ThermaSys Transaction was fair and provided a benefit to Insilco. The Moving Defendants may be right, but they cannot try the issue of fairness on a dismissal motion. See In re New Valley Corp., 2001 WL 50212, at *7 (Del. Ch. Jan. 11, 2001) (declining to conduct an entire fairness review at the motion to dismiss stage). In contrast to other issues, the fact pleading addressing the ThermaSys Transaction is relatively clear and suffices to state a duty of loyalty claim.
The parties agree that Palumbo was on the board from January 26, 1999 to March 14, 2000. See Brauerman Ex. 10 (Insilco Form 14A (May 14, 2000)) at 1. Thus, the July 14, 2000 ThermaSys Transaction occurred after Palumbo was no longer a board member. The Moving Defendants also argue that Peinado had nothing to do with the ThermaSys Transaction, and cannot be held liable for it. But the complaint avers that Peinado was placed on the board on July 14, 2000 — the very day that the ThermaSys Transaction was approved by the Special Committee. Compl. ¶ 59. Thus, for purposes of this motion, Shandler has sufficiently pled this allegation against Peinado.
As to defendant Ashton, the circumstances of his behavior and interests are sufficiently unusual as to raise an inference that his willingness to jump in as a new board member and to ratify an interested transaction within five days of being seated was influenced by his relationships with DLJ. That oddly rapid action may turn out to be evidence merely of an incisive and decisive mind, quick to grasp all material facts and come to a wise decision. But, it may also be evidence of a mindset well captured by Chancellor Allen in his 1990 article in The Business Lawyer about the need for special negotiating committees to act with genuine vigor and independence if they are to fulfill their intended purpose. In that regard, I note that the complaint alleges that Ashton allowed himself to be named by a resolution that simply indicated he had no material relationship with DLJ, while failing to state that he had previously served as the CEO of a private equity portfolio company that a DLJ-related company controlled. The fact that Ashton later was named by DLJ to be ThermaSys's CEO is also something that I cannot ignore at a pleading stage. Thus, the complaint states a claim for breach of the duty of loyalty against Ashton.
Id. ¶¶ 72-75.
William T. Allen, Independent Directors in MBO Transactions: Are They Fact or Fantasy, 45 BUS. LAW. 2055, 2061 (1990) (describing situations where the independent directors on a special committees "appear no more than, in T.S. Eliot's phrase, `an easy tool, deferential, glad to be of use'" (quoting T.S. Eliot, The Love Song of J. Alfred Prufrock, in Collected Poems 1909-1962 (Harcourt, Brace World 1970))).
Compl. ¶ 60.
Id. ¶¶ 7, 80.
I conclude differently as to director Fort. In the complaint, all that is pled is that Fort was on a DLJ Merchant Advisory Board. There is no allegation that Fort received any remuneration for participating on that board or that service on that board was material in any other way to Fort. The complaint is largely silent as to the role of Fort in any of the events and simply lumps him in with the other directors. Given that there are no pled facts that suggest any material reason for Fort to favor DLJ's interests over the interests of Insilco in the ThermaSys Transaction, and the absence of any pled facts otherwise supporting an inference that Fort breached his duty of loyalty by acting in bad faith to injure Insilco, the complaint at best states a due care claim against Fort. That claim is barred by the exculpatory charter provision and therefore the complaint is dismissed against Fort.
Id. ¶ 58.
As to the complaint's allegation involving for fees paid to the DLJ Advisors, I cannot conclude that the complaint even states a claim. I have already addressed the reality that Shandler may not base claims on conduct occurring before December 16, 1999. After that date, the complaint alleges that the DLJ Advisors received advisory and other fees that were "excessive" and highlights that certain DLJ Advisors received fees of a total of $6.7 million in 2000 in connection with the refinancing of Insilco's Credit Agreement, and that those Advisors received a total of $15 million in fees from 1998 to 2002.
See supra pages 20-22.
Compl. ¶¶ 62, 87.
The problem is that the complaint only alleges that the fees were excessive, and does not plead any factual basis to support that mere conclusion. The complaint itself notes that Insilco engaged in a large number of M A transactions in 1999 and 2000. Although the complaint challenges the wisdom of these transactions, it makes no attempt to indicate that the DLJ Advisors received a premium for their advisory services over market for assisting with those transactions. Likewise, the complaint makes no attempt to plead that the amounts received by the DLJ Advisors for helping to arrange a very large Credit Agreement were in excess of market rates, and makes no attempt to show that the credit procured under that Agreement was less favorable than market. Even though our law stringently reviews interested transactions, a plaintiff must still plead facts that plausibly support an inference that fees received by a controlling stockholder's affiliate were in fact excessive, in the sense that they were more than would have been paid to a comparable firm providing the same services. All Shandler has done is point to an amount of fees that the DLJ Advisors received in various capacities and call those fees excessive, while simultaneously identifying a wide array of complicated transactions to which those services relate. It may be that as part of any damages award that might result if Shandler succeeds on his challenge relating to the ThermaSys Transaction, Insilco can recover any fees it paid to DLJ Advisors for advice on that deal. But his more general conclusory charge that the board breached their fiduciary duties by causing Insilco to pay "excessive" fees is not supported by any non-conclusory facts and cannot buttress a claim for breach of fiduciary duty.
Id. ¶ 64.
E.g., Kahn v. Lynch Commc'ns Syst., Inc., 638 A.2d 1110, 1116 (Del. 1994).
See Nelson v. Emerson, 2008 WL 1961150, at *10 (Del. Ch. May 6, 2008) (dismissing an excessive compensation claim where no information was provided about "the amount or specific instances of the alleged excessive compensation"); Canal Capital Corp. By Klein v. French, 1992 WL 159008, at *4 (Del. Ch. July 2, 1992) (dismissing a duty of care claim alleging that management fees paid to a company controlled by the majority shareholder were excessive because the "complaint contain[ed] no factual support for the conclusory allegation that the fee[s] [were] excessive"); see also Metcap Secs. LLC v. Pearl Senior Care, Inc., 2009 WL 513756, at *7 (Del. Ch. Feb. 27, 2009) (declining to find, at the summary judgment stage, that a $20 million advisors fee was unreasonable because no facts were pled "that could lead the court to conclude . . . that a $20 million fee [was] unreasonable").
Likewise, I dismiss Shandler's third and final category, his so-called "deepening insolvency"-based fiduciary duty claim. That theory is pled in a way that makes no coherent sense. To the extent that the theory is based on an argument that the Moving Directors caused Insilco to take a reckless and value-destroying gamble so as to provide a chance for DLJ to recoup value for its 74% share of Insilco's equity, that argument finds no basis in the complaint as there are no facts indicating that the board took any such gamble. Instead, the complaint argues that the board kept Insilco out of bankruptcy for too long and that as a result the firm somehow lost even more value than it would have had if it had entered bankruptcy earlier. The bad faith motivation for this is supposedly that the additional time enabled the DLJ Advisors to obtain more in advisory fees and for DLJ to sell out of its senior debt positions while the getting was good. In large measure, the complaint also relies on the $15 million Term-C Loan that DLJ provided as stop-gap financing, financing that subordinate to the senior lenders' position but senior to certain company notes. As will be discussed, to the extent that this claim turns on DLJ's interests in providing the Term-C financing, it has been released by a prior agreement that was entered as a stipulation in the Bankruptcy Court proceeding.
Compl. ¶¶ 134-139.
Id. ¶ 136.
See infra pages 36-38.
What is left is the contention that the board knew that Insilco had no chance to survive as a going concern, and in bad faith delayed a bankruptcy filing so as to enable DLJ to siphon off benefits that would salve its wounds at the expense of Insilco's entity value and therefore at the expense of Insilco's junior creditors. But I cannot find any rational support for this theory in the pled facts. During the period when Shandler says that bankruptcy proceedings should have been filed — June 2001 forward — Shandler fails to specify any fees that the DLJ Advisors received, much less that they were material in relationship to the 74% equity interest the DLJ held or, even more important, to the senior debt positions DLJ held. Even if one considers the Term-C Loan, the complaint pleads no rational inference why DLJ or the board would want DLJ to put another $15 million at risk on top of what it already had at risk if it knew that Insilco's performance and value would deteriorate if Insilco did not file for bankruptcy. Admittedly, the complaint says that the time that was bought allowed DLJ to reduce its senior debt positions by an unspecified amount. But what the complaint does not allege is that DLJ was engaged in a pattern of large transactions in senior debt that plausibly supports the inference that DLJ put in $15 million more and kept Insilco alive with the bad faith knowledge that Insilco's situation could not improve and the company's value would deteriorate, and for the purpose of enabling DLJ to reap benefits of materially more than that $15 million and the risk to its remaining senior debt position from that value deterioration by getting rid of Insilco debt and equity well in excess of that amount.
Compl. ¶ 95.
Id. ¶ 101.
No doubt the complaint pleads that DLJ had all kinds of financial interests at stake in Insilco, including most notably as a senior lender and majority equity owner. But the complaint never articulates a rational basis for inferring that DLJ, which the complaint alleges held large amounts of senior debt and was acting for the senior lenders, intentionally kept Insilco out of bankruptcy knowing that would result in a diminishment of Insilco's value for the purpose of allowing DLJ to reap illicit gains for itself. Indeed, the complaint suggests that the company's senior lenders agreed to defer declaring a default largely in the hope that the Term-C Loan infusion would enable the company to weather the downturn and be put it in a better position to pay off the senior debt than would be the case if an immediate bankruptcy filing occurred upon a declaration of default.
Id. ¶ 111.
Id. ¶¶ 101, 113.
In a situation like this one, to sustain this theory would require the pleading of a scenario whereby it was plausible that: i) DLJ knew that failing to file for bankruptcy would lower the value of Insilco; and ii) irrespective of DLJ's substantial equity and senior debt position, DLJ could reap enough gains through fees and debt sales to make it worthwhile to take action reducing Insilco's value and therefore its ability to satisfy debt claims, including its ability to pay back the additional $15 million DLJ put at risk in 2001 to keep Insilco operating. After the point in time when Shandler alleges that DLJ should have caused Insilco to file for bankruptcy, Shandler does not allege that DLJ received any material amount of fees from Insilco, much less enough to approach the level of the additional $15 million it was putting at risk. Nor does Shandler allege facts suggesting that DLJ had a rational incentive to keep Insilco out of bankruptcy knowing that would lower its value because DLJ could reap more from its senior debt positions that way through market sales of that debt than if Insilco had actually declared bankruptcy.
Although Shandler alleges that DLJ was attempting to unwind its position, he pleads no facts about the magnitude or timing of any sales of senior debt by DLJ and his theory seems entirely undercut by the fact that the senior lenders as a group were willing to defer their default rights in order to take a chance that Insilco would pull through. That forbearance suggests that the senior debtors were worried about whether they could recover in full in bankruptcy and felt that they were better off deferring the bankruptcy that would have come if they had exercised their rights precisely because they perceived that they would do better as creditors if Insilco could escape bankruptcy. Of course, the mere fact that the company was not able to avoid ultimate insolvency does not, in itself, mean that there was not a good faith basis to take a chance on survival if the board viewed that as the best option to maximize Insilco's value. See Trenwick Am. Litig. Trust v. Ernst Young, LLP, 906 A.2d 168, 205 (Del. Ch. 2006) (rejecting "deepening insolvency" as a cause of action under Delaware law, and stating that "[i]f a board of an insolvent corporation, acting with due diligence and good faith, pursues a business strategy that it believes will increase the corporation's value, but that also involves the incurrence of additional debt, it does not become a guarantor of that strategy's success"), aff'd, 931 A.2d 438 (Del. 2007); Geyer v. Ingersoll Publ'ns Co., 621 A.2d 784, 787 (Del. Ch. 1992) ("Even where the law recognizes that the duties of directors encompass the interests of creditors, there is room for application of the business judgment rule."). Indeed, given the incentives for creditors to break rank and seek to recover as much of their loans as possible before their claims become administered through a bankruptcy proceeding, the fact that the creditors jointly agreed on a course of action suggests a good faith basis for the deferral. See THOMAS H. JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW 122-23 (1986) (discussing the problem that creditors of a company on the brink of insolvency have an incentive to call their loans in order to beat the other creditors in hopes of recovering their loans before a bankruptcy proceeding requires them to split the insolvent company's assets more equally).
Compl. ¶¶ 113-14.
In this regard, it is critical to note that Shandler cannot base his fiduciary duty claim on the premise that the board did not do what was best for a particular class of Insilco creditors. Even when Insilco was insolvent, the board was entitled to exercise a good faith business judgment to continue to operate the business if it believed that was what would maximize Insilco's value. Although the rambling complaint makes the cursory allegation that the board did not consider strategic alternatives, it then immediately says that the board retained Bain Company and consulted with a DLJ-affiliated workout specialist for just that purpose. The complaint indicates later that efforts to find buyers took place but did not succeed.
N. Am. Catholic Edu. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 103 (Del. 2007) (holding that "individual creditors of an insolvent corporation have no right to assert direct claims for breach of fiduciary duty against corporate directors").
See Trenwick, 906 A.2d at 174 ("[D]irectors may, in the appropriate exercise of their business judgment, take action that might, if it does not pan out, result in the firm being painted in a deeper hue of red.").
Compl. ¶ 96.
Id. ¶ 112.
In the absence of any pled facts that plausibly support an inference that DLJ could rationally benefit from knowingly diminishing Insilco's enterprise value by purposely delaying bankruptcy when DLJ knew that filing was the value maximizing option, I cannot conclude that the complaint pleads a claim for the breach of the duty of loyalty against the Moving Directors. And, although Insilco was ultimately unable to stay out of bankruptcy, the complaint does not even indicate why a bankruptcy filing early in 2001 or earlier in 2002 would have preserved more value for Insilco, or that it was gross negligence not to file. Although I am doubtful that the complaint even states a due care claim given this absence, I need not make that determination because the exculpatory charter provision bars any such claim.
For all of these reasons, I conclude that Shandler has pled a non-exculpated claim for breach of the duty of loyalty against Moving Directors Dawson, Dean, Peinado, and Ashton as to the ThermaSys Transaction, including as to any fees paid to DLJ Advisors in connection with that transaction. I otherwise dismiss the fiduciary duty claims.
C. Shandler Has Stated A Breach Of Fiduciary Duty Claim Against DLJ Only As To The ThermaSys Transaction 1. DLJ, Inc., DLJMB And The DLJ Funds Are Alter-Egos For Purposes Of This Motion Shandler has brought the same fiduciary duty claims against DLJ that he has brought against the Insilco directors. DLJ contends that DLJ, Inc., DLJMB and the DLJ Funds are all separate entities and cannot be considered, even at the pleading stage, as part of a group that acted as Insilco's controlling stockholders. I disagree.
This court has allowed claims of alter-ego liability to survive where plaintiffs alleged that the boards of a parent company and its subsidiary were identical and one company appeared to operate as an instrumentality of the other, as well as where the officers and directors of two companies were the same, and the two companies shared a common address. According to the complaint, DLJ, Inc. and DLJMB had control over the DLJ Funds through various entities that they owned and controlled. Additionally, DLJ, Inc., DLJMB, and the DLJ Funds share the same address on Madison Avenue in New York City. And, the complaint alleges that "the same individuals were the officers or principals of" DLJMB and DLJ Merchant Banking II, Inc. — the DLJ Funds' managing partner. Fairly read, the complaint alleges that DLJ, Inc. presided over a family of entities that it dominated and controlled, including the entities that together owned 74% of Insilco's equity. Using their unified power in a concerted way, DLJ controlled Insilco and directed its business strategy, including causing it to employ the DLJ Advisors. For purposes of a dismissal motion, I believe that Shandler has pled sufficient facts from which it can be inferred that the DLJ Funds were instrumentalities operated for the benefit of DLJ, Inc. and DLJMB. Without conflating their existence for all purposes, there is a pleading stage inference that these entities acted jointly together as if they were a single controlling stockholder and on that basis owed fiduciary duties to Insilco.
Mabon, Nugent Co. v. Texas Am. Energy Corp., 1990 WL 44267, at *5 (Del. Ch. Apr. 12, 1990) (finding, on a motion for summary judgment, that genuine issues of material fact existed on a veil-piercing theory where two entities had substantially the same boards, and the subsidiary seemed to operate as an instrumentality of the parent).
Haisfield v. Cruver, 1994 WL 497868, at *3-4 (Del. Ch. 1994) (holding that a plaintiff had succeeded in alleging alter ego status where, on a motion to dismiss, facts were pled to show common financial interests, board members and officers, and a common address).
See supra note 7.
See Compl. ¶¶ 16-30.
Id. ¶ 45.
Cf. Mabon, 1990 WL 44267, at *5 ("A court can pierce the corporate veil of an entity where there is fraud or where a subsidiary is in fact a mere instrumentality or alter ego of its owner.").
Because, however, the premise of controlling stockholder fiduciary responsibility is to hold the controller liable for actions its causes using its control of the company's board, liability under this theory is largely coextensive with the liability faced by the corporation's directors. That is, a controlling stockholder cannot be held liable for a breach of the duty of care when the directors are exculpated. The purpose of controlling stockholder liability is to make sure that controlling stockholders do not use their control to reap improper gains through unfair self dealing or other disloyal acts. Thus, Shandler's claim for breach of fiduciary duty stands against DLJ only as to the ThermaSys Transaction and is otherwise dismissed for the reasons previously given.
E.g., ATR-KIM Eng Fin. Corp. v. Araneta, 2006 WL 3783520, at *16 (Del. Ch. Dec. 21, 2006) (noting that a majority stockholder "was prohibited from using his position of control to extract value from the corporation to the exclusion of, and detriment to, the minority stockholders").
See Trenwick, 906 A.2d at 194 ("A judicial acknowledgement that, as a matter of the common equity, directors of a public company protected by an exculpatory charter provision may be exposed to negligence-based liability claims made by the public company's wholly-owned subsidiaries would undercut the important public policy reflected in 8 Del. C. § 102(b)(7)."); Abraham v. Emerson Radio Corp., 901 A.2d 751, 759 (Del. Ch. 2006) (questioning the logic of holding a controlling shareholder liable when care claims against directors were exculpated, and noting that "the unthinking acceptance that a greater class of claims ought to be open against persons who are ordinarily not subject to claims for breach of fiduciary duty at all — stockholders — than against corporate directors is inadequate to justify recognizing care-based claims against sellers of control positions"); see also Official Comm. of Unsecured Creditors of Color Tile, Inc. v. Investcorp S.A., 137 F. Supp. 2d 502, 515 (S.D.N.Y. 2001) (applying Delaware law, stating that "[e]nabling plaintiff to sue the [controlling] shareholder defendants for acts of [the director] for which [the directors] personally cannot be held liable would provide an illogical end-run around the protections of § 102(b)(7)").
2. To The Extent That The Fiduciary Duty Claims In The Complaint Rely On The Term-C Loan, Those Claims Are Barred By Res Judicata
The Moving Defendants argue that res judicata bars Shandler's claim that it was a breach of fiduciary duty not to file for bankruptcy earlier to the extent that the claim is premised on the notion that the delay was inspired by DLJ's desire to enter into the Term-C Loan so as to benefit the Term-C Lenders at the expense of Insilco and its other creditors. The Moving Defendants point out that the Term-C Lenders filed proofs of claims in Bankruptcy Court in May 2004, and the claims against the Term-C Lenders were dismissed due to a Settlement Agreement that released all claims and defenses against them. The Settlement Agreement provided that the Term-C Lenders were released from Shandler's claims "only in respect of the Term-C Loans under the Credit Agreement." The United States Court of Appeals for the Third Circuit recognized in In re Insilco Technologies, Inc. that the Settlement Agreement provided that "the secured creditors agreed to contribute money to [a] [t]rust for payment of the unsecured creditors' claims in return for a full release from the unsecured creditors' challenges to their claims." But, the Court of Appeals explained that the Settlement Agreement applied only to claims "related to the Term C Loans," and that claims not related to the Term-C Loan would be permitted because "the Term C Lenders' primary relationship to Insilco was as equity holders and controlling shareholders, not as lenders." That is, the Settlement Agreement disposed of claims against the Term-C Lenders only insofar as the claims related to the Term-C Loan.
Again, the Term-C Lenders include DLJ Capital, DLJ Securities, and eight of the DLJ Funds. See supra page 17.
Compl. ¶¶ 102, 108, 111, 113-14.
See Settlement Agreement.
Id.
Insilco, 280 F.3d at 215.
Id. at 219.
The complaint raises allegations that directly relate to the Term-C Loan, including that it violated the 12% Note. The complaint also suggests that the Term-C Loan was given in order to help delay a bankruptcy filing. Although the complaint is extremely unclear, to the extent that the complaint implies that DLJ sought to benefit from the Term-C Loan and therefore improperly delayed a bankruptcy filing, that implication cannot form the basis for a claim. Likewise, to the extent the complaint suggests that it was in any way a breach of duty for Insilco's board to enter into the Term C-Loan, that suggestion cannot form the basis for a claim. The Settlement Agreement clearly encompasses any claim that is based on the notion that it was wrongful for the Insilco board to agree to the Term-C Loan. Therefore, Counts II, III, and IV are dismissed, in addition to the reasons already given, to the extent that they are so premised.
See supra pages 11-12.
D. The Professional Malpractice Claim Against The DLJ Advisors Is Dismissed
Shandler also brings a professional malpractice claim against the DLJ Advisors in Count V, alleging that they failed "to meet the industry standards applicable to financial advisory service providers." The Moving Defendants argue that, under New York law, professional malpractice claims cannot be brought against financial advisors. This is an undecided issue under New York law. In Scientific Research, Inc. v. NIA Group, Inc., the New York Court of Appeals stated that, to sustain a claim for professional malpractice, the defendant must be a professional as a matter of law, and defined a professional as being "commonly understood to refer to the learned professions exemplified by law and medicine." In Leather v. U.S. Trust Co. of New York, the New York Appellate Division First Department found that financial advisors are not "professionals" who could be sued for professional malpractice under New York law. By contrast, in EBC I, Inc. v. Goldman, Sachs Co., in a later decision addressing a similar question, the identical court, the New York Appellate Division First Department, reached the opposite conclusion, finding that "investment bankers are professionals" who are subject to malpractice suits. But on appeal in that case, the New York Court of Appeals found that the lower court had properly dismissed the case on other grounds and therefore declined to affirm or address the finding below that a financial advisor was a "professional," choosing instead to "leave open the question of whether a financial advisor or underwriter may ever be treated as a professional for purposes of" malpractice liability.
Compl. ¶ 143.
Choice of law questions are governed by the most significant relationship test set forth in the Restatement (Second) of Conflicts of Laws. To determine which state has the most significant relationship, the following factors are considered: (1) the place where the injury occurred; (2) the place where the conduct causing the injury occurred; (3) the domicil, residence, nationality, place of incorporation and place of business of the parties, and (d) the place where the relationship, if any, between the parties is centered. See RESTATEMENT (SECOND) OF CONFLICTS OF LAWS § 145(1) (1971); see also Travelers Indem. Co. v. Lake, 594 A.2d 38, 46-47 (Del. 1991). The balance of these factors points to New York. See Am. Int'l Group, Inc. v. Greenberg, 965 A.2d 763, 818-23 (Del. Ch. 2009) (applying New York law to a professional malpractice claim where no acts occurred in Delaware, and the majority of work at issue took place in New York).
96 N.Y.2d 20, 29 (N.Y. 2001).
279 A.D.2d 311, 312-13 (N.Y. App. Div. 2001).
7 A.D.3d 418, 420 (N.Y. App. Div. 2004).
832 N.E.2d 26, 33 (N.Y. 2005).
Without necessity, I am not going to base my decision on an unsettled issue of another state's law. Even assuming that the New York Court of Appeals would ultimately find that firms that hold themselves out as expert financial advisors on M A and other important corporate transactions owe their clients an enforceable duty of care, Shandler has failed to state a claim. The complaint is entirely devoid of pled facts explaining how the DLJ Advisors committed malpractice. Instead, Shandler raises conclusory allegations that the DLJ Advisors failed to "properly . . . perform [their] services and . . . to render objective advice to Insilco," and "meet the industry standards applicable to financial advisory service providers." Shandler makes no claim about what the industry standards were, or what the DLJ Advisors did that was below those standards. Without any facts pled to support the professional malpractice claim, I grant the motion to dismiss Count V.
Compl. ¶¶ 141-42.
E. Shandler Has Pled An Aiding And Abetting Claim Against KeyBanc
Shandler also brings a claim against KeyBanc for aiding and abetting breach of fiduciary duty (Count VII), and an alternative claim against KeyBanc for professional malpractice (Count VIII). The aiding and abetting claim alleges that KeyBanc aided and abetted the DLJ Directors' breaches of fiduciary duty by "submit[ting] a fairness opinion as to the ThermaSys Sale originally prepared for DLJMB to Insilco as if it had been prepared for Insilco, changing the valuation in the opinion at the direction of DLJMB, and knowingly concluding a valuation of the ThermaSys Sale that was far lower than appropriate." The professional malpractice claim alleges that KeyBanc "failed to meet the industry standards applicable to financial advisory service providers rendering fairness opinions."
Id. ¶ 161.
Id. ¶ 166.
KeyBanc has moved for dismissal of the aiding and abetting claim, but not the professional malpractice claim. I therefore only consider whether the aiding and abetting claim requires dismissal. KeyBanc puts forth two different grounds for dismissal of the aiding and abetting claim: (1) the claim is barred by the statute of limitations; and (2) under Ohio law, which KeyBanc argues controls, no cause of action for aiding and abetting a breach of fiduciary duty exists. I deal with these in turn.
As to the first issue, KeyBanc argues that the aiding and abetting claim is untimely because that theory of recovery was not pled in Shandler's Bankruptcy Court proceeding and, thus, was not preserved under 10 Del. C. § 8118 (the "Savings Statute"). Section 8118(a) of the Savings Statute provides that:
If in an action duly commenced within the time limited therefore in this chapter, . . . the action [is] otherwise avoided or defeated for any matter or form, . . . a new action may be commenced,
for the same cause of action, at any time within one year after the abatement or other determination of the original action, or after the reversal of the judgment therein.
Shandler argues that his aiding and abetting claim is timely because it was brought within one year of the date that the Bankruptcy Order dismissing his professional malpractice claim against KeyBanc became final, and asks that the "same cause of action" language in § 8118 be interpreted broadly such that the professional malpractice claim he brought against KeyBanc in Bankruptcy Court is considered the same cause of action as the aiding and abetting claim here, because those claims are based on the same factual scenario. In response, KeyBanc argues that the aiding and abetting claim and the malpractice claim are not the same cause of action because the aiding and abetting claim alleges intentional misconduct and collusion while the malpractice claim only alleges negligence.
Compl. ¶ 4.
Section 8118 and its predecessors have been on the books for a long time. But the parties were unable to find any case law shedding light on what the General Assembly meant by the term "cause of action" in that statute. Does the term cause of action refer to each distinct legal theory that the plaintiff could assert arising out of an identical course of action? Or does the term cause of action simply refer more generally to a plaintiff's contention that it was injured and is due compensation as a result of a single course of action by the defendant and therefore encompass all theories of recovery that could justify such relief?
See Frombach v. Gilbert Assoc., Inc., 236 A.2d 363, 365 (Del. 1967) ("The Savings Statute has been a part of Delaware law, with no change presently significant, since 1829.").
KeyBanc argues for the former reading, and says that Shandler now pleads an entirely new cause of action by asserting for the first time in his August 2009 complaint that KeyBanc's conduct in the ThermaSys Transaction not only supports a claim for malpractice, but also supports a claim for knowingly assisting in a breach of fiduciary duty. Shandler advocates the latter reading, and argues that all he has done is deepen his previously pled cause of action that KeyBanc caused compensable injury to Insilco by its actions in connection with the ThermaSys Transaction.
In support of their distinct positions, neither party has cited case law interpreting the words "cause of action" in the Savings Statute because they could find no such cases. Nor could I. To fill that void, both KeyBanc and Shandler analogized to Court of Chancery Rule 15(c)(2), which allows a party to amend the party's pleadings where the amendment "arose out of the conduct, transaction or occurrence" in the original pleading to interpret the term "cause of action" in the Savings Statute. Given that KeyBanc makes that concession and given the remedial purposes of the Savings Statute, I find that its interpretation of § 8118 is less reasonable than the one advanced by Shandler.
Ct. Ch. R. 15(c)(2).
See Marvel v. Prison Indus., 884 A.2d 1065, 1067 (Del. Super. 2005) (reasoning that the Savings Statute was intended to "alleviate the harsh consequences of the statute of limitations when an action, through no fault of the plaintiff, is technically barred by the statute of limitations," and that, as a remedial measure, the Savings Statute "should be liberally construed").
The Savings Statute is designed to make sure that defendants have timely notice of the claims against them so that defendants are not burdened by stale claims from indolent plaintiffs. When a party like Shandler files a timely complaint pleading a theory based on a course of action against a party like KeyBanc, the defendant has no basis for repose. Indeed, Court of Chancery Rule 15(c)(2) itself allows plaintiffs who do not plead all their theories within the limitations period to amend so long as "the claim or defense asserted in the amended pleading arose out of the same conduct, transaction, or occurrence . . . in the original pleading." Reading § 8118 of the Savings Statute consistent with Rule 15(c)(2) makes policy sense as it harmonizes our state's approach to these related issues.
See Giles v. Rodolico, 140 A.2d 263, 267-68 (Del. 1958) (holding that a defendant would not be prejudiced by allowing a suit to proceed against him under § 8117 of the Savings Statute because the defendant was "on notice that he was going to be sued"); Howmet Corp. v. City of Wilmington, 285 A.2d 423, 425-36 (Del. Super. 1971) (noting that the policy objective behind the Savings Statute is that, "by invoking judicial aid, a litigant gives timely notice to his adversary of a present purpose to maintain his rights before the courts").
Ct. Ch. R. 15(c)(2).
Although KeyBanc may not have known as of the limitations date that it faced an aiding and abetting claim, it knew that Shandler sought to hold it responsible in damages for harm its allegedly deficient performance in the ThermaSys Transaction caused to Insilco. KeyBanc faces no undue prejudice because Shandler has now alleged that KeyBanc's conduct in the same Transaction supports an additional legal theory as to why any harm suffered by Insilco in that Transaction should be remedied by KeyBanc. It is rational to interpret the term "cause of action" in § 8118 as embodying the Rule 15(c)(2) approach of deeming as one cause of action all theories that arise out of the same "conduct, transaction, or occurrence." For these reasons, I hold that the aiding and abetting claim is not time barred.
Id.; see Gosnell v. Whetsel, 198 A.2d 924, 927 (Del. 1964) (stating that the Savings Statute has "a remedial purpose and should be liberally construed"); Giles, 140 A.2d at 267 (explaining that the Savings Statute was "designed to mitigate against the harshness of the defenses of the statute of limitations raised against a plaintiff who, through no fault of his own, finds his case technically barred by the lapse of time").
Second, KeyBanc argues that Shandler's aiding and abetting claim must be dismissed because it is governed by Ohio law, which does not recognize such a claim. KeyBanc's only argument as to why Ohio law applies is that its contract with Insilco provided for Ohio law to apply. But the mere fact that any contractual or malpractice obligations KeyBanc owed to Insilco were governed by Ohio law does not give Ohio a stronger interest in Delaware as to an aiding and abetting claim. When the claim against a third-party is that it was knowingly complicitous in a breach of fiduciary duty against a Delaware entity, Delaware's interest is paramount. Because Delaware has the strongest interest, because our law recognizes aiding and abetting claims, and because the complaint clearly states such a claim against KeyBanc in relation to the ThermaSys Transaction, its motion to dismiss is denied.
See In re Am. Intern. Group, Inc., 965 A.2d 763, 822 (Del. Ch. 2009) ("Although another state might have a policy interest in applying its own standards of professional accountability to auditors practicing within its borders, it is difficult to see how such a state could exculpate an auditor for knowing complicity in a breach of fiduciary duty against a Delaware corporation and trump Delaware's interest in holding the auditor accountable for its purposeful wrongdoing."); cf. Sample v. Morgan, 935 A.2d 1046, 1063-64 (Del. Ch. 2007) (holding that personal jurisdiction over lawyers who allegedly aided and abetted breaches of fiduciary duty to a Delaware corporation did not violate due process because, among other reasons, Delaware had an important interest in the internal affairs of its corporations).
See Am. Intern. Group, 965 A.2d at 822 (noting that, if a complaint had raised a claim for aiding and abetting breaches of fiduciary duty "injuring a Delaware corporation, Delaware's policy interest would . . . be paramount").
IV. Conclusion
For the foregoing reasons, I grant the motion to dismiss Counts I, II, III, and IV as to all Moving Defendants, except insofar as those counts challenge the ThermaSys Transaction and any fees paid in relation to that ThermaSys Transaction. I grant the motion to dismiss all claims against defendants Palumbo and Fort. I dismiss Counts V and VII in their entirety against the DLJ Advisors. Finally, I deny KeyBanc's motion to dismiss Count VII as brought against it. IT IS SO ORDERED.
In addition, I dismiss defendant DLJ Merchant Banking Partners, L.P. from this action, because Shandler has consented to the dismissal.