Washington v. Preferred Communication Systems, Inc. ( 2017 )

IN THE SUPREME COURT OF THE STATE OF DELAWARE
JOSEPH L. WASHINGTON, JAMES F. §
SOLIC, JAMES WASHINGTON, JR., § No. 436, 2016
LAURA M. ODELL, and ARLENE BETH §
CLARKE, § Court Below: Court of
§ Chancery of the State of
Plaintiffs Below, § Delaware
Appellants, §
§ C.A. No. 10810-VCL
v. §
§
PREFERRED COMMUNICATION §
SYSTEMS, INC., §
§
Defendant Below, §
Appellee. §
Submitted: February 15, 2017
Decided: February 27, 2017
Before STRINE, Chief Justice; HOLLAND, VALIHURA, VAUGHN, and
SEITZ, Justices, constituting the Court en Banc.
Upon appeal from the Court of Chancery. REVERSED.
Evan O. Williford, Esquire, Andrew J. Huber, Esquire, The Williford Firm LLC,
Wilmington, Delaware; Dennis M. Holmgren, Esquire, (Argued), Holmgren
Johnson: Mitchell Madden, LLP, Dallas, Texas, for Appellants Joseph L.
Washington, James F. Solic, James Washington, Jr., Laura M. Odell, and Arlene
Beth Clarke.
Gary W. Lipkin, Esquire, (Argued), Aimee M. Czachorowski, Esquire, Eckert
Seamans Cherin & Mellott, LLC, Wilmington, Delaware, for Appellee Preferred
Communication Systems, Inc.
STRINE, Chief Justice:
I.
In this case, noteholders succeeded in securing warrants that the issuer of the
notes had promised as a result of the resolution of a previous event of default.
When addressing the merits, the Court of Chancery held that the promise of
warrants had become a right of the noteholders under the notes, as amended after
the default. For that reason, the Court of Chancery awarded the noteholders the
warrants they sought. The noteholders then sought to recover their attorneys’ fees
based on a fee-shifting provision in the notes which entitled the noteholders to
attorneys’ fees if: (1) ―any indebtedness‖ evidenced by the notes was collected in a
court proceeding; or (2) the notes were placed in the hands of attorneys for
collection after default. But, the Court of Chancery denied this request and the
noteholders brought this appeal. Because the warrants are a form of indebtedness
that the noteholders had to collect through an action in the Court of Chancery, the
noteholders are entitled to attorneys’ fees. The noteholders are also entitled to
attorneys’ fees because they had to seek the assistance of counsel to collect the
warrants after default.
II.
In 2006, the appellants (or ―Noteholders‖ for simplicity’s sake) invested in
promissory notes (the ―Notes‖) issued by the appellee, Preferred Communication
Systems, Inc. In exchange for their investment, they were promised repayment of
1
principal and interest, plus warrants upon execution of the Notes. When the Notes
came due in 2007, Preferred Communication was unable to pay and defaulted.
Therefore, Preferred Communication sought to satisfy the noteholders by
promising them additional consideration if they would forgo remedies for default
under the Notes. Preferred Communication sent a written offer (the ―Offer Letter‖)
to the noteholders presenting them with two alternatives, one of which promised
additional warrants (the ―Extension Warrants‖) in exchange for the noteholders
extending the repayment date of the Notes indefinitely.1 The appellant
Noteholders accepted Preferred Communication’s offer by returning an acceptance
letter that stated:
Please repay my principal and interest under the Note as soon as the
Company determines it has sufficient cash to pay the Note. The
maturity date of my note is hereby extended to the date such
repayment is made, with the understanding that in return for the
extension I will receive warrants for 225 shares of Class B Common
Stock ($5.00 exercise price and five year exercise term) for every
month between the original maturity date of my Note and the time the
Note is repaid as described in the First Action. The warrants will be
cumulated and issued to me on the date the Note is repaid in full.2
A plain reading of this amendment to the Notes indicates that when Preferred
Communication repaid the Notes, in addition to paying principal and interest, it
was also required to issue the Extension Warrants.
1
The second option provided that the noteholders could convert their Notes into Series B
Preferred Stock.
2
App. to Appellant’s Opening Br. at A87 (Ex. 2 to Plaintiffs’ First Amended Complaint, dated
May 15, 2015) [hereinafter Offer Letter].
2
In 2013, Preferred Communication sold most of its assets to Sprint
Corporation for approximately $60 million, which triggered its obligation to pay
off the Notes, as amended by the Offer Letter. Certain noteholders, including the
appellant Noteholders, sued Preferred Communication in Texas, bringing claims to
collect their principal, interest, and Extension Warrants. Preferred Communication
and the Texas plaintiffs settled the claims for outstanding principal and interest in
exchange for an immediate cash payment, and they agreed to litigate the claim for
the Extension Warrants in the Court of Chancery. The settlement agreement stated
that the Noteholders ―shall retain any claim to fees and costs related to their claim
for warrants incurred after the [the effective date of the settlement agreement] to be
paid, if at all, in accordance with the terms of the [Notes].‖3
The Noteholders then moved for summary judgment in the Court of
Chancery, arguing that Preferred Communication breached its obligations under
the Notes by failing to issue the Extension Warrants. The Court of Chancery
granted the motion in part,4 explaining ―[t]he contract at issue consists of the Notes
3
Id. at A162 (Ex. 17 to Plaintiffs’ First Amended Complaint, dated May 15, 2015) [hereinafter
Settlement Agreement].
4
The Court of Chancery granted summary judgment in favor of seven plaintiffs. Id. at 269–71
(Order Granting in Part Plaintiffs’ Motion for Summary Judgment, dated June 4, 2015)
[hereinafter Summary Judgment Order]. After newly discovered evidence was brought to the
attention of the Court of Chancery, it vacated the partial summary judgment order as to three
plaintiffs and entered summary judgment in favor of one plaintiff. Washington et al. v. Preferred
Communication, C.A. No. 10810 (Del. Ch. Sept. 10, 2015) (ORDER). The Noteholders
comprise the five plaintiffs who ultimately obtained summary judgment in their favor. The
3
as modified by the Offer Letter,‖5 and Preferred Communication ―failed to issue the
Extension Warrants, resulting in breach.‖6 The Court of Chancery concluded that
―[Preferred Communication] promised warrant coverage as a component of the
plaintiffs’ return and is now obligated to provide it.‖7 Preferred Communication
did not appeal this ruling.
Thereafter, the Noteholders filed a motion seeking attorneys’ fees and
expenses for fees incurred in the Court of Chancery action.8 They based their
argument for fees exclusively on the first sentence of Section 6.2 of the Notes—the
fee-shifting provision.9 Section 6.2 provides:
Should any indebtedness evidenced by this Note be collected by
action at law, or in bankruptcy, receivership, or other court
proceedings, or should this Note be placed in the hands of attorneys
for collection after default, Maker agrees to pay, upon demand by
Holder, in addition to principal and interest and other sums, if any,
due and payable hereon, court costs and reasonable attorneys’ fees
and other reasonable collection charges. Should Maker be required
to bring any action to enforce its rights under this Note, it shall be
remaining plaintiffs dismissed their claims. Washington et al. v. Preferred Communication, C.A.
No. 10810 (Del. Ch. Mar. 4, 2016) (ORDER).
5
App. to Appellant’s Opening Br. at A266 (Summary Judgment Order) (emphasis added).
6
Id. at A272.
7
Id. at A275 (emphasis added).
8
Preferred Communication paid the attorneys’ fees incurred in the Texas action as part of the
settlement agreement. Id. at A162 (Settlement Agreement).
9
The Noteholders’ motion for fees stated: ―The Notes at issue each contain one-sided fee
shifting provisions. Plaintiffs, as successful parties, are entitled to recover their fees and costs.
[Preferred Communication] is not entitled to recover costs and fees from the dismissed plaintiffs
because it did not bring an action to enforce its rights under the Notes.‖ Id. at A326 (Plaintiffs’
Motion for Fees and Expenses, dated June 21, 2016).
4
entitled to an award of its court costs and reasonable attorneys’ fees in
such action.10
The Court of Chancery originally granted the Noteholders’ request for fees
of $166,313.26, but, in doing so, relied on the second sentence of Section 6.2. The
Court of Chancery explained:
Section 6.2, entitled ―Collection,‖ contains two sentences. The first
deals with the indebtedness evidenced by the Note and the collection
of that indebtedness. The second is broader. It states, ―Should Maker
be required to bring any action to enforce its rights under this Note, it
shall be entitled to an award of its court costs and reasonable
attorneys’ fees in such action.‖ The right to the Extension Warrants
was a right that the Maker received under the Note. This action was
brought to enforce that right. [Preferred Communication] has a fair
point that this enforcement action did not fall within the first sentence.
Instead, it fell within the second sentence.
The court has reviewed the fees and expenses sought. They are
reasonable given the nature and scope of the action. In the context
presented, they are adequately supported.11
Preferred Communication then filed a motion for reargument, arguing that the
second sentence of Section 6.2 only permitted fees in favor of Preferred
Communication. The Noteholders responded respectfully by attempting to defend
the Court of Chancery’s ruling as to the second sentence of Section 6.2 by the only
reasoning that they could,12 but they primarily argued that the Court of Chancery
10
Id. at A78 (Ex. 1 to Plaintiffs’ First Amended Complaint, dated May 15, 2015) [hereinafter
Promissory Note] (emphasis added).
11
Ex. A to Appellant’s Opening Br. (Order Granting Plaintiffs’ Motion for Fees and Expenses,
dated July 12, 2016).
12
The Noteholders alleged that ―[i]n relying on the second sentence of Section 6.2 to award
attorneys’ fees, the Court correctly followed a trend towards mutual fee-shifting provisions.‖
5
should uphold its award of attorneys’ fees based on the first sentence of Section
6.2, as they had originally urged in their motion for fees and expenses.
But, the Court of Chancery instead granted Preferred Communication’s
motion—thereby reversing itself—and explained:
The two sentences in Section 6.2 are worded differently. The second is
broader, but it grants rights only to the Maker. The movant is correct
that the Maker is the defendant, not the plaintiff. The plaintiff’s fee-
shifting rights extend only to collection efforts.13
On appeal, the Noteholders argue that the Court of Chancery erred in
interpreting Section 6.2. The first sentence of Section 6.2 provides that fee shifting
will occur if either of two conditions is satisfied: (1) ―[s]hould any indebtedness
evidenced by this Note be collected by action at law, or in bankruptcy,
receivership, or other court proceedings‖; or (2) ―should this Note be placed in the
hands of attorneys for collection after default.‖14 The Noteholders argue that both
conditions were satisfied here, providing two bases for their recovery.
First, the Noteholders argue that Preferred Communication’s failure to issue
the Extension Warrants created a debt, which the Noteholders collected through a
court proceeding. The Noteholders allege that—contrary to Preferred
App. to Appellant’s Opening Br. at A357 (Plaintiffs’ Opposition to Defendant’s Motion for
Reargument, dated July 25, 2016). As explained at oral argument, the Noteholders were
―surprised‖ by the Court of Chancery’s reasoning when it originally granted the fee request
based on the second sentence of Section 6.2. Oral Argument at 5:32, Washington, et al. v.
Preferred Communication, No. 436, 2016 (Del. Feb. 15, 2017) [hereinafter Oral Argument].
13
Ex. B to Appellant’s Opening Br. (Order Granting Defendant’s Motion for Reargument under
Rule 59(f), or, Alternatively, for Relief from Clerical Error or Oversight under Rule 60(a)).
14
App. to Appellant’s Opening Br. at A78 (Promissory Note) (emphasis added).
6
Communication’s assertion—the term ―any indebtedness‖ is a broad term that
easily encompasses the Extension Warrants.
Even if the term ―any indebtedness‖ originally only applied to principal and
interest, as Preferred Communication suggests, the Noteholders maintain that it
still encompasses the Extension Warrants because the Notes, as amended by the
Offer Letter, promised the Noteholders the Extension Warrants as part of their
return in exchange for them extending the maturity date of the Notes indefinitely.
Indeed, the Court of Chancery found that ―[t]he contract at issue consists of the
Notes as modified by the Offer Letter.‖15 And, as the Court of Chancery also
found, ―[Preferred Communication] promised warrant coverage as a component of
the plaintiffs’ return and is now obligated to provide it.‖16 Thus, the Noteholders
argue that ―any indebtedness‖ includes the Extension Warrants, and, therefore,
they are entitled to attorneys’ fees because they were forced to collect an
indebtedness evidenced by the Notes through a court proceeding.
Second, the Noteholders argue that Section 6.2 applies because Preferred
Communication was in default by not issuing the Extension Warrants, and the
Notes were placed in the hands of attorneys for collection. Section 5 of the
Notes—which defines ―Event of Default‖—includes ―Maker fail[ing] to duly
observe, perform or comply with any covenant, agreement or provision of this
15
Id. at A266 (Summary Judgment Order).
16
Id. at A275 (emphasis added).
7
Note . . . and such failure remains umremedied for a period of ten (10) days after
written notice of such failure is given by Holder to Maker.‖17 Under the Notes, as
amended by the Offer Letter, Preferred Communication was required to issue the
Extension Warrants to the Noteholders at the time it repaid the Notes. And, as the
Court of Chancery found, Preferred Communication failed to issue the Extension
Warrants at that time, resulting in a breach of its obligations under the Notes.
Thus, the Noteholders maintain that Preferred Communication defaulted by not
issuing the Extension Warrants and, therefore, they are entitled to attorneys’ fees
incurred in collecting the Extension Warrants.
Preferred Communication argues that the Noteholders are not entitled to
attorneys’ fees because, under the Notes as originally drafted, ―any indebtedness‖
and ―collection‖ only apply to monetary amounts, and the Offer Letter did not
amend Section 6.2 to include attorneys’ fees for the Extension Warrants. Preferred
Communication asserts that because Section 6.2 states ―Maker agrees to pay . . . in
addition to principal and interest and other sums,‖ it only permits fee-shifting
when the Noteholders collect certain monetary amounts—not warrants.18 And,
because the Notes as originally drafted promised warrants upon execution, Section
6.2 could have been drafted to include ―principal and interest and warrants and
other sums,‖ but it was not. Thus, Preferred Communication maintains that the
17
Id. at A78 (Promissory Note) (emphasis added).
18
Id. (emphasis added).
8
term ―any indebtedness‖ does not encompass the Extension Warrants. Preferred
Communication also argues that even if the Extension Warrants did constitute
indebtedness, they were not ―evidenced by the Notes‖ because the Extension
Warrants were promised in the Offer Letter, which was an ―ancillary agreement.‖19
Finally, Preferred Communication asserts that the use of the term ―collection‖—
which is commonly used to refer to the collection of monetary amounts—indicates
that fee shifting does not apply to an action to compel Preferred Communication to
issue warrants.
We agree with the Noteholders. The Court of Chancery found that ―[t]he
contract at issue consists of the Notes as modified by the Offer Letter.‖20 Thus, the
Notes were modified to include the Extension Warrants. And, by its plain terms,
the first sentence of Section 6.2 of the Notes entitles the Noteholders to attorneys’
fees incurred in enforcing the Notes in the Court of Chancery.
The first half of the first sentence of Section 6.2 entitles noteholders to
attorneys’ fees ―[s]hould any indebtedness evidenced by this Note be collected by
action at law, or in bankruptcy, receivership, or other court proceedings.‖21 Here,
the Noteholders filed suit in the Court of Chancery to enforce their rights to the
Extension Warrants. Preferred Communication’s insistence that the Extension
19
Appellee’s Answering Br. at 15.
20
App. to Appellant’s Opening Br. at A266 (Summary Judgment Order) (emphasis added).
21
Id. at A78 (Promissory Note) (emphasis added).
9
Warrants do not qualify as indebtedness is unconvincing. The Noteholders were
promised the Extension Warrants as consideration in exchange for extending the
maturity date of the Notes indefinitely after Preferred Communication defaulted.
The fact that this consideration was in the form of additional warrants and not a
specific sum of money is irrelevant. Preferred Communication was required to
issue the Extension Warrants at the time it repaid the Notes, and, as the Court of
Chancery found, its failure to do so resulted in a breach. Thus, Preferred
Communication was indebted to provide the Noteholders their Extension Warrants.
Equally applicable to the Noteholders’ argument is the latter half of the first
sentence of Section 6.2, which entitles noteholders to attorneys’ fees if ―this Note
be placed in the hands of attorneys for collection after default.‖22 Section 5 of the
Notes defines default as—in addition to failure to pay principal or interest—the
failure to ―observe, conform or comply with any covenant, agreement or provision
of this Note.‖23 As the Court of Chancery found, under the Notes, as amended by
the Offer Letter, the Noteholders were promised Extension Warrants, which
Preferred Communication was required to issue ―on the date the Note is repaid in
full.‖24 And, as the Court of Chancery also found, ―[Preferred Communication]
has repaid the [Notes] but failed to issue the Extension Warrants, resulting in
22
Id.
23
Id.
24
Id. at A87 (Offer Letter).
10
breach.‖25 By failing to issue the Extension Warrants at the time it repaid the
Notes, Preferred Communication defaulted because it failed to ―observe, conform
or comply with any covenant, agreement or provision of this Note.‖26 Thus, the
Noteholders are entitled to the attorneys’ fees they incurred in bringing a suit to
force Preferred Communication to issue the Extension Warrants.
Finally, we do not find convincing Preferred Communication’s argument
that the Noteholders cannot recover their attorneys’ fees because the Extension
Warrants do not qualify as ―other sums‖ under Section 6.2, which states ―[s]hould
any indebtedness evidenced by this Note be collected by action at law . . . Maker
agrees to pay, upon demand by Holder, in addition to principal and interest and
other sums, if any, due and payable hereon, court costs and reasonable attorneys’
fees and other reasonable collection charges.‖27 The Notes were amended to
include the Extension Warrants in exchange for the Noteholders extending the
maturity date of the Notes indefinitely. Thus, although Section 6.2 may not have
originally encompassed warrants, once the Notes were amended, Preferred
Communication owed the Noteholders not just principal and interest, but also the
Extension Warrants.
25
Id. at A72 (Summary Judgment Order).
26
Id. at A78 (Promissory Note).
27
Id.
11
Preferred Communication tries to narrow the broad and undefined term ―any
indebtedness‖ to only monetary amounts by arguing that originally the only
indebtedness under the Notes was principal and interest because the original
warrants the Notes promised were issued at the time the Notes were executed.
Thus, Preferred Communication argues that the capacious phrase ―any
indebtedness‖ does not in fact mean that, but only means any indebtedness in the
form of monetary payments of principal and interest. In arguing this point,
Preferred Communication admits that, when the Noteholders were encouraged by
Preferred Communication to defer the enforcement of their rights for principal and
interest by extending the maturity date of the Notes indefinitely in exchange for the
Extension Warrants, Preferred Communication did not tell the Noteholders that if
they would have to pursue Preferred Communication in the context of a future
default to recover the Extension Warrants, that the plain promise of attorneys’ fees
in Section 6.2 would not be applicable.28 Preferred Communication also further
admits that the Noteholders would not have found it comforting if the company
had told them that they would not have the advantage of the fee-shifting provision
of Section 6.2 if they had to chase down Preferred Communication to get the
28
Oral Argument at 24:21-26:00.
12
Extension Warrants, and they might not have been willing to give Preferred
Communication breathing room to address its original default.29
By its use of the clear term ―any indebtedness,‖ the first sentence of Section
6.2 promises the Noteholders that they will be able to recover for their enforcement
efforts if they have to secure that payment in court. The fact that part of the first
sentence refers to the most obvious form of indebtedness does not undercut the
reality that the Extension Warrants promised to the Noteholders in the Notes, as
amended by the Offer Letter, are plainly a form of indebtedness. The Court of
Chancery’s own summary judgment ruling, which Preferred Communication has
not appealed, recognizes that inescapable reality.
Likewise, although the term ―collection‖ might be most usually associated
with collecting on the principal and interest under a note, it also sensibly can be
understood as applying in any situation when a noteholder has been promised
payments of any kind under a note and must take action to enforce that promise.
After the Offer Letter amended the Notes, the Noteholders were due not just
principal and interest, but also the Extension Warrants. In our view, Preferred
Communication’s attempt to narrow the plain words of the promise it made to the
Noteholders is unconvincing and requires us to carve out exceptions to the
unambiguous terms of Section 6.2. Furthermore, when Preferred Communication
29
Id. at 27:20.
13
entered into the settlement agreement with the Noteholders in resolving the Texas
litigation, at no point did it suggest that by separating the claim for the Extension
Warrants from the claims for principal and interest that the Noteholders would lose
the ability to secure their attorneys’ fees. Indeed, the settlement agreement itself
stipulated that none of the releases or dismissals in the agreement had any effect on
―any claim by the [Noteholders] for future collection costs incurred with respect to
their outstanding claims for warrants.‖30
In any event, Preferred Communication is also poorly positioned to argue
this point for another reason. The undisputed record indicates that Preferred
Communication drafted both the Notes and the Offer Letter that amended the
Notes without negotiating with the Noteholders. Even if the Notes, as amended by
the Offer Letter, are somehow ambiguous, the Noteholders have offered a
reasonable interpretation of Section 6.2 that supports an award of fees to them.
Because any ambiguity must be resolved against Preferred Communication,
Preferred Communication would still owe the Noteholders their attorneys’ fees and
costs even if its reading of Section 6.2 was plausible.31
30
App. to Appellant’s Opening Br. at A160 (Settlement Agreement) (emphasis added). Notably,
Preferred Communication suggested at oral argument that had the claim for the Extension
Warrants not been separated from the claims for principal and interest, the Noteholders may have
been able to collect all of their attorneys’ fees because it would have been difficult for a court to
carve out the fees attributable to the Extension Warrants and a court may have been unwilling to
do so. Oral Argument at 19:20.
31
See Bank of N.Y. Mellon v. Commerzbank Capital Funding Trust II, 65 A.3d 539, 551 (Del.
2013) (noting that ambiguities in a contract will be resolved against the drafter).
14
For the foregoing reasons, the judgment of the Court of Chancery is reversed
and the matter is remanded to the Court of Chancery to enter an award of
attorneys’ fees for the fees incurred in litigating the merits of the case plus the fees
incurred in litigating the fee request.
15