Knott Partners L.P. v. Telepathy Labs, Inc. ( 2022 )

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
Sam Glasscock III CHANCERY COURTHOUSE
VICE CHANCELLOR 34 The Circle
GEORGETOWN, DELAWARE 19947
AND
LEONARD L. WILLIAMS JUSTICE CENTER
500 NORTH KING STREET, SUITE 11400
WILMINGTON, DELAWARE 19980-3734
Date Submitted: July 15, 2022
Date Decided: August 18, 2022
Michael Wagner, Esquire Thomas Macauley, Esquire
Neal Belgam, Esquire Macauley LLC
Jason Miller, Esquire 300 Delaware Avenue, Suite 1018
Smith, Katzenstein & Jenkins LLP Wilmington, Delaware 19801
1000 N. West Street, Suite 1501
Wilmington, Delaware 19801
RE: Knott Partners L.P. v. Telepathy Labs, Inc.,
C.A. No. 2021-0583-SG
Dear Counsel:
This Letter Opinion addresses Plaintiff Knott Partners L.P.’s pending
Interim Fee Petition (the “Motion”). 1 The Motion seeks over $250,000 in
attorney’s fees and expenses associated with a portion of a single count of the
Complaint.2
1
Pl.’s Interim Fee Pet., Dkt. No. 80. This matter remains ongoing; the fee petition here is interim in nature. Such
petitions are disfavored for reasons of judicial and litigants’ economy; nonetheless, since I find the petition readily
resolvable, I address the interim petition here.
2
See Opening Br. in Supp. of Its Interim Fee Appl., Dkt. No. 84 [hereinafter “OB”]; see also Pl. Knott Partners L.P.
Books and Rs. Verified Compl. Against Def. Telepathy Labs, Inc., Dkt. No. 1. The complaint contains plenary
claims in addition to the books and records count; the books and records count was bifurcated out for purposes of
trial, and was further bifurcated for purposes of determining whether the Plaintiff was in fact a stockholder or
beneficial holder entitled to Section 220 rights. That is, the books and records count has not been fully addressed to
date.
The general rule applied to fee awards is the American Rule, which advises
that each party bears its own fees and costs.3 Delaware follows the American
Rule. 4 The American Rule has certain notable exceptions, including the bad faith
exception, the common fund exception and the corporate benefit exception. 5 The
bad faith exception, argued here, is applicable where a losing party has “acted in
bad faith, vexatiously, wantonly, or for oppressive reasons,”6 and “applies only in
extraordinary cases” to prevent future abusive litigation.7 Examples include
parties unnecessarily prolonging or delaying litigation, falsifying records,
knowingly asserting frivolous claims, misleading the court, altering testimony, or
changing position on a contested issue. 8
Here, the Plaintiff argues that Defendant Telepathy Labs, Inc. (“Telepathy”)
acted in bad faith by failing to acknowledge the Plaintiff’s status as a stockholder,
necessitating the first phase of this litigation, where I ultimately issued a post-trial
memorandum opinion determining that the Plaintiff was indeed a stockholder of
Telepathy (the “Memorandum Opinion”). 9 The Memorandum Opinion rested in
part on certain concessions I found Telepathy to have made regarding Knott
Partners’s status as a stockholder, despite the apparent lack of reflection of such
3
See, e.g., Dover Hist. Soc’y, Inc. v. City of Dover Plan. Comm’n, 902 A.2d 1084, 1089 (Del. 2006) (citing Chrysler
Corp. v. Dann, 223 A.2d 384, 386 (Del. 1966)).
4
See id. at 1090.
5
Id. (citing In re First Interstate Bancorp Consol. S’holder Litig., 756 A.2d 353, 357 (Del. Ch. 1999)); id. at 1093.
6
Slawik v. State, 480 A.2d 636, 639 n.5 (Del. 1984) (quoting F.D. Rich Co. v. United States ex rel. Indus. Lumber
Co., 417 U.S. 116, 129 (1974)).
7
Dover Hist. Soc’y, 902 A.2d at 1093.
2
status on the Company’s stock ledger at the time of the original books and records
demand. 10
I have reviewed the papers submitted in connection with the Motion. The
papers, and the record presented at the November 2021 trial, are insufficient to
demonstrate bad faith by Telepathy. As Telepathy points out, the Plaintiff’s
argument—whether it was a stockholder of record or a beneficial stockholder at
the time it issued its demand—underwent evolution throughout the pre-trial stages
of this litigation. 11 Ultimately, the “necessity to litigate” the question of
stockholder status, as the Plaintiff terms it, is attributable to both parties—not
merely Telepathy—because of the various different arguments the Plaintiff raised
in support of its claim. 12 The question of whether Knott Partners was a beneficial
owner of Telepathy stock, as construed in conjunction with the statutory language
of Section 220 of the Delaware General Corporation Law, was clearly a genuinely
contested issue. I found by clear and convincing evidence in the Memorandum
Opinion that Knott Partners was in fact a stockholder for purposes of Section 220,
in a tightly cabined13 decision that involved extension of prior Section 220
caselaw. Given the Memorandum Opinion’s posture, I cannot find that Telepathy
8
See id. (quoting Beck v. Atlantic Coast PLC, 868 A.2d 840, 850–51 (Del. Ch. 2005)).
9
See, e.g., Knott Partners L.P. v. Telepathy Labs, Inc., 2021 WL 5493092 (Del. Ch. Nov. 23, 2021); OB 8.
10
See generally id. at *5.
11
Def. Telepathy Labs, Inc.’s Answering Br. in Opp’n to Pl.’s Interim Fee Pet. 10–11, Dkt. No. 88.
12
OB 1.
13
Or so I hope.
3
engaged in bad faith conduct during this phase of the litigation, even though the
Memorandum Opinion rested in part upon concessions by Telepathy.
Because the Plaintiff has not shown bad faith in connection with its
contested status as a Telepathy stockholder, it cannot avail itself of the bad faith
exception to the American Rule with respect to this issue, either now or at the
conclusion of this action.
The Motion is denied. To the extent the foregoing requires an order to take
effect, IT IS SO ORDERED.
Sincerely,
/s/ Sam Glasscock III
Vice Chancellor Sam Glasscock III
4