Nicholas Day v. Diligence, Inc.

COURT OF CHANCERY
OF THE
SAM GLASSCOCK III STATE OF DELAWARE COURT OF CHANCERY COURTHOUSE
VICE CHANCELLOR 34 THE CIRCLE
GEORGETOWN, DELAWARE 19947
Date Submitted: April 29, 2020
Date Decided: May 15, 2020
Ashley R. Altschuler, Esq. Paul J. Lockwood, Esq.
Ethan H. Townsend, Esq. Daniel S. Atlas, Esq.
Harrison S. Carpenter, Esq. SKADDEN, ARPS, SLATE, MEAGHER &
Aaron P. Sayers, Esq. FLOM LLP
MCDERMOTT WILL & EMERY LLP One Rodney Square
The Nemours Building P.O. Box 636
1007 North Orange Street, 4th Floor Wilmington, Delaware 19899
Wilmington, Delaware 19801
RE: Nicholas Day v. Diligence, Inc.
C.A. No: 2020-0076-SG
Dear Counsel:
The entity Defendant (“Diligence”) in this action for advancement of legal
fees and expenses has objected to the individual Plaintiff’s first and second invoices
(the “Invoices”). The Invoices total $788,377.52.1 Certain of the Defendant’s
objections have been resolved. Remaining is the Defendant’s challenge to the
reasonableness of the fees and expenses sought by the Plaintiff, and the Plaintiff’s
own challenge to the timing of payment for advanceable expenses.
1
Def. Diligence Inc.’s Objections to Pl.’s First and Second Invoices, D.I. 11, Ex. A, at 8; Def.
Diligence Inc.’s Objections to Pl.’s First and Second Invoices, D.I. 11, Ex. B, at 16.
The Plaintiff, as the party making a fee application, bears the burden of
justifying the amounts sought, and must provide “a good faith estimate” of the fees
and expenses sought to be approved.2 “This Court has discretion when determining
a reasonable fee award.”3 To assess a fee’s reasonableness, I am to consider the
factors set forth in the Delaware Lawyers’ Rules of Professional Conduct, including
“the time and labor required, the novelty and difficulty of the questions involved,
and the skill requisite to perform the legal service properly” and “the amount
involved and the results obtained.”4
In the substantive action underlying this advancement action, Diligence v.
Day, 2020-0041-SG, Diligence alleges that Day breached fiduciary duties owed to
the entity and pleads millions of dollars in damages related to alleged self-dealing
transactions.5 Diligence seeks an order requiring Day to “disgorge all compensation
received as an officer, director or employee of the Company since he began
breaching his fiduciary duties,” and seeks damages equaling “the full value of
potential M&A activity that could have brought value to the stockholders,” and
Diligence’s “fees and expenses incurred in pursuit of this action, including attorneys’
2
Citadel Hldg. Corp. v. Roven, 603 A.2d 818, 823–24 (Del. 1992); Fasciana v. Elec. Data Sys.
Corp., 829 A.2d 160, 177 (Del. Ch. 2003).
3
Danenberg v. Fitracks, Inc., 58 A.3d 991, 995 (Del. Ch. 2012) (citing Mahani v. EDIX Media
Gp., Inc., 935 A.2d 242, 245 (Del. 2007)).
4
Mahani, 935 A.2d at 245–6; see Del. Lawyers' Rules of Prof’l Conduct R. 1.5(a)(1).
5
Diligence v. Day, 2020-0041-SG, Verified Compl., D.I. 1, ¶¶ 91–114.
2
fees.”6 Plaintiff’s counsel, a member of the Delaware bar, has submitted an affidavit
stating that “[i]n [his] professional judgment, having reviewed the relevant invoices
in detail, all fees and expenses sought by Day pursuant his advancement demand,
were reasonably incurred in defense of the [substantive action].”7 Plaintiff’s counsel
has also submitted a letter contending that “Day’s legal spend . . . is more than
commensurate with the dispute Diligence brought.”8
Upon review of the Invoices, I find that the hourly rate charged by Plaintiff’s
counsel is reasonable, and there is no suggestion that any amount invoiced does not
reflect legal services actually performed. I also find that the amounts are reasonable
in light of the damages pled by Diligence in the substantive action. Diligence
contends that the main thrust of its complaint against Day is that he purloined an
entity belonging equitably to Diligence. It suggests that entity is worth less than the
combined fees of Plaintiff’s and Defendant’s counsel already incurred. It contends
that I should deny Day’s fees as unreasonable based on the “real” amount at issue,
and that if I fail to do so, economic reality may prevent it from seeking justice here.
I am aware of the expensive nature of corporate litigation, and sympathetic to
Diligence’s concerns. However, Diligence has bound itself to Day, via the
6
Id. at 31–33.
7
Letter, D.I. 20, Ex. A, ¶ 2.
8
Letter, D.I. 20, at 4. I assume that, in using the phrase “more that commensurate,” counsel meant
to convey that the legal effort was appropriate and that even more effort could be justified in light
of the nature of the action.
3
certificate of incorporation, to advance fees, and Diligence framed a complaint
putting Day in legal jeopardy for millions of dollars. Diligence’s dilemma is, at its
base, one common to all plaintiffs; balancing the strength of its case against the cost
of litigation. Here, Day has undertaken to repay amounts advanced that prove not
amenable to indemnification, as the contested fees will if Diligence prevails in its
breach-of-loyalty action.9 In light of the cost of litigation, and in light of its
evaluation of the strength of its case, Diligence must make a business decision on
how to proceed. Having said that, I realize that an advancement or fee-shifting
provision can cause mischief in litigation among undercapitalized litigants. I urge
the Plaintiff to be mindful that I will scrutinize fee applications going forward to
limit the effects of any perverse incentive involved here.
For the forgoing reasons, I find the full amount of the fees invoiced reasonable
and they must be advanced by Diligence.
For his part, Day has sought an order requiring Diligence to pay future
invoices in full no less than 30 days from the date they are submitted by Day to
Diligence.10 Diligence’s certificate of incorporation reads, in pertinent part: “any
advancement of expenses . . . shall be made promptly, and in any event within sixty
(60) days, after the written notice of the director, officer, employee or agent seeking
9
See 8 Del. C. § 145.
10
Pl. Nicholas Day’s Opp’n to Def.’s Objections to the Reasonableness of Pl.’s Fees, D.I. 12, ¶
27.
4
such . . . advancement of expenses.”11 Day contends that 60 days is not “prompt”
within the meaning of Diligence’s certificate of incorporation, notwithstanding the
clause: “in any event within sixty (60) days,” and argues that a 60-day
reimbursement schedule would be unfair and out of alignment with the purposes of
his advancement rights. Day’s advancement rights, I note, do not arise in equity, but
instead from the certificate itself, and are subject to interpretation under contract
principles. To my mind, Day has failed to establish a right to deviate from the
express sixty-day payment period limitation in Diligence’s certificate of
incorporation, and payment within this period is presumed timely. Therefore, I deny
Day’s request that I mandate payment of advanceable fees and expenses prior to 60
days after submission to Diligence.
To the extent the foregoing requires an order to take effect, it is SO
ORDERED.
Sincerely,
/s/ Sam Glasscock III
Sam Glasscock III
11
Pl. Nicholas Day’s Verified Compl. for Advancement against Def. Diligence, Inc., D.I. 1, Ex.
A, Art. Tenth, Section F.
5