Zohar II 2005-1, Limited v. FSAR Holdings, Inc. ( 2017 )

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
417 S. State Street
JOSEPH R. SLIGHTS III Dover, Delaware 19901
VICE CHANCELLOR Telephone: (302) 739-4397
Facsimile: (302) 739-6179
Date Submitted: April 17, 2017
Date Decided: April 17, 2017
Kenneth J. Nachbar, Esquire Kevin G. Abrams, Esquire
Morris, Nichols, Arsht & Tunnell LLP Abrams & Bayliss LLP
1201 North Market Street 20 Montchanin Road, Suite 200
Wilmington, DE 19801 Wilmington, DE 19807
Re: Zohar II 2005-1, Limited v. FSAR Holdings, Inc.
C.A. No. 12946-VCS
Dear Counsel:
On April 4, 2017, the Court issued an oral ruling denying a motion to sever or
stay counterclaims and defenses brought by Defendant, Counterclaim Plaintiff and
Third-Party Plaintiff, Lynn Tilton (the “Motion”). Specifically, Ms. Tilton urged
the Court to preclude the parties from presenting evidence relating to, or asking the
Court to adjudicate the issue of, who, as among the parties to this litigation, are the
beneficial owners of certain equity interests in FSAR Holdings, Inc., Glenoit
Universal Ltd. and UI Acquisition Holding Co. (together, the “Defendant
Companies”). According to Ms. Tilton, this issue is highly complex and well
Zohar II 2005-1, Limited v. FSAR Holdings, Inc.
C.A. No. 12946-VCS
April 17, 2017
Page 2
beyond the bounds of this summary proceeding which Plaintiffs initiated under 8
Del. C. §§ 211 & 225 to determine the properly-elected members of the board of
directors of each of the Defendant Companies. The Court disagreed and denied the
Motion.
Ms. Tilton has now petitioned this Court to certify an expedited interlocutory
appeal of its decision to deny the Motion. The petition was filed on the night of
April 11, 2017, just one week before the trial of this Section 225 action is set to
begin. Plaintiffs oppose the petition.
Delaware Supreme Court Rule 42(b)(i) provides that “[n]o interlocutory
appeal will be certified by the trial court or accepted by [the Delaware Supreme]
Court unless the order of the trial court decides a substantial issue of material
importance that merits appellate review before a final judgment.” Instances where
the trial court certifies an interlocutory appeal “should be exceptional, not routine,
because [interlocutory appeals] disrupt the normal procession of litigation, cause
delay, and can threaten to exhaust scarce party and judicial resources.”1 For this
1
Del. Supr. Ct. R. 42(b)(ii).
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reason, “parties should only ask for the right to seek interlocutory review if they
believe in good faith that there are substantial benefits that will outweigh the certain
costs that accompany an interlocutory appeal.”2 When certifying an interlocutory
appeal, “the trial court should identify whether and why the likely benefits of
interlocutory review outweigh the probable costs, such that interlocutory review is
in the interests of justice. If the balance is uncertain, the trial court should refuse to
certify the interlocutory appeal.”3
The gravamen of Ms. Tilton’s argument is that the Court should sever the
equity ownership issues from the issues to be tried this week because it would be
unfair (and contrary to due process) to require that she defend her claim to the equity
in the Defendant Companies in a summary proceeding. She contends that the only
issues that should be tried now are whether she, as a director of each of the Defendant
Companies, or as former collateral manager of the Zohar Funds, properly executed
irrevocable proxies that granted to her exclusive voting control in each entity, and
2
Id.
3
Del. Supr. Ct. R. 42(b)(iii).
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C.A. No. 12946-VCS
April 17, 2017
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whether the irrevocable proxies nullify the consents that the Plaintiffs delivered to
the Defendant Companies to effect changes on their boards of directors. Yet, as I
noted in my oral ruling, Ms. Tilton cannot dispute that the Plaintiffs raised the equity
ownership issue in their Complaint and tied the issue to the relief they are seeking
here, Ms. Tilton raised the issue in her counterclaims, and the parties have engaged
in extensive discovery relating to the issue since the outset of this litigation.
Ms. Tilton maintains that she alone controls the equity in the Defendant
Companies and will argue, either in these proceedings or later if the issue is severed,
that she alone is entitled to vote the equity interests to elect directors to the boards
of these companies. Ms. Tilton does not deny that the equity ownership issue will
have to be resolved at some point and that the resolution of the issue will affect (and
potentially undo) the resolution of the claims that will remain if the equity ownership
issue is severed. Nevertheless, she contends that the issue is too complicated to
resolve here.4
4
I note that in denying the Motion, I did agree to extend the trial from three days to six
days in order to address Ms. Tilton’s argument that the Court had not allotted enough time
to try both the irrevocable proxy and consent issues and the equity ownership issue.
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C.A. No. 12946-VCS
April 17, 2017
Page 5
What Ms. Tilton proposes is a piecemeal approach to the litigation that will
not advance the interests of justice but, instead, will increase costs and burdens.5 If
the Court agrees with Plaintiffs that Ms. Tilton’s attempt to grant to herself
irrevocable proxies to secure voting rights in connection with each of the Defendant
Companies was ineffective, and that the consents to remove and replace members of
the board of directors of each of the Defendant Companies were effective, the core
issue in this Section 225 action (who are the rightful members of the boards) will
still remain in flux. To the extent Ms. Tilton does not prevail on the irrevocable
proxy and consent issues in this trial, she will argue in the next proceeding that the
disposition of the irrevocable proxy and consent issues in Plaintiffs’ favor was
irrelevant since she has been the beneficial owner of the equity interest in the
Defendant Companies all along and, therefore, she alone is and has been authorized
5
Krahmer v. Christie’s Inc., 2006 WL 4782303, at *1 (Del. Ch. June 15, 2006) (denying
certification upon noting that “[c]ertification would likely result in the piecemeal appeal of
factually and legally related issues and would be contrary to the interest of justice and the
orderly procession of matters before this court.”).
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to vote those shares.6 This inevitable next chapter of the parties’ serial litigation
would frustrate one of the principal purposes of this Section 225 action which is “to
afford a procedure for determining expeditiously who are a Delaware corporation’s
de jure managers, in order to resolve uncertainty over who is authorized to manage
the corporation and act on its behalf.”7 Ms. Tilton’s request to sever and stay the
equity ownership issue, if granted, would leave the cloud of uncertainty regarding
the management of the Defendant Companies intact and hovering over all
concerned.
The decision to submit an issue for trial or sever it for later adjudication rests
within the sound discretion of the trial court. Such determinations neither
“determine substantial issues” nor “establish legal rights” that would justify
interlocutory review under Delaware Supreme Court Rule 42(a).8 Under these
6
Of course, as I noted in my ruling on the Motion, it may not be necessary to reach the
equity ownership issue if the Court agrees with Ms. Tilton that her status (and interests) as
director of or collateral manager for the Defendant Companies was adequate to allow her
to execute the irrevocable proxies that she alleges granted her the right to vote shares
registered in the name of the Zohar Funds.
7
Carvel v. Andreas Hldgs. Corp., 698 A.2d 375, 378 (Del. Ch. 1995).
8
Fireman’s Fund Ins. Co. v. Hoechst Celanese Corp., 642 A.2d 836 (TABLE), 1994
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circumstances, I cannot certify that the likely benefits of interlocutory review
outweigh the probable costs. Accordingly, the petition for certification of an
interlocutory appeal must be denied.
IT IS SO ODERED.
Very truly yours,
/s/ Joseph R. Slights III
WL 144314, at *1 (Del. Apr. 22, 1994).