In re Rural/Metro Corporation Stockholders Litigation

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE RURAL/METRO CORPORATION ) Consolidated
STOCKHOLDERS LITIGATION ) C.A. No. 6350-VCL
OPINION
Date Submitted: July 28, 2014
Date Decided: October 10, 2014
Joel Friedlander, Jeffrey M. Gorris, FRIEDLANDER & GORRIS, P.A., Wilmington,
Delaware; Randall J. Baron, David Knotts, ROBBINS GELLER RUDMAN & DOWD
LLP, San Diego, California; Attorneys for Plaintiffs.
Patricia R. Urban, Seton C. Mangine, PINCKNEY, WEIDINGER, URBAN & JOYCE
LLC, Wilmington, Delaware; Alan J. Stone, MILBANK, TWEED, HADLEY &
McCLOY LLP; Attorneys for Defendant RBC Capital Markets, LLC.
LASTER, Vice Chancellor.
The post-trial decision in this action held RBC Capital Markets, LLC (―RBC‖)
liable to a class of stockholders of Rural/Metro Corporation (―Rural‖ or the ―Company‖)
for aiding and abetting breaches of fiduciary duty by the board of directors of Rural (the
―Board‖). In re Rural/Metro Corp. S’holders Litig., 88 A.3d 54 (Del. Ch. 2014)
[hereinafter ―Liability Opinion‖]. This decision sets the amount of RBC‘s liability to the
class at $75,798,550.33, representing 83% of the total damages that the class suffered.
Pre- and post-judgment interest is awarded at the legal rate from June 30, 2011, until the
date of payment.
I. FACTUAL BACKGROUND
This decision relies on the facts as found in the Liability Opinion. As to new issues
not reached in the Liability Opinion, the facts are drawn from the evidentiary record
created at trial and finalized on December 17, 2013, when the court denied Rural‘s
application to supplement the record. In re Rural/Metro S’holders Litig., 2013 WL
6634009 (Del. Ch. Dec. 17, 2013) [hereinafter ―Trial Record Opinion‖].
A. The Merger
On March 28, 2011, Rural announced that it was being acquired by Warburg
Pincus LLC (―Warburg‖) in a transaction that implied an equity value for the Company
of $437.8 million (the ―Merger‖). Two stockholders filed lawsuits challenging the
Merger, which were consolidated into this proceeding. On June 30, 2011, the Merger
closed, and each publicly held share of Rural common stock was converted into the right
to receive $17.25 in cash.
1
The original complaint named as individual defendants Eugene Davis, Earl
Holland, Conrad Conrad, Henry Walker, Christopher Shackelton, Robert Wilson, and
Michael DiMino. Each served as a member of the Board before the Merger. DiMino was
Rural‘s President and CEO; the other individual defendants were outside directors. The
complaint contended that the individual defendants breached their fiduciary duties in two
ways: first, by making decisions that fell outside the range of reasonableness during the
process leading up to the Merger and when approving the Merger (the ―Sale Process
Claim‖), and second, by failing to disclose material information in the definitive proxy
statement (the ―Proxy Statement‖) that the Company issued in connection with the
Merger (the ―Disclosure Claim‖). The complaint also named as defendants Warburg and
its two acquisition subsidiaries and contended that they aided and abetted the individual
defendants‘ breaches of fiduciary duty. Oddly, the complaint named Rural itself as a
defendant, even though the complaint only asserted claims for breach of fiduciary duty
and aiding and abetting breaches of fiduciary duty. Neither species of claim can be
asserted against the corporation whom the fiduciaries serve.
On February 10, 2012, the plaintiffs filed an amended complaint that continued to
assert both the Sale Process Claim and the Disclosure Claim, but modified those theories
and added more supporting allegations. The amended complaint omitted the claim against
Warburg and its acquisition subsidiaries and dropped Wilson from the list of individual
defendants, because he had not voted on the Merger.
On August 29, 2013, the plaintiffs filed a second amended complaint that added
claims against RBC and Moelis & Company LLC (―Moelis‖). RBC acted as Rural‘s lead
2
financial advisor during the process that led to the Merger. Moelis served as Rural‘s
secondary financial advisor in a role junior to RBC. The second amended complaint
contended that RBC and Moelis aided and abetted the individual defendants in breaching
their fiduciary duties. It remained the operative pleading through trial.
On October 24, 2012, the court entered a scheduling order setting trial for May 6-
9, 2013. During the pre-trial proceedings, the court granted a contested motion for class
certification. The class was defined as
all holders of common stock of Rural Corporation at any time from March
28, 2011 through and including June 30, 2011, whether beneficial or of
record, including their legal representatives, heirs, successors in interest,
transferees and assigns of such foregoing holders, excluding the
Defendants, Warburg Pincus, LLC, and Coliseum Capital Management,
LLC, and their associates, affiliates, legal representatives, heirs, successors
in interest, transferees and assignees.
Dkt. 185, ¶ 1 (the ―Class‖). The parties have stipulated that the Class comprises
21,900,133 shares.
B. The Agreements In Principle
On April 8, 2013, all of the parties filed pre-trial opening briefs, and the case
appeared to be headed for trial against all of the defendants. On April 25, all of the parties
other than Moelis filed pre-trial answering briefs. By letter, the plaintiffs explained that
they had reached an agreement in principle with Moelis on a settlement that contemplated
a payment of $5 million to the Class. The plaintiffs asked the court to sever the claims
against Moelis and to excuse Moelis from attending trial. The letter proposed that if the
settlement with Moelis was later terminated or not approved, then the plaintiffs and
Moelis would have a separate trial on the claims against Moelis.
3
The plaintiffs‘ letter attached a term sheet reflecting the agreement in principle,
which included the following points:
2. Moelis denies all allegations of wrongdoing and liability to Plaintiff
and the class, and the settlement does not constitute any admission
of wrongdoing or liability.
3. All claims against Moelis to be dismissed with prejudice.
4. Moelis to be given a general release on behalf of all Class members.
5. Plaintiff and the Class agree, pursuant to 10 Del. C. § 6304(b), that
the damages recoverable against all the other tortfeasors will be
reduced to the extent of the pro rata share of Moelis.
6. Moelis has the right (but not the obligation) to terminate the
settlement if the Court does not enter a final order as part of final
approval of the settlement (a) barring any claims against Moelis by
any other alleged tortfeasor for contribution (whether denominated
as contribution, indemnification or otherwise); and (b) expressly
preserving such rights as Moelis may have to contractual
indemnification from Rural. . . .
Dkt. 251.
On April 26, 2013, the court held a teleconference to discuss the Moelis
settlement. The other defendants explained that they had not had time to determine
whether they objected to the proposal to sever the claims against Moelis and to excuse
Moelis from attending trial. The other defendants wanted to consider whether to assert
cross-claims against Moelis for contribution and to evaluate how issues of relative fault
might be addressed. Counsel asked to have until April 29 to respond.
On April 29, 2013, the court held a follow-up teleconference. The individual
defendants informed the court that they had reached an agreement in principle of their
own with the plaintiffs that contemplated a payment of $6.6 million to the Class. RBC
4
then advised the court that it would be amending its answer to add cross-claims for
contribution in accordance with a stipulated procedure. RBC also requested a
continuance, which the plaintiffs opposed. The court took the question of a continuance
under advisement.
On April 30, 2013, the plaintiffs provided the court with a term sheet documenting
their agreement in principle with Rural and the individual defendants, referred to
collectively in the term sheet as the ―Rural/Metro Defendants.‖ The term sheet included
the following provisions:
2. The Rural/Metro Defendants deny all allegations of wrongdoing and
liability to Plaintiff and the Class, and the settlement does not
constitute any admission of wrongdoing or liability.
3. All claims against the Rural/Metro Defendants to be dismissed with
prejudice.
4. The Rural/Metro Defendants to be given a general release on behalf
of all Class members.
5. Plaintiff and the Class agree, pursuant to 10 Del. C. § 6304(b), that
the damages recoverable against all the other tortfeasors will be
reduced to the extent of the pro rata share of the Rural/Metro
Defendants.
6. The Rural/Metro Defendants have the right (but not the obligation)
to terminate the settlement if the Court does not enter a final order as
part of final approval of the settlement barring any claims against the
Rural/Metro Defendants by any other alleged tortfeasor for
contribution.
Dkt. 270. As with Moelis, the plaintiffs proposed to sever the claims against the
Rural/Metro Defendants for potential disposition later if the settlement was not approved.
Rather than excusing the individual defendants from attending trial, the term sheet
5
contemplated that the Rural/Metro Defendants would make DiMino and any other
individual defendant that the plaintiffs might reasonably request available as witnesses.
Later in the day on April 30, 2014, the court issued a letter ruling denying RBC‘s
request for a continuance. On May 2, the court entered an order severing and staying the
claims against the Rural/Metro Defendants. The parties submitted a stipulation and
proposed order severing and staying the plaintiffs‘ claims against Moelis. The stipulation
granted RBC leave to file its cross-claims for contribution. The recitations in the
stipulation included the following:
RBC contends that there was no breach of fiduciary duty or aiding and
abetting such a breach and that the claims against defendants are without
merit, but seeks to amend its answer to assert a cross claim solely for the
purposes of determining at trial the relative degrees of fault for purposes of
10 Del. C. § 6304 in order to secure a reduction of the damages recoverable
against it to the extent of the pro rata share of Moelis and/or the
Rural/Metro Defendants based on relative degrees of fault (the ―Cross
Claim‖).
Dkt. 296. Notably, in this recitation, RBC represented that it was not contending that the
individual defendants breached their fiduciary duties or that Moelis had aided and abetted
any breach. The court entered the order.
As contemplated, RBC filed an amended answer that asserted cross-claims for
contribution against the Rural/Metro Defendants and Moelis. Paragraph 4 of the cross-
claim stated that
RBC denies all liability to Plaintiff. However, in the event any monetary
liability is assessed in favor of Plaintiff for any of the claims asserted in this
Action, RBC asserts a cross claim against the Rural/Metro Defendants and
Moelis solely for purposes of enabling the Court to make an appropriate
determination of the relative degrees of fault as between RBC and the other
defendants for the sole purpose of reducing the damages recoverable
6
against RBC pursuant to 10 Del. C. § 6304 to the extent of the pro rata
share of the other defendants based on relative degrees of fault.
Dkt. 296. Consistent with the stipulation, RBC‘s cross-claim did not actually allege any
wrongdoing by the Rural/Metro Defendants or Moelis that could give rise to liability to
the Class.
As a result of the agreements in principle, the case went to trial solely against
RBC. During trial, RBC did not contend that the individual defendants breached their
fiduciary duties or that Moelis aided and abetted a breach of duty. Rather, RBC
proceeded at trial consistent with the position it staked out in the Pre-Trial Stipulation and
Order: ―RBC disputes Plaintiff‘s claims and contends that . . . the Rural/Metro directors
did not breach their fiduciary duties in connection with the Merger.‖ Dkt. 292 at 2. RBC
did not seek to prove that any of the individual defendants or Moelis were joint
tortfeasors and liable to the plaintiffs for money damages. Nor did RBC seek to establish
that, under principles of relative fault, RBC‘s share of any potential liability should be
reduced and some or all of the other defendants‘ shares of liability increased. In its post-
trial brief, RBC argued only that if it were found liable, then it should be entitled to
contribution.
C. The Settlement
On August 5, 2013, the plaintiffs, the individual defendants, and Moelis submitted
a 38-page Stipulation and Agreement of Compromise and Settlement with a proposed
form of order. Dkt. 323 (the ―Settlement Stipulation‖). The terms of the Settlement
Stipulation were conditioned on court approval.
7
The Settlement Stipulation memorialized the terms of the agreements in principle
by granting expansive releases to Rural, the individual defendants, Moelis, and their
affiliates—but excluding RBC—and foreclosing RBC‘s ability to seek contribution.
Paragraphs 12 and 13 stated:
12. . . . It is the intention of the Settling Parties that the Settlement
eliminate all further risk and liability relating to the Released
Plaintiffs‘ Claims and the Released Settling Defendants‘ Claims and
that the Settlement shall be a final and complete resolution of all
disputes asserted or which could be or could have been asserted with
respect to the Released Plaintiffs‘ Claims and the Released Settling
Defendants‘ Claims, including without limitation any third party
claims for contribution in accordance with 10 Del. C. § 6304 and
any similar laws or statutes; provided, however, that nothing herein
shall release or otherwise affect any claims for contribution or
indemnity between or among Defendants and/or their insurance
carriers.
13. Lead Plaintiff and the Class agree pursuant to 10 Del. C. § 6304(b)
that the damages recoverable against non-settling defendant RBC
and any other alleged tortfeasor will be reduced to the extent of the
pro rata shares, if any, of Moelis and the Rural/Metro Defendants.
Id. at 22-23.
On November 19, 2013, the court conducted a hearing on the settlement. RBC did
not object to the terms of the settlement either before or during the hearing. The court
approved the settlement and entered the proposed form of order, which contained the
following provisions:
16. Any claims against Moelis (and its employees, representatives and
affiliates) by any other alleged tortfeasor for contribution (whether
denominated as contribution, indemnification or otherwise, but not
including contractually based claims by Rural/Metro arising under
the January 10, 2011 Engagement Letter, as to which the parties
thereto reserve any and all rights or defenses) are hereby barred.
8
***
18. Any claims against the Rural/Metro Defendants (and Rural/Metro
Corporation's employees, representatives and affiliates) by any other
alleged tortfeasor for contribution (whether denominated as
contribution, indemnification or otherwise, but not including
contractually based claims arising under the January 10, 2011
Engagement Letter, if any, against the Rural/Metro Defendants, as to
which the parties thereto reserve any and all rights or defenses) are
hereby barred.
***
20. Pursuant to 10 Del. C. §6304(b) the damages recoverable against
non-settling defendant RBC and any other alleged tortfeasor will be
reduced to the extent of the pro rata shares, if any, of Moelis and the
Rural/Metro Defendants.
Dkt. 351 (the ―Partial Final Judgment‖). This decision refers to the settlement among the
plaintiffs, the Rural/Metro Defendants, and Moelis that was memorialized in the
Settlement Stipulation and implemented through the Partial Final Judgment as the
―Settlement.‖
D. The Liability Opinion
On December 17, 2013, the court issued the Trial Record Opinion, which rejected
RBC‘s attempt to supplement the trial record by having the court consider a declaration
from Rural‘s then-CFO that was filed two years after the Merger closed. On March 7,
2014, the court issued the Liability Opinion.
As to the Sale Process Claim, the Liability Opinion held that the individual
defendants breached their fiduciary duties by making decisions, taking actions, and
allowing steps to be taken that fell outside the range of reasonableness, which the
Liability Opinion held was the applicable standard of review. The first occasion when
9
their conduct fell outside the range of reasonableness was when the Board allowed
Shackelton and RBC to initiate a sale process in December 2010, without Board
authorization and contrary to the Board‘s instruction that the Special Committee should
simply pursue ―an in-depth analysis of the alternatives discussed during the [December 8,
2010] meeting.‖ Liability Op., 88 A.3d at 91. This ruling relied in part on findings that
RBC designed the sale process to run in parallel with a process being conducted by
Emergency Medical Services Corporation (―EMS‖)—the parent company of American
Medical Response (―AMR‖) and Rural‘s lone national competitor in the ambulance
business—and that ―RBC did not disclose that proceeding in parallel with the EMS
process served RBC‘s interest in gaining a role on the financing trees of bidders for
EMS.‖ Id.
The second occasion was when the Board approved the Merger. Id. at 94. During
the final negotiations between Rural and Warburg, the Board failed to provide active and
direct oversight of RBC. As a result, when it approved the Merger,
the Board was unaware of RBC‘s last minute efforts to solicit a buy-side
financing role from Warburg, had not received any valuation information
until three hours before the meeting to approve the deal, and did not know
about RBC‘s manipulation of its valuation metrics. Under the
circumstances, the Board‘s decision to approve Warburg‘s bid lacked a
reasonable informational basis and fell outside the range of reasonableness.
Id.
As to the Disclosure Claim, the Liability Opinion held that the individual
defendants breached their fiduciary duties by providing materially misleading
information in the Proxy Statement. The plaintiffs proved at trial that ―[i]nformation that
10
RBC provided to the Board in connection with its precedent transaction analyses was
false, and that false information was repeated in the Proxy Statement.‖ Id. at 104.
RBC told the directors that it used ―Wall Street research analyst consensus
projections‖ to derive Rural's EBITDA for 2010. The ―consensus
projections‖ were neither analyst projections, nor did they represent a Wall
Street consensus. The figures were actually Rural's reported results, not
projections, and RBC used the reported figures without adjusting for one-
time expenses, which was contrary to the Wall Street consensus. The
resulting figure that RBC used in the precedent transaction analysis was
$69.8 million. The Proxy Statement elsewhere identified Rural's Adjusted
EBITDA for 2010 as $76.8 million, which adjusted for one-time expenses,
and identified Rural's Pro Forma Adjusted EBITDA as $83.7 million. The
Proxy Statement also noted RBC adjusted the guideline target companies'
EBITDA in its precedent transaction analysis ―to account for ... certain one-
time expenses.‖
Id. at 104-05 (internal citations omitted).
The plaintiffs also proved at trial that information RBC provided about its
conflicts of interest was false:
The Proxy Statement stated that RBC received the right to offer staple
financing because it ―could provide a source for financing on terms that
might not otherwise be available to potential buyers of the Company....‖
This statement was false. The Board never concluded that RBC could
provide financing that might otherwise not be available, and no evidence to
that effect was introduced at trial. In December 2010, RBC told the Special
Committee that the credit markets were open and receptive to acquisition
financing, and they remained so for the duration of the sale process.
Id. at 106 (internal citations omitted). This statement also constituted a partial disclosure
which ―imposed on the Rural directors a duty to speak completely on the subject of
RBC‘s financing efforts.‖ Id. The Proxy Statement did not describe how RBC used the
initiation of the Rural sale process to seek a role in the EMS acquisition financing, did
not disclose RBC's receipt of more than $10 million for its part in financing the
11
acquisition of EMS, and said nothing about RBC's lobbying of Warburg after the delivery
of Warburg's fully financed bid while RBC was developing its fairness opinion. Id.
For purposes of the plaintiffs‘ claim against RBC for aiding and abetting a breach
of duty, the Liability Opinion only needed to determine that the directors‘ conduct fell
outside the range of reasonableness. The plaintiffs did not ask the court to go further and
categorize the defendant directors‘ breaches as either breaches of the duty of loyalty or
the duty of care. Nor did the plaintiffs address or attempt to overcome the defendant
directors‘ potential entitlement to exculpation under Section 102(b)(7) of the Delaware
General Corporation Law (the ―DGCL‖). 8 Del. C. § 102(b)(7). Because the plaintiffs
were not seeking to impose liability on the defendant directors, they did not ask the court
to rule on the availability of exculpation. RBC did not either. The Liability Opinion
observed that ―[t]he plaintiffs did not press a loyalty claim in their post-trial briefing, and
when advancing its contribution claim, RBC did not argue for director-by-director
determinations of culpability.‖ 88 A.3d at 89. The Liability Opinion did not determine,
for purposes of either the Sale Process Claim or the Disclosure Claim, that any of the
directors breached the duty of loyalty or failed to act in good faith. The Liability Opinion
commented that Shackelton, Davis, and DiMino each faced personal circumstances that
inclined them towards a near-term sale of Rural, but the Liability Opinion only described
those interests without making any findings. Id. at 64-65.
The Liability Opinion did not make any findings regarding whether Moelis
knowingly participated in a breach of fiduciary duty. RBC did not argue that Moelis
aided and abetted a breach of duty and that, but for the Settlement, Moelis would have
12
been a joint tortfeasor and liable to the plaintiffs for money damages. Moelis was not
identically situated to RBC. Moelis acted in a secondary role; RBC had the primary role.
Like RBC, Moelis had a contingent fee arrangement in which it would only be paid if
Rural was sold, but, unlike RBC, Moelis never sought buy-side financing work, nor did it
seek to use its position as an advisor to Rural to obtain a role in financing the sale of
another company. Like RBC, Moelis did modify its valuation materials in debatable ways
that had the effect of lowering the range of fairness and making the Merger price look
more attractive, but because Moelis settled with the plaintiff, the Liability Opinion did
not delve into the minutiae of Moelis‘s work, and it did not make any findings as to why
Moelis made the changes. Id. at 77 n.1.
The Liability Opinion did not fix an amount of damages suffered by the Class. The
decision provided inputs to the parties and asked for supplemental expert submissions
that the court would consider when determining the fair value for Rural at the time of the
Merger. The Liability Opinion also did not address RBC‘s argument that if it were held
liable, then the Delaware Uniform Contribution Among Tortfeasors Act (―DUCATA‖),
10 Del. C. ch. 63, required that any damages award against RBC be reduced by the
aggregate pro rata share of the liability of the defendants who had settled. This argument
raised issues of first impression under Delaware law as applied to claims for breach of
fiduciary duty and aiding and abetting. The Liability Opinion requested supplemental
briefing on these issues.
13
II. LEGAL ANALYSIS
This opinion quantifies the amount of damages for which RBC is liable. A
defendant who aids and abets a breach of fiduciary duty is jointly and severally liable for
the damages resulting from the breach.1 Under this liability standard, ―the injured person
1
Gotham P’rs, L.P. v. Hallwood Realty P’rs, L.P., 817 A.2d 160, 172 (Del. 2002)
(―[T]he Court of Chancery properly held HGI, Gumbiner, and Guzzetti jointly and
severally liable with the General Partner for aiding and abetting the General Partner's
breach of fiduciary duties[.]‖); Laventhol, Krekstein, Horwath & Horwath v. Tuckman,
372 A.2d 168, 170 (Del. 1976) (―[P]ersons who knowingly join a fiduciary in an
enterprise which constitutes a breach of his fiduciary duty of trust are jointly and
severally liable for any injury which results.‖); Beard Research, Inc. v. Kates, 8 A.3d
573, 619 (Del. Ch. 2010) (imposing joint and several liability on defendants for breaches
of fiduciary duty and for aiding and abetting the breach), aff'd sub nom. ASDI, Inc. v.
Beard Research, Inc., 11 A.3d 749 (Del. 2010); Triton Const. Co., Inc. v. E. Shore Elec.
Servs., Inc., 2009 WL 1387115, at *28 (Del. Ch. May 18, 2009) (―Defendants Eastern
and Elliott aided and abetted Kirk's breaches of fiduciary duty. Therefore, they are jointly
and severally liable for the damages imposed to remedy those breaches.‖), aff'd, 988 A.2d
938 (Del. 2010); see RESTATEMENT (THIRD) OF TORTS: APPORTIONMENT OF LIAB. § 15
(2000) [hereinafter ―Restatement (Third)‖] (―When persons are liable because they acted
in concert, all persons are jointly and severally liable for the share of comparative
responsibility assigned to each person engaged in concerted activity.‖); RESTATEMENT
(SECOND) OF TORTS § 876 (1979) [hereinafter ―Restatement (Second)‖] (―For harm
resulting to a third person from the tortious conduct of another, one is subject to liability
if he . . . (b) knows that the other‘s conduct constitutes a breach of duty and gives
substantial assistance or encouragement to the other[.]‖).
As a caveat, it is not clear that the Restatements apply directly to the facts of this
case. The Restatement (Third) states that it applies to torts involving injury to persons
and tangible property, not torts resulting in economic loss alone. Restatement (Third) § 1
& cmt. c (defining ―economic loss‖ as ―a financial loss not arising from injury to the
plaintiff's person or from physical harm to the plaintiff's property‖). The Restatement
(Third) does, however, apply to torts such as professional negligence, negligent
misrepresentation, and negligent performance of services, which often result in economic
loss alone. RESTATEMENT (THIRD) OF TORTS: LIAB. FOR ECON. HARM §§ 4-6 TD No 1
(2012). The Restatement (Second) generally applies to torts involving injury to persons
and tangible property, but it also contains sections on negligent misrepresentation and
fraud, which frequently result in economic loss alone, as well as sections addressing harm
14
is entitled to recover his damages from [any] of the tortfeasors, without distinction,
subject to the limitation that his total recovery may not exceed the full amount of his
damage.‖2 A defendant has no right to require the injured party to pursue another
tortfeasor first.3 The plaintiffs therefore had the ability, if they had wished, to sue only
RBC, obtain a full judgment from RBC, and recover 100% of their damages from RBC.
Had the plaintiffs proceeded in that fashion, RBC would not have been without
remedies. Most notably, RBC could have pursued claims for contribution against other
joint tortfeasors. ―Contribution is the right of one who has discharged a common liability
to recover from another who is also liable.‖ Reddy v. PMA Ins. Co., 20 A.3d 1281, 1284
to intangible property interests, like a person‘s reputation, which do not involve physical
harm. Restatement (Second) §§ 525, 552 (fraud and negligent misrepresentation,
respectively); id. div. 5, ch. 27 Scope Note (discussing liability for reputational damages
in cases of libel and slander). Although it is debatable whether either Restatement
technically governs the harm that stockholders suffer when their shares are converted into
a right to receive merger consideration and the merger has been tainted by breaches of
fiduciary duty, the Restatements are at least persuasive authority on the questions
presented. Both sides have discussed the Restatements without questioning their
relevance. See Dkt. 376 at 12-13 (plaintiff); Dkt. 378 at 24-25 (defendant; distinguishing
the Restatement (Third) on the facts without challenging applicability).
2
Brown v. Comegys, 500 A.2d 611, 613 (Del. Super. 1985); accord Campbell v.
Robinson, 2007 WL 1765558, at *2 (Del. Super. June 19, 2007); see Restatement (Third)
§ 10 (―When, under applicable law, some persons are jointly and severally liable to an
injured person, the injured person may sue for and recover the full amount of recoverable
damages from any jointly and severally liable person.‖); Restatement (Second) § 875
(―Each of two or more persons whose tortious conduct is a legal cause of a single and
indivisible harm to the injured party is subject to liability to the injured party for the
entire harm.‖).
3
Brown, 500 A.2d at 613; Campbell, 2007 WL 1765558, at *2; see Restatement
(Third) § 10; Restatement (Second) § 875.
15
(Del. 2011). This right is what now gives rise to RBC‘s argument that it should not bear
100% of the damages award.
At common law, Delaware did not recognize a right of contribution among joint
tortfeasors.4 If multiple tortfeasors could be held jointly and severally liable, a plaintiff
could pursue any one of them and recover its full damages. That tortfeasor would have to
bear the full loss, and it would not have the ability to seek contribution from the other
joint tortfeasors. At the same time, the common law held that a release of any one joint
tortfeasor operated to release all other joint tortfeasors. A plaintiff therefore could not
4
DiStefano v. Lamborn, 81 A.2d 675, 677 (Del. Super. 1951), disapproved on
other grounds, Halifax Chick Express, Inc. v. Young, 137 A.2d 743 (Del. 1958); accord
Cox v. Del. Elec. Coop., Inc., 823 F. Supp. 241, 246 (D. Del. 1993) (―The general rule of
common law, and that operable in Delaware prior to 1949, is that where two or more
individuals jointly or independently negligently cause harm to a plaintiff, one putative
defendant is not entitled to contribution from the other.‖); Clark v. Teeven Hldg. Co.,
Inc., 625 A.2d 869, 877 (Del. Ch. 1992) (―Under Delaware law, however, there was no
right to contribution among joint tortfeasors until the enactment of [DUCATA] on May 7,
1949. . . . Because the substantive right to contribution among joint tortfeasors was not
created until the adoption of [DUCATA] in 1949, that right was never a part of equity‘s
traditional jurisdiction in Delaware.‖ (internal citations omitted)); Clark v. Brooks, 377
A.2d 365, 368 (Del. Super. 1977) (―The most startling change made by [DUCATA] was
to provide a remedy of contribution among tortfeasors.‖), aff'd sub nom. Blackshear v.
Clark, 391 A.2d 747 (Del. 1978); Lutz v. Boltz, 100 A.2d 647, 647 (Del. Super. 1953)
(―Prior to 1949, no right of contribution existed between joint tortfeasors in this State.‖).
Although Delaware did not recognize a right of contribution among tortfeasors, it did
recognize a right of equitable contribution among parties to a contract. Clark v. Teeven,
625 A.2d at 877; see also, e.g., De Paris v. Wilm. Trust Co., 104 A. 691, 695 (Del. 1918)
(recognizing right of contribution among co-guarantors); Hutchinson v. Roberts, 11 A.
48, 51 (Del. Ch. 1887), aff’d, 17 A. 1061 (Del. 1889) (same); Jefferson v. Tunnell, 2 Del.
Ch. 135, 139 (Del. Ch. 1847) (same), rev’d on other grounds, 5 Harr. 206 (Del. 1849).
16
settle with one joint tortfeasor for a portion of its damages then seek to recover the
balance from other joint tortfeasors.5
In 1949, the General Assembly changed the common law rules by enacting
DUCATA, which largely tracked the Uniform Contribution Among Tortfeasors Act in
the form approved by the National Conference of Commissioners on Uniform State Laws
in 1939 (the ―Uniform Act of 1939‖).6 Section 6302 of DUCATA overrules the common
law ban on contribution in tort actions by providing that ―[t]he right of contribution exists
among joint tortfeasors.‖ 10 Del. C. § 6302(a). Section 6304(a) of DUCATA overrules
the common law rule that a release of one joint tortfeasor releases all. It states:
A release by the injured person of 1 joint tortfeasor, whether before or after
judgment, does not discharge the other tortfeasor unless the release so
5
See Restatement (Second) § 885 cmt. b (citing the common law rule under which
―a release given to one of a number of persons who have co-operated in causing a tort or
who have failed in the performance of a common duty discharges the others, irrespective
of the intent of the parties, although a covenant not to sue one of the parties has no effect
upon the liability of the others to the injured person‖).
6
The parties do not dispute that DUCATA applies. This court has held that when
the defendants‘ liability arises out of a breach of fiduciary duty, the defendants are liable
―in tort‖ and come within the ambit of DUCATA. Hampshire Gp., Ltd. v. Kuttner, 2010
WL 2739995, at *54 (Del. Ch. July 12, 2010) (―A breach of fiduciary duty is easy to
conceive of as an equitable tort[.]‖); accord Frazer v. Worldwide Energy Corp., 17 Del.
J. Corp. L. 606, 615 n.1 (Del. Ch. 1991) (noting that ―[a]ny recovery against the
corporate defendants will, of course, be subject to reduction in accordance with the terms
of [DUCATA]‖). See generally J. Travis Laster & Michelle D. Morris, Breaches of
Fiduciary Duty and the Delaware Uniform Contribution Act, 11 Del. L. Rev. 71 (2010)
(reviewing Delaware precedents and the history and structure of DUCATA and arguing
that DUCATA should apply to claims for breach of fiduciary duty). By extension,
DUCATA should apply when a defendant‘s liability arises out of a claim for aiding and
abetting a breach of fiduciary duty, which requires knowing participation in the
underlying tort. See Malpiede v. Townson, 780 A.2d 1075, 1096 (Del. 2001).
17
provides; but reduces the claim against the other tortfeasors in the amount
of the consideration paid for the release, or in any amount or proportion by
which the release provides that the total claim shall be reduced, if greater
than the consideration paid.
10 Del. C. § 6304(a).
DUCATA also addresses how the release of one joint tortfeasor affects
contribution among joint tortfeasors. Section 6302(c) generally prevents a settling joint
tortfeasor from seeking contribution from another joint tortfeasor unless the settlement
extinguishes the other joint tortfeasor‘s liability as well. 10 Del. C. § 6302(c) (―A joint
tortfeasor who enters into a settlement with the injured person is not entitled to recover
contribution from another joint tortfeasor whose liability to the injured person is not
extinguished by the settlement.‖). This provision permits one or more joint tortfeasors to
settle on behalf of themselves and another joint tortfeasor and then pursue that joint
tortfeasor for its share of the settlement payment. See, e.g., In re Telecorp PCS, Inc.,
2003 WL 22901025, at *3 (Del. Ch. Nov. 19, 2003) (Strine, V.C.) (allowing one
defendant to settle with plaintiff and seek contribution against codefendants in a separate
action). But Section 6302(c) does not permit a settling joint tortfeasor to seek
contribution from a party that still faces liability to the plaintiff. In this case, the
Settlement did not extinguish RBC‘s liability. Consequently, Section 6302(c) prevents
the Rural/Metro Defendants and Moelis from seeking contribution from RBC for any
portion of the $11.6 million they paid in settlement.
Section 6304(b) addresses the ability of a non-settling joint tortfeasor like RBC to
seek contribution from settling joint tortfeasors. It states:
18
A release by the injured person of 1 joint tortfeasor does not relieve the 1
joint tortfeasor from liability to make contribution to another joint
tortfeasor unless the release is given before the right of the other tortfeasor
to secure a money judgment for contribution has accrued, and provides for
a reduction, to the extent of the pro rata share of the released tortfeasor, of
the injured person‘s damages recoverable against all the other tortfeasors.
10 Del. C. § 6304(b). Under this provision, when a plaintiff settles with one joint
tortfeasor before the entry of judgment and grants that party a release, the settlement can
grant the joint tortfeasor complete peace, including from claims for contribution, but only
if the plaintiff agrees to reduce the amount of damages it can recover from the remaining
joint tortfeasors.
In essence, the non-released tortfeasor's right to recover contribution from
the released tortfeasor is protected unless the plaintiff agrees to reduce his
recovery against the non-released party by the amount he chose not to
collect from the released party. Thus, the plaintiff assumes the risk that the
released tortfeasor's pro rata share of recovery is greater than the settlement
amount and agrees to reduce any recovery against the non-released
tortfeasor by the amount of the released tortfeasor's pro rata share.
Roca v. Riley, 2008 WL 1724259, at *2 (Del. Super. Apr. 10, 2008) (footnotes omitted);
accord Farrall v. A.C. & S. Co., 586 A.2d 662, 664 (Del. Super. 1990) (explaining that
under this scenario, if a plaintiff has released a tortfeasor for less than its pro rata share,
―the non-released tortfeasor is protected against having to bear the portion of the released
tortfeasor‘s share which plaintiff failed to collect in the settlement‖).
In this case, RBC contends that by suing six of the Rural directors and Moelis, the
plaintiffs recognized that they were joint tortfeasors along with RBC against whom RBC
would have a right of contribution. RBC further contends that because the Settlement
extinguished RBC‘s right of contribution, any damages suffered by the class for which
19
RBC otherwise might be liable must be reduced by the aggregate pro rata share of six
individual defendants and Moelis (together, the ―Settling Defendants‖). The seven
Settling Defendants plus RBC make eight, and RBC argues that each defendant should be
allocated an equal 12.5% share. RBC claims a settlement credit under Section 6304(b)
equal to 87.5% of the damages. RBC would remain liable for 12.5% of the total damages
suffered by the Class.
This decision holds that RBC is entitled to a settlement credit, but only in the
amount of 17% of the total damages suffered by the Class. This decision enters judgment
against RBC for $75,798,550.33, representing 83% of the total damages suffered by the
Class.
A. The Damages Suffered By The Class
The Liability Opinion held RBC liable, but did not determine either the total
damages suffered by the Class or RBC‘s share of liability. This decision finds that the
Class suffered damages of $4.17 per share.
A traditional measure of compensatory damages is appropriate for this case:
The traditional measure of damages is that which is utilized in connection
with an award of compensatory damages, whose purpose is to compensate a
plaintiff for its proven, actual loss caused by the defendant‘s wrongful
conduct. To achieve that purpose, compensatory damages are measured by
the plaintiff‘s ―out-of-pocket‖ actual loss. Thus, where a merger is found to
have been effected at an unfairly low price, the shareholders are normally
entitled to out-of-pocket (i.e., compensatory) money damages equal to the
20
―fair‖ or ―intrinsic‖ value of their stock at the time of the merger, less the
price per share that they actually received.7
The ―fair value‖ or ―intrinsic value‖ of the shares held by the class is determined using
the same methodologies employed in an appraisal,8 and this form of damages is
7
Strassburger v. Earley, 752 A.2d 557, 579 (Del. Ch. 2000); accord Kahn v.
Tremont Corp. (Tremont I), 1996 WL 145452, at *9 (Del. Ch. Mar. 21, 1996) (Allen, C.)
(explaining that in a cash out merger or other forced sale, ―the shares, even if not entitled
to participate in the majority shareholders ‗control premium,‘ must carry at a minimum
the pro rata value of the entire firm as a going enterprise‖ (footnote omitted)), rev’d on
other grounds, Kahn v. Tremont Corp., 694 A.2d 422 (Del. 1997).
8
See, e.g., Weinberger v. UOP, Inc., 457 A.2d 701, 713-14 (Del. 1983) (equating
the fair price measure in fiduciary duty action with the fair value standard in appraisal);
Sterling v. Mayflower Hotel Corp., 93 A.2d 107, 114 (Del. 1952) (adopting for a breach
of fiduciary duty case the valuation standard for appraisal announced in Tri-Continental
v. Battye, 74 A.2d 71 (Del. Ch. 1950)); see also Bershad v. Curtiss-Wright Corp., 535
A.2d 840, 845 (Del. 1987) (explaining that fair price measure in a breach of fiduciary
duty case ―flow[s] from the statutory provisions . . . designed to ensure fair value by an
appraisal, 8 Del. C. § 262‖); Rosenblatt v. Getty Oil Co., 493 A.2d 929, 940 (Del. 1985)
(following Sterling); Poole v. N.V. Deli Maatschappij, 243 A.2d 67, 69 (Del. 1968)
(affirming Court of Chancery‘s conclusion that when determining the stock‘s ―true
value‖ for purposes of compensatory damages, ―the stock is to be evaluated on a going-
concern basis and not on a liquidation basis; that the actual or true [value] of the stock is
to be determined by considering the various factors of value including earnings,
dividends, market price, assets, and the other factors deemed relevant in a stock
evaluation problem arising under . . . 8 Del. C. § 262‖); Del. Open MRI Radiology
Assocs., P.A. v. Kessler, 898 A.2d 290, 342-44 (Del. Ch. 2006) (determining fair value
and using that as a basis for damages in breach of fiduciary duty case); In re Emerging
Commc’ns, Inc. S’holders Litig., 2004 WL 1305745, at *24 (Del. Ch. June 4, 2004)
(finding that ―fair value‖ was $38.05, stating that ―[f]rom that fair value finding it further
follows that the $10.25 per share merger price was not a ‗fair price‘ within the meaning
of the Delaware fiduciary duty case law beginning with Weinberger,‖ and granting the
difference as damages). See generally Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442,
461-64 (Del. Ch. 2011).
21
sometimes colloquially called a ―quasi-appraisal‖ remedy.9 The quasi-appraisal method
provides an appropriate measure of damages for RBC‘s aiding and abetting liability on
both the Sale Process Claim and the Disclosure Claim.10
The Liability Opinion did not assign a value to the damages suffered by the Class.
That decision adopted as ―the general framework for the valuation analysis‖ the
discounted cash flow model presented by plaintiffs‘ expert, Kevin Dages. Liability Op.,
88 A.3d at 107. The Liability Opinion also resolved a series of disputes between Dages
and RBC‘s expert, Thomas Lys, and instructed the parties to submit revised expert
9
See Weinberger, 457 A.2d at 714 (coining the term to describe the measure of
damages for a breach of fiduciary duty by the controlling stockholder and its
representatives on subsidiary board); Arnold v. Soc’y for Savings Bancorp, Inc. (Arnold
III), 1995 WL 376919, *4 (Del. Ch. June 15, 1995) (holding that damages for breach of
fiduciary duty could be awarded using a quasi-appraisal remedy), aff’d, 678 A.2d 533
(Del. 1996); In re Ocean Drilling & Exploration Co. S’holders Litig., 1991 WL 70028,
*7 (Del. Ch. Apr. 30, 1991) (holding that alleged breaches of fiduciary duty did not
threaten irreparable harm because the class could be awarded a quasi-appraisal remedy);
Steiner v. Sizzler Rests. Int’l, Inc., 1991 WL 40872, at *2 (Del. Ch. Mar. 19, 1991)
(Allen, C.) (same).
10
See Arnold III, 1995 WL 376919, at *6 (holding that if defendants were found to
have breached their duty of disclosure, ―the Court [can] assess damages, calculated
through a quasi-appraisal proceeding‖); Wacht v. Cont’l Hosts, Ltd., 1994 WL 525222,
*4, *7 (Del. Ch. Sept. 16, 1994) (awarding quasi-appraisal damages for breach of the
duty of disclosure); Weinberger v. UOP, Inc., 1985 WL 11546, at *9-10 (Del. Ch. Jan.
30, 1985) (awarding quasi-appraisal damages on remand); see also Berger v. Pubco
Corp., 976 A.2d 132, 134, 145 (Del. 2009) (awarding compensatory damages measured
using quasi-appraisal as remedy for breach of duty of disclosure in short-form merger);
Poole v. N.V. Deli Maatschappij, 224 A.2d 260, 262, 265 (Del. 1966) (affirming use of
―out-of-pocket‖ damages as measure of damages in challenge to majority stockholder‘s
tender offer involving fraudulent misrepresentations and defining the appropriate ―out-of-
pocket‖ measure as ―the difference between the price paid for the stock and its true
value‖). See generally In re Orchard Enters., Inc. S’holder Litig., 88 A.3d 1, 42-53 (Del.
Ch. 2014).
22
valuations using the inputs that the Liability Opinion identified, along with matrices
showing sensitivities, so that the court could consider them when determining damages.
Id. at 107-109.
Based on the supplemental submissions and the evidence presented at trial, this
decision uses a beta of 1.199. The beta calculated as instructed in the Liability Opinion is
1.147, which is lower than the figure advocated by Dages. To avoid awarding value
beyond what the plaintiffs sought, this decision uses Dages‘s beta.
This decision adopts the compromise position of giving equal weight to the supply
side and historical equity risk premiums. The Liability Opinion instructed the parties‘
experts to value the Company using both the historical equity risk premium and the
supply side equity risk premium. Dages valued the Company in his report using both a
historical equity risk premium of 6.7% and a supply side equity risk premium of 6.0%.
Lys valued the Company in his report primarily using the historical equity risk premium
of 6.7%, although he conceded that some Delaware decisions have used a supply side
equity risk premium, which he calculated to be 6.0%. In Global GT LP v. Golden
Telecom, Inc., Chief Justice Strine, writing as a Vice Chancellor, noted that those who
militate for supply side equity risk premium ―ha[ve] the better of the argument.‖ 993
A.2d 497, 516 (Del. Ch. 2010), aff’d, 11 A.3d 214 (Del. 2010). He used the supply side
equity risk premium of 6% advanced by the appraisal petitioners‘ expert, as opposed to
the historical equity risk premium of 7.1% advanced by the company‘s expert. Id. at 518.
Chief Justice Strine noted that the ―data [was] far from perfect,‖ but it suggested that the
supply side estimate was ―much nearer‖ to the equity risk premium than the historical
23
estimate. Id. In the current case, neither expert argued definitively for the superiority of
one estimate over the other. Recognizing that valuation is not a perfect science, this
decision takes both into account.
This decision adopts 3.7% as the perpetuity growth rate. Dages and Lys agreed
that the perpetuity growth rate should fall between the expected long-term rate of
inflation and the expected long-term growth rate of nominal GDP. The experts‘ reports
indicate that the expected long-term rate of inflation at the time of the transaction was
approximately 2.1%, and the expected long-term growth rate of nominal GDP was
approximately 4.3%. Dages advocated for a perpetuity growth rate equal to the expected
long-term growth rate of nominal GDP. Lys used a range of 3.7% to 4.5%. The low end
of that range falls comfortably between the expected long-term rate of inflation and the
expected long-term growth rate of nominal GDP.
Using a beta of 1.199, giving equal weight to the supply side and historical equity
risk premiums, and assuming a perpetuity growth rate of 3.7% yields a quasi-appraisal
value for Rural as of the Merger date of $21.42 per share. The members of the Class
received $17.25 in the Merger and therefore suffered damages of $4.17 per share. There
were 25,380,542 shares of Rural common stock outstanding at the time of the Merger.
The members of the Class, which excludes the defendants, Warburg, Coliseum, and their
associates and affiliates, held 21,900,133 shares. The amount of damages suffered by the
Class as of the date of the Merger was therefore $91,323,554.61.
24
B. Contribution For An Intentional Tort
Whether the amount of the judgment entered against RBC should be less than the
amount of the damages suffered by the Class depends on RBC‘s ability to claim
DUCATA‘s settlement credit. The plaintiffs contend that because RBC committed an
intentional tort, RBC could not have obtained contribution from the Settling Defendants
as a matter of law. Therefore, the plaintiffs say, RBC cannot claim DUCATA‘s
settlement credit, and RBC must bear 100% of the damages suffered by the Class. The
Delaware Supreme Court has not ruled on whether DUCATA bars contribution for an
intentional tort. Pending high court guidance, this opinion concludes that DUCATA does
not establish a bright-line rule barring contribution for all intentional torts. A defendant in
RBC‘s situation could seek contribution from other joint tortfeasors, so RBC is not barred
from claiming DUCATA‘s settlement credit.
1. The Plain Language Of DUCATA
Because DUCATA governs this case, the analysis starts there. The plain language
of DUCATA does not bar contribution for intentional torts. Section 6302(a) states that
―[t]he right of contribution exists among joint tortfeasors‖ without specifying particular
types or categories of tortfeasors. 10 Del. C. § 6302(a). Section 6301 defines ―joint
tortfeasors‖ as ―2 or more persons jointly or severally liable in tort for the same injury to
person or property,‖ without limiting the definition to particular types or categories of
torts. 10 Del. C. § 6301.
―It is well-settled that unambiguous statutes are not subject to judicial
interpretation.‖ Leatherbury v. Greenspun, 939 A.2d 1284, 1288 (Del. 2007). ―If the
25
statute as a whole is unambiguous and there is no reasonable doubt as to the meaning of
the words used, the court‘s role is limited to an application of the literal meaning of those
words.‖ Id. (internal quotation marks omitted); accord Friends of the H. Fletcher Brown
Mansion v. City of Wilm., 34 A.3d 1055, 1059 (Del. 2001). The literal meaning of the
words of DUCATA permits contribution among all tortfeasors. The words do not
establish a bright-line rule barring contribution for intentional torts. DUCATA therefore
permits RBC to seek contribution from other joint tortfeasors and, potentially, to claim
the settlement credit.
Because the plain language of DUCATA permits RBC to seek contribution and
claim the settlement credit, this decision could reject the plaintiffs‘ argument against
contribution for intentional torts based on the statutory text alone. The plaintiffs,
however, have pointed to one Delaware state court decision holding that contribution is
not available for intentional torts. Eastridge v. Thomas, 1987 WL 9605 (Del. Super. Apr.
13, 1987). They also have cited common law authorities which maintain that contribution
is not available for intentional torts. See, e.g., Restatement (Second) § 886A(3) (―There is
no right of contribution in favor of any tortfeasor who has intentionally caused the
harm.‖). This decision therefore examines and takes into account other sources of
authority on contribution for intentional torts beyond the plain language of DUCATA.11
11
There are grounds to debate whether RBC committed what tort scholars would
label an intentional tort. Many torts involve a knowing or conscious act, but that level of
intentionality can be distinguished from and is less culpable than malicious intent, which
involves a specific intent to cause harm or a specific intent to engage in an act that is
substantially certain to cause harm. See generally W. Page Keeton et al., PROSSER AND
26
2. The Uniform Act of 1939
One place to look for insight into DUCATA is the Uniform Act of 1939, on which
DUCATA was based. The Delaware Supreme Court has called on Delaware courts to
―give considerable deference to an official commentary written by the statute's drafters
and available to the General Assembly before the statutory enactment.‖ Kallop v.
McAllister, 678 A.2d 526, 530 (Del. 1996); see Acierno v. Worthy Bros. Pipeline Corp.,
KEETON ON THE LAW OF TORTS § 8 (5th ed. 1984). When tort scholars speak of
intentional torts, they mean the latter: ―Many intentional acts, such as driving a vehicle,
are not tortious in any way at all. . . . [I]ntentionally driving at high speed is . . . not an
intentional tort unless the defendant either intends to inflict harm or is certain to do so.‖
Dan B. Dobbs, THE LAW OF TORTS 518 (2001). ―[A] jailer may intentionally refuse
medical attention, but unless the assertion is that he intended harm or that harm was
certain, the claim is one for negligence . . . .‖ Id. n.10 (citing Del Tufo v. Twp. of Old
Bridge, 685 A.2d 1267 (N.J. 1996)). As noted, the plaintiffs rely on Section 886A(3) of
the Restatement (Second) for the proposition that there is no right of contribution among
intentional tortfeasors. A close reading of the Restatement (Second) suggests that its rule
against contribution applies only to traditional intentional torts where the tortfeasor ―has
intentionally caused harm to another.‖ Id., cmt. j (―It is not enough for the application of
the rule stated in Subsection (3) that the tortfeasor seeking contribution has intentionally
violated a statute, as by driving at a speed in excess of the statutory limit or parking next
to a fireplug, if his conduct is not intended to do harm to anyone.‖). The Liability
Opinion did not find that RBC acted with malicious intent. It found that RBC aided and
abetted a breach of fiduciary duty by knowingly participating in and inducing breaches of
duty. In doing so, RBC was not acting with actual intent to harm the Class. Instead,
RBC‘s representatives acted selfishly with the actual intent to extract greater benefits
from the transaction for RBC and themselves. I believe they rationalized their self-
interested actions by telling themselves that a successful transaction would provide
Rural‘s stockholders with a premium over the pre-announcement market price, so the
Class would benefit. At some point, it might have occurred to the sophisticated bankers
that Rural and its stockholders could have done better if RBC had not pursued its own
interests, and therefore in a larger sense the stockholders were harmed, but I do not
believe that RBC acted with the intent to inflict harm. Regardless, because the parties
have cast the debate in terms of contribution for an intentional tort, this decision uses that
conceptual framework.
27
656 A.2d 1085, 1090 (Del. 1995) (relying on official commentary to uniform act); Bell
Sports, Inc. v. Yarusso, 759 A.2d 582, 592 (Del. 2000) (same). The commentary to
Section 2 of the Uniform Act of 1939 has this to say about the provision that became
Section 6302 of DUCATA:
This subsection creates the right of contribution among joint tortfeasors. It
does not, in any way, qualify the creation of this right by confining it to
joint tortfeasors in any narrower sense than that indicated in section 1. Nor
does it confine contribution to merely negligent tortfeasors or to those in
any way inadvertently harming others. It permits contribution among all
tortfeasors whom the injured person could hold liable for the same damage
or injury to his person or property.
Uniform Act of 1939, § 2 cmt. The commentary thus stresses and reinforces the absence
of any limitation on the torts for which contribution is available.
The drafting history for the Uniform Act of 1939 further supports the absence of a
bright-line rule against contribution for intentional torts, while contemplating the
existence of judicial authority to deny contribution based on the facts of a particular case.
Professor Charles O. Gregory was the Reporter for the Uniform Act of 1939. During a
session held to discuss an early draft, one of the participants asked whether its coverage
would extend to intentional torts. Professor Gregory stated that the drafters were inclined
―to take the view that contribution should be confined to tortfeasors of inadvertence,‖ but
found it ―utterly impossible to state such a view satisfactorily in statutory form[.]‖
Discussion of Contribution Among Tortfeasors Act Tentative Draft No. 1, 346, 347
(1938). Later in the session, the discussion revisited the issue, and the participants
discussed how a definition would account for the range of subclasses of torts, such as
those involving moral turpitude, degrees of fault greater than negligence, statutory
28
violations, and vicarious liability. Id. at 356-60. One participant expressed concern about
the possibility of contribution for acts of violence and posited a scenario involving a mob
of 100 people that intentionally destroyed the plaintiff‘s property. Id. at 346. Professor
Gregory commented that the hypothetical was ―an extreme one and would be very
unlikely to arise . . . and if it does, I would be perfectly willing myself to bar contribution
there.‖ Id. at 347.
During the debates, Professor Gregory referred to his contemporaneous law
review article that discussed the difficulty of defining the types of torts for which
contribution should be available. See Charles O. Gregory, Contribution Among
Tortfeasors: A Uniform Practice, 1938 Wis. L. Rev. 365 (1938). His article took the
position that contribution should not be limited to torts involving negligence, but he
stopped short of embracing mandatory contribution for all intentional torts. The following
paragraphs illustrate his skepticism about attempting to limit the classes of torts for which
contribution is available:
Statutes in eight jurisdictions permit contribution among tortfeasors without
stipulating that the required common liability must rest on negligence or
arise out of torts of inadvertence. Nevertheless, courts and writers seem to
think that it should be so limited. But then, courts have always been
reluctant to offer their assistance to a wrongdoer. They have left such
persons where they found them and have not permitted them to base an
action ―on their own wrong.‖ This stern moral note may be justified in an
action for an accounting between highwaymen. It is clearly out of place in
actions to spread loss inadvertently inflicted. . . .
There are some practical reasons . . . for not confining contribution to
common liability for negligence. In the first place, . . . courts seem unable
to agree upon what should be considered as negligence. For instance,
breach of a criminal statute is frequently regarded as more reprehensible
than ―common-law negligence,‖ and a person held liable because of such
29
breach is therefore denied recovery of contribution. This result is hard to
reconcile with the almost universal view that the inadvertent breach of such
statutes as a basis of liability for damages is treated as ―negligence per se‖
or evidence of negligence. . . .
Another reason is the emphasis thereby placed on the unfairness of denying
contribution in all instances of liability through inadvertence not involving
negligence. If contribution is allowed only in negligence cases in order to
prevent a ―wrongdoer from profiting by his own conscious wrong,‖ it
should by parity of reason be permitted whenever common liability arises
from torts inadvertently committed, whether they be simple negligence,
gross negligence, trespass, libel, conversion, breach of criminal statute,
nuisance, or absolute liability.
Id. at 366-67 (footnotes omitted).
Having discussed these difficulties, Professor Gregory recommended the approach
taken by the Uniform Act of 1939 and DUCATA:
In the interests of practical administrative convenience, if for no other
reason, the best proposal is to permit contribution among all tortfeasors
commonly liable for the same damage, regardless of the nature of the
particular derelictions involved. Such a provision obviates the need of
drawing impossible lines between torts of inadvertence and torts involving
intent. It eliminates varying personal interpretations of the concept of
―moral turpitude.‖ Furthermore, it makes unnecessary nice discrimination
between the qualities of the conduct referable to each of two or more
tortfeasors who are commonly liable anyway for the same damage. These
considerations are extremely important. Heeding them would save our
courts from a large amount of troublesome detail and would effect a system
of loss distribution with the least possible number of technical legalisms.
This system would be understandable and easily applied….
Id. at 368 (footnote omitted). Yet despite the broad endorsement of contribution
contemplated by this passage, Professor Gregory recognized as a ―valid objection‖ the
time-honored principle that ―wicked persons should not receive the assistance of the
courts.‖ Id. To address this concern, he held out the possibility that ―if cases do arise . . .
in which particular courts feel that it would be shocking to permit contribution, they can
30
then deny it on the particular facts presented without building up a body of precedent
resting on some legal abstraction well-nigh impossible to define.‖ Id.
Professor Gregory‘s comments suggest that the principal drafter of the Uniform
Act of 1939, and hence the intellectual father of DUCATA, believed that contribution
generally should be available for all torts and that there should not be a bright-line rule
excluding contribution for intentional torts. He also seems to have believed that
contribution need not automatically be available in every case and that a court could
exercise discretion to deny contribution based on the facts. He appears to have thought
that denying contribution was most appropriate for conduct intentionally designed to
cause physical injury, such as the hypothetical involving mob violence or the seminal
precedent of claims between highwaymen addressed in Merryweather v. Nixan, 101 Eng.
Rep. 1337 (K.B. 1799).
3. Other Delaware Statutes That Authorize Contribution
Moving beyond DUCATA and the Uniform Act of 1939, another source of
guidance is other Delaware statutes. If the General Assembly has authorized contribution
among intentional tortfeasors in other circumstances, then that fact makes it more likely
that the General Assembly intended to authorize contribution in such cases generally
under DUCATA.
In addition to DUCATA, two Delaware statutes authorize contribution in specific
circumstances. Both encompass acts involving degrees of intent greater than negligence.
The first statute is Section 174 of the DGCL. 8 Del. C. § 174. It provides that ―[i]n case
of any willful or negligent violation § 160 or § 173 . . . the directors under whose
31
administration the same may happen shall be jointly and severally liable . . . to the full
amount of the dividend unlawfully paid‖ or for the amount of stock unlawfully purchased
or redeemed. Id. § 174(a). It then states that ―[a]ny director against whom a claim is
successfully asserted under this section shall be entitled to contribution from the other
directors who voted for or concurred in the unlawful dividend, stock purchase or stock
redemption.‖ Id. § 174(b). Section 173 of the DGCL limits when a corporation may pay
dividends. Id. § 173. Section 160(a)(1) extends the limitations on the payment of
dividends to stock redemptions, and Sections 160(a)(2) and (3) impose other restrictions
on the corporations‘ ability to purchase its own shares. Id. § 160. For directors to violate
these sections necessarily involves a conscious act: they must declare the dividend or
authorize the stock redemption. Section 174(a) recognizes that the violation could be
―willful.‖ Nevertheless, Section 174(b) authorizes a director who has been held liable to
seek contribution.
The second statute is Delaware‘s Blue Sky Law. Section 73-605(a) imposes civil
liability on persons who buy or sell securities in violation of particular sections of the act.
6 Del. C. § 73-605(a). Section 73-605(b) imposes joint and several liability on
[e]very person who directly or indirectly controls a seller or buyer liable
under subsection (a) of this section, every partner, officer, or director of
such a seller or buyer, every person occupying a similar status or
performing similar functions, every employee of such seller or buyer who
materially aids in the sale, and every broker-dealer or agent who materially
aids in the sale . . . to the same extent as the seller or buyer, unless the
nonseller or nonbuyer who is so liable sustains the burden of proof that the
person did not know, and in exercise of reasonable care could not have
known, of the existence of the facts by reason of which the liability is
alleged to exist.
32
6 Del. C. § 73-605(b). The statute provides for contribution, stating: ―There is
contribution as in cases of contract among the several persons so liable.‖ Id. Under the
terms of Section 73-605(b), for joint and several liability to exist, the nonseller or
nonbuyer at least must have known about the violation, acted knowingly, or had reason to
know of the facts giving rise to liability. This standard contemplates imposing liability for
a mental state greater than simple negligence, yet Section 73-605(b) authorizes
contribution.
For the General Assembly to have authorized contribution for wrongs involving
conscious acts under Section 174 of the DGCL and Delaware‘s Blue Sky Law suggests
that it is not contrary to Delaware law to permit contribution under such circumstances.
The existence of these statutes is consistent with the plain language of DUCATA, which
authorizes contribution generally and does not exclude torts where the tortfeasor acted
with a state of mind more culpable than negligence.
4. Cases Addressing The Availability Of Contribution For
Intentional Torts Under Delaware Law
Turning to case law, Eastridge is the only Delaware state court decision to have
addressed contribution for an intentional tort, but that opinion did not mention or discuss
DUCATA. Three federal court decisions have considered the issue, reaching opposing
conclusions. One decision pre-dated Eastridge, applied DUCATA, and permitted
contribution. McLean v. Alexander (McLean II), 449 F. Supp. 1251 (D. Del. 1978), rev'd
on other grounds, 599 F.2d 1190 (3d Cir. 1979). The other two decisions post-dated
Eastridge and interpreted that decision as foreclosing contribution. 380544 Can., Inc. v.
33
Aspen Tech., Inc., 544 F. Supp. 2d 199 (S.D.N.Y. 2008); Hollinger Int’l, Inc. v.
Hollinger, 2006 WL 1444916 (N.D. Ill. Jan. 25, 2006). In my view, McLean II provides
the most persuasive analysis and is closest to the facts of this case.
The earliest decision was McLean II, which involved a suit by the acquirer of a
closely held company against the selling stockholders, the sellers‘ investment banker, and
the sellers‘ accountant and his firm for securities fraud and common law fraud. Everyone
settled except for the accountant and his firm, who were found liable after trial on both
theories. McLean v. Alexander (McLean I), 420 F. Supp. 1057 (D. Del. 1976). The
accountant and his firm then sought to have the amount of any judgment against them
reduced by the portion of liability attributable to the settling defendants. McLean II, 449
F.Supp at 1255-56. Judge Murray M. Schwartz held that the selling stockholders who
were active in management would have been liable to the plaintiff but for the settlement.
Id. at 1260. He held that the investment bank would not have been liable to the plaintiff.
Id. at 1261-62. After reviewing a wide range of authorities, Judge Schwartz concluded
that ―all wrongdoers may properly share in the apportionment of damages via claims for
contribution.‖ Id. at 1267. He construed DUCATA to authorize contribution, reasoning
that ―there is no limitation expressed within the terms of the statute,‖ and he interpreted
Professor Gregory‘s writings to show that ―[c]ommentators writing at the time of its
passage understood the statute to apply to intentional wrongdoing as well as non-
intentional torts.‖ Id. at 1275. Applying principles of relative fault, Judge Schwartz
assessed 10% fault to the accountant and his firm and 90% to the culpable shareholders
who settled. Id. at 1277. On appeal, the result in McLean II was reversed on other
34
grounds: the Court of Appeals found the evidence of scienter insufficient to establish
liability on the party of the accountant and his firm. McLean v. Alexander, 559 F.2d 1190,
1199 (3d Cir. 1977). The Court of Appeals had ―no occasion to discuss the method by
which contribution and indemnity were calculated.‖ Id. at 1201.
Next came Eastridge, a case that involved very different facts. The plaintiff
(Eastridge) sued the defendant (Thomas) for injuries suffered when Thomas intentionally
struck Eastridge in the face with a beer bottle. Eastridge also sued the owner of the bar
where the incident took place, alleging that the bar owner acted negligently or willfully
and wantonly by serving alcohol to Thomas after he was obviously intoxicated. Thomas
cross-claimed for contribution from the bar owner, claiming that the bar owner had a duty
to control his patrons and that a breach of this duty proximately caused Thomas to assault
the plaintiff with the beer bottle. The Delaware Superior Court granted summary
judgment in favor of the bar owner:
It is an elementary [tenet] of the law of indemnity and contribution that
such a cause of action will not arise for an unlawful or illegal act by a party,
not expressly approved or authorized by the party against whom relief is
sought. See 41 Am. Jur. 2d, Indemnity, §§ 11, 19 et. seq. and 18 Am. Jur.
2d, Contribution §§ 35, 37 et seq. Thus, in a case such as this where the act
complained of is an intentional tort by Thomas, no contribution or
indemnification will lie.
1987 WL 9605, at *2. While the Eastridge decision appeared to state broadly that ―where
the act complained of is an intentional tort . . ., no contribution or indemnification will
lie,‖ the facts of the case involved the intentional infliction of physical harm. It therefore
resembled the situations where Professor Gregory indicated that he would not
35
contemplate a right of contribution. Notably, Eastridge did not consider DUCATA or
McLean II.
After Eastridge, two federal district courts followed that decision in denying
contribution on facts more closely resembling McLean II. In Aspen, the defendants were
corporate officers who had been sued for securities fraud, common law fraud, and breach
of fiduciary duty. They sought contribution under DUCATA from other corporate
officers. The district court dismissed their contribution claim:
As the defendants correctly observe, it is a tenet of common tort law that
―courts will not aid one who has deliberately done harm.‖ Restat. (2d) Torts
§ 886A(3), cmt. j. The claims for which [the officers] seek contribution
stem entirely from allegations of [the officers‘] intentionally wrongful
conduct. [The officers] are alleged to have intentionally withheld
information about the Yukos transaction from their employer and used the
undisclosed information for their benefit by attempting to extort Aspen's
Board of Directors into furnishing cash for its disclosure. Whether styled as
fraud or breach of fiduciary duty, this is intentional and willful conduct.
Construing Delaware‘s contribution law in light of the state court‘s holding
in Eastridge and the well-settled common law prohibition against
permitting a tortfeasor to seek contribution on alleged intentionally tortious
conduct, I find that Plaintiffs are barred from seeking contribution from the
Individual Defendants on Aspen's Counterclaim.
Aspen, 544 Supp. 2d. at 234. The Aspen court declined to follow McLean II because it
pre-dated Eastridge. Id. The Aspen court did not consider the factual distinctions between
the cases.
In the other federal decision, Hollinger, the district court stated simply that
―[a]lthough it appears that under Delaware law contribution may be sought for a breach
of fiduciary duty, it may not be sought for an intentional tort.‖ 2006 WL 1444916, at *2.
As support, the court cited Eastridge, which it treated as authoritative.
36
McLean II and Eastridge can be harmonized by recognizing that Eastridge
involved a tortfeasor who consciously intended to cause physical harm, bringing it within
Professor Gregory‘s paradigmatic case for denying contribution. In McLean II, Judge
Schwartz applied DUCATA and permitted contribution by wrongdoers who committed
an intentional act (securities fraud), but under circumstances similar to situations where
Delaware‘s Blue Sky Law and Section 174 of the DGCL would authorize contribution. In
my view, the Aspen and Hollinger decisions read Eastridge too broadly as ostensibly
establishing a bright-line rule against contribution for all intentional torts. In this case, the
acts in which RBC engaged reflect a level of culpability similar to the conduct in McLean
II, which supports RBC‘s ability to claim the settlement credit under DUCATA.
5. Contribution In Other States
Because DUCATA is based on a uniform act, it is natural to ask how other states
have approached the question of contribution for intentional torts. Unfortunately, other
states have reached diverse results that make it difficult to draw helpful lessons. ―The
approaches that the states take to [contribution] are remarkably fragmented. . . . Not only
are the uniform laws inconsistent with each other, but inconsistent applications of
identical provisions exist among states adopting the same uniform act.‖ Jean Macchiaroli
Eggen, Understanding State Contribution Laws and Their Effect on the Settlement of
Mass Torts, 73 Tex. L. Rev 1701, 1701-02 (1995) (footnotes omitted).
DUCATA is based on the Uniform Act of 1939, but that act fell well short of
uniformity. Only Arkansas, Delaware, Hawaii, Maryland, New Mexico, Pennsylvania,
Rhode Island, and South Dakota adopted and currently adhere to it. Restatement (Third)
37
§ 23 Reporters‘ Note cmt. a. The state courts in the seven jurisdictions other than
Delaware do not appear to have addressed whether an intentional tortfeasor can seek
contribution under their versions of the Uniform Act of 1939. Consistent with the
analysis in this opinion, two federal decisions have predicted that Rhode Island would not
draw any distinction for purposes of contribution among types of tortfeasors because of
the plain language of its version of the Uniform Act of 1939. See N. Atl. Fishing, Inc. v.
Geremia, 153 B.R. 607, 612 (D.R.I. 1993); Testa v. Winquist, 451 F. Supp. 388, 393
(D.R.I. 1978). Yet federal courts have predicted that Hawaii and Pennsylvania would
draw a distinction between types of tortfeasors and would not permit intentional
tortfeasors to seek contribution, premised largely on the traditional common law rule
against it. See Beavers v. W. Penn Power Co., 436 F.2d 869, 875 (3d Cir. 1971)
(Pennsylvania law); Whirlpool Corp. v. CIT Gp./Bus. Credit., Inc., 293 F. Supp. 2d 1144,
1150 (D. Haw. 2003) (Hawaii law); In re One Meridian Plaza Fire Litig., 820 F. Supp.
1492, 1496 (E.D. Pa. 1993) (Pennsylvania law).
Eleven jurisdictions have adopted the revised Uniform Contribution Among
Tortfeasors Act of 1955. See Restatement (Third) § 23 Reports‘ Note cmt. a (listing
Arizona, Colorado, Florida, Massachusetts, Nevada, North Carolina, North Dakota, Ohio,
Oklahoma, South Carolina, and Tennessee). The Uniform Act of 1955 contains a
provision barring contribution for intentional torts and recommends extending the bar to
torts involving willful or wanton conduct. See Uniform Act of 1955 § 1(c) (―There is no
right of contribution in favor of any tortfeasor who has intentionally [willfully or
wantonly] caused or contributed to the injury or wrongful death.‖). The Uniform Act of
38
1955 also states that it ―shall not apply to breaches of trust or other fiduciary obligation.‖
Id. § 1(g); see Laster & Morris, supra, at 83-85 (discussing historical development of
Uniform Act of 1955 and reasons for excluding breaches of fiduciary duty). Notably,
Delaware did not adopt the 1955 revision: ―Delaware‘s statute was not modified after the
1955 Revision was promulgated. Hence, the language changes of the 1955 Revision do
not affect the Delaware law.‖ Clark v. Brooks, 377 A.2d at 372.
Fifteen states have contribution statutes that are not based on a uniform act. See
Restatement (Third) § 23 Reports‘ Note cmt. a (listing Connecticut, Idaho, Illinois,
Georgia, Kentucky, Louisiana, Michigan, Mississippi, Montana, New Hampshire, New
Jersey, New York, Oregon, Virginia, and Wisconsin). Four states have contribution
statutes which, like DUCATA, do not make distinctions among types of tortfeasors. New
York‘s contribution statute provides that ―two or more persons who are subject to
liability for damages for the same personal injury, injury to property or wrongful death,
may claim contribution among them,‖ N.Y. C.P.L.R. 1401 (McKinney), and the New
York Court of Appeals held that the statute applies to all tortfeasors, regardless of their
degree of intent, Bd. of Educ. v. Sargent, Webster, Crenshaw & Folley, 71 N.Y.2d 21, 27
(1987). New Jersey‘s statute provides that ―[t]he right of contribution exists among joint
tortfeasors‖ and defines joint tortfeasors as ―two or more persons jointly or severally
liable in tort,‖ N.J.S.A. 2A:53A-1 to 53A-2, and the New Jersey Supreme Court held that
the act permits contribution among all tortfeasors, regardless of their degree of intent,
Judson v. Peoples Bank & Trust Co., 17 N.J. 67, 91 (1954). The Michigan statute is
similar, and the Michigan Supreme Court reached the same result. See Mich. Comp.
39
Laws Ann. § 600.2925a(1); Donajkowski v. Alpena Power Co., 460 Mich. 243, 252
(1999). By contrast, the Illinois Supreme Court held that a comparable definition which
did not distinguish among tortfeasors was ambiguous, then relied on legislative history to
hold that the statute excluded contribution for intentional torts. Gerill Corp. v. Jack L.
Hargrove Builders, 128 Ill. 2d 179, 206 (1989). The state courts of Georgia, Idaho,
Mississippi, Montana, New Hampshire, and Oregon do not appear to have addressed the
issue.
Six of the non-uniform act states have statutes that foreclose the possibility of
contribution for intentional torts by limiting contribution to judgment debtors.
Restatement (Third) § 23 Reports‘ Note cmt. a (listing California, Kansas, Minnesota,
Missouri, Texas, and West Virginia). The Virginia and Kentucky statutes foreclose the
possibility by limiting contribution to torts resulting from negligence and not involving
moral turpitude. Va. Code § 8.01-34; K.R.S. § 412.030.
Iowa and Washington have recognized contribution by adopting the Uniform
Comparative Fault Act. See Restatement (Third) § 23 Reports‘ Note cmt. a. The official
comment to the Uniform Comparative Fault Act states that its coverage does extend to
intentional torts. Unif. Comparative Fault Act § 1, cmt. States that continue to recognize
contribution as a matter of common law follow the historical rule of denying contribution
to intentional tortfeasors. Preferred Accident Ins. v. Musante, Berman & Steinberg, 133
Conn. 536, 541 (1947); Bedard v. Greene, 409 A.2d 676, 677-78 (Me. 1979); Royal
Indem. Co. v. Aetna Cas. & Sur. Co., 229 N.W.2d 183, 189 (Neb. 1975); Ellis v. Chi. &
Nw. Ry. Co., 167 N.W. 1048, 1053-54 (Wisc. 1918).
40
Given the diversity of positions in other jurisdictions, it is hard to draw meaningful
insights for purposes of this case. At the risk of overgeneralization, there appears to be a
growing trend away from bright-line, all-or-nothing rules and towards concepts of
relative fault and the allocation of responsibility among parties, including parties who
have committed intentional torts. This trend includes movement towards permitting joint
tortfeasors who have acted with a more culpable state of mind than negligence to seek
contribution, although jurisdictions that permit contribution for intentional torts appear
still to be in the minority.12 Most persuasive for present purposes are decisions from
states with statutes which, like DUCATA, do not differentiate among classes of torts.
Applying their respective statutes, the highest courts in New Jersey, New York, and
Michigan have interpreted the lack of a distinction among classes of torts to authorize
12
See J. Tayler Fox, Note: Can Apples Be Compared To Oranges? A Policy-Based
Approach For Deciding Whether Intentional Torts Should Be Including In Comparative
Fault Analysis, 43 Val. U. L. Rev. 261, 270-286 (2008) (describing trends); Ellen M.
Bublick, The End Game of Tort Reform: Comparative Apportionment and Intentional
Torts, 78 Notre Dame L. Rev. 355, 357 (2003) (noting that ―a significant number of state
courts and legislatures are permitting liability to be apportioned between some types of
intentional and negligent fault‖); id. at 364-71 (describing trends). A prominent
illustration of the trend is the Restatement (Third), which does not distinguish among
types of torts when discussing contribution. It states as the general rule, ―[w]hen two or
more persons are or may be liable for the same harm and one of them discharges the
liability of another by settlement or discharge of judgment, the person discharging the
liability is entitled to recover contribution from the other, unless the other previously had
a valid settlement and release from the plaintiff.‖ Restatement (Third) § 23(a). A
comment on this section entitled ―Intentional Torts‖ states that ―[a] person who can
otherwise recover contribution is not precluded from receiving contribution by the fact
that he is liable for an intentional tort.‖ Id. cmt. l.
41
intentional tortfeasors to seek contribution. These precedents support interpreting
DUCATA to permit RBC to claim the settlement credit.
6. Federal Law
A final place to look for guidance on contribution for intentional torts is federal
law. It turns out that federal contribution decisions often involve state law claims where
the federal court exercised diversity jurisdiction, so the opinions apply state law under
Erie R. Co. v. Tompkins, 304 U.S. 64 (1938), and are properly treated as part of the state
law jumble. With those cases set aside, the federal authorities present much the same
picture as the Delaware authorities. They do not suggest a bright-line rule against
contribution for all intentional torts, and they support the availability of contribution
among joint tortfeasors when the tortious conduct involves a level of culpability similar
to the acts in which RBC engaged.
The most instructive authorities involve contribution under the federal securities
laws.13 Federal statutes have long provided for contribution among joint tortfeasors who
acted with scienter. See 15 U.S.C. § 77k(f); 15 U.S.C. §§ 78i(f) & 78r(b). Building on
those statutory provisions, the United States Supreme Court recognized a common law
13
An extensive body of scholarship focuses on these issues. See, e.g., Marc I.
Steinberg & Christopher D. Olive, Contribution and Proportionate Liability Under The
Federal Securities Laws In Multidefendant Securities Litigation After The Private
Securities Litigation Reform Act of 1995, 50 SMU L. Rev. 337 (1996); Vincent P. Liberti,
Joint & Several Liability Under Rule 10b-5: The Apportionment of Liability for
Contribution Claims Involving Non-Settling Defendants, 7 DePaul Bus. L.J. 45 (1994);
Phillip M. Nichols, Symmetry and Consistency and the Plaintiff’s Risk: Partial Settlement
and the Right of Contribution in Federal Securities Actions, 10 Del. J. Corp. L. 1 (1994).
42
right of contribution among joint tortfeasors found liable under Rule 10b-5. Musick,
Peller & Garrett v. Emp’rs Ins. Of Wasau, 508 U.S. 286, 288 (1993). A right to
contribution among joint tortfeasors who ―knowingly committed‖ a violation of the
Securities and Exchange Act was codified by the Private Securities Litigation Reform
Act of 1995, which contemplates allocation of liability among jointly and severally liable
defendants based on their percentage of responsibility. 15 U.S.C. § 78u-4(f)(8).
These authorities support permitting RBC to seek contribution from its fellow
joint tortfeasors. Under the federal securities laws, defendants who acted with scienter
can seek contribution. The fact that these defendants engaged in knowing or intentional
acts does not operate as a bright-line bar to contribution. Similar principles should apply
to RBC, which engaged in conduct comparable in culpability to a violation of the federal
securities laws.
7. Application To This Case
Based on the foregoing authorities, it does not appear that a bright-line rule exists
that would bar RBC from claiming DUCATA‘s settlement credit. To reiterate, DUCATA
does not contain any language that would limit a contribution claim by RBC. The
drafting history of the Uniform Act of 1939 suggests that Professor Gregory expected
contribution to be broadly available, and statutes like Sections 174 of the DGCL and
Delaware‘s Blue Sky Law contemplate contribution in similar situations. Although
Eastridge and McLean II point in different directions, Eastridge did not consider
DUCATA and involved conduct similar to Professor Gregory‘s paradigmatic case for
denying contribution. Judge Schwartz‘s decision in McLean II addressed contribution
43
under DUCATA and is closer to the facts of this case. This decision therefore adheres to
the plain language of DUCATA and holds that RBC is not barred from claiming a
settlement credit because RBC knowingly participated in the individual defendants‘
breach.
C. Equitable Defenses
For the reasons discussed in the preceding section, DUCATA does not establish a
bright-line rule that bars a defendant who has acted with a mental state more culpable
than negligence from seeking contribution. Nevertheless, as Professor Gregory
envisioned, a court retains discretion to deny contribution under DUCATA if warranted
by the facts of the case. Farrall v. A.C. & S. Co., Inc., 586 A.2d 662, 664 (Del. Super.
1990). Equitable considerations can provide a discretionary basis for a court to deny
contribution, because DUCATA ―was intended to apply equitable considerations in the
relationships of injured parties and tortfeasors.‖ Id. In this case, the plaintiffs argue that
the doctrines of in pari delicto and unclean hands should bar RBC from receiving a
settlement credit. This decision holds that in pari delicto does not apply, but that unclean
hands bars RBC from claiming the settlement credit for the Disclosure Claim and for the
Sale Process Claim to the extent that the breaches of duty related to the Board‘s final
approval of the Merger.
―Delaware, like most American jurisdictions and our federal common law (where
applicable), embraces to some extent the venerable in pari delicto doctrine.‖ In re Am.
Int'l Grp., Inc., Consol. Deriv. Litig. (AIG II), 976 A.2d 872, 882 (Del. Ch. 2009) (Strine,
V.C.). The doctrine provides that courts ―will not extend aid to either of the parties to a
44
criminal act or listen to their complaints against each other but will leave them where
their own act has placed them.‖ Id. (quoting 1 Am.Jur.2d Actions § 40); accord In re
LJM2 Co-Inv., LP, 866 A.2d 762, 775 (Del. Ch. 2004) (―[U]nder the in pari delicto
doctrine, a party is barred from recovering damages if his losses are substantially caused
by activities the law forbade him to engage in.‖ (internal quotation marks omitted)). The
doctrine does not apply here because RBC did not engage in criminal or illegal conduct.
RBC committed a tort by participating knowingly in tortious acts. Some tortious acts rise
to the level of criminal acts. RBC‘s did not.
Delaware law also recognizes the doctrine of unclean hands. This doctrine
is aimed at providing courts of equity with a shield from the potentially
entangling misdeeds of the litigants in any given case. The Court invokes
the doctrine when faced with a litigant whose acts threaten to tarnish the
Court‘s good name. In effect, the Court refuses to consider requests for
equitable relief in circumstances where the litigant‘s own acts offend the
very sense of equity to which [the litigant] appeals.
Nakahara v. NS 1991 Am. Trust, 718 A.2d 518, 522 (Del. Ch. 1998). ―[T]he purpose of
the [doctrine] is to protect the public and the court against misuse by one who, because of
his conduct, has forfeited his right to have the court consider his claims, regardless of
their merit.‖ Skoglund v. Ormand Indus., Inc., 372 A.2d 204, 213 (Del. Ch. 1976).
―[C]ourts of equity have extraordinarily broad discretion in application of the [unclean
hands] doctrine.‖ Nakahara, 718 A.2d at 522. Courts ―are not bound by formula or
restrained by any limitation that tends to trammel the free and just exercise of discretion.‖
Id. (quoting Keystone Driller Co. v. Gen. Excavator Co., 290 U.S. 240, 245-46 (1933)).
45
―Fraud will typically suffice to hold a party ineligible for relief under the unclean hands
doctrine.‖ Healy v. Healy, 2006 WL 3289623, at *2 (Del. Ch. Oct. 31, 2006).
In my view, when considering whether the unclean hands doctrine limits RBC‘s
ability to claim the settlement credit, the relevant focus should be on RBC‘s conduct vis-
à-vis the other alleged joint tortfeasors, not on RBC‘s conduct vis-à-vis the Class. This is
because for the unclean hands doctrine to apply, ―the inequitable conduct must have an
‗immediate and necessary‘ relation to the claims under which relief is sought.‖ Nakahara,
718 A.2d at 523 (internal quotation marks in original). ―The doctrine of ‗unclean hands‘
provides that ‗a litigant who engages in reprehensible conduct in relation to the matter in
controversy . . . forfeits his right to have the court hear his claim, regardless of its merit.‖
Portnoy v. Cyro-Cell Int’l, Inc., 940 A.2d 43, 80-81 (Del. Ch. 2008) (Strine, V.C.)
(internal citation omitted; emphasis added). The court is not an ―avenger[] of wrongs
committed at large . . . Thus to trigger the unclean-hands doctrine, the inequitable
conduct of the party seeking relief must be directly related to the matter before the court.‖
Donald J. Wolfe, Jr. & Michael A. Pittenger, CORPORATE AND COMMERCIAL PRACTICE
IN THE DELAWARE COURT OF CHANCERY 11.07(c) (2013) (emphasis added). ―The maxim
does not extend to any misconduct, however gross, which is unconnected with the matter
in litigation, and with which the opposite party has no concern.‖ 27A Am. Jur. 2d Equity
§ 104. In an ordinary, bilateral case, ―[t]he traditional defense of unclean hands applies to
facts involving only two parties, plaintiff and defendant, and one transaction involving
both parties.‖ Id. Once the focus shifts to the issue of contribution, the defense of unclean
46
hands looks to the facts involving the contribution plaintiff (RBC) and the contribution
defendants (the other joint tortfeasors).
The availability of contribution for violations of the securities laws is consistent
with focusing on conduct among the defendants when applying the defense of unclean
hands. As discussed in the preceding section, contribution is generally available under the
federal securities laws and Delaware‘s Blue Sky Law, even among wrongdoers who
acted with scienter. See 15 U.S.C. §§ 77k(f), 78i(f), 78r(b), 78u-4(f)(8) & 78u-4(f)(2)(A);
6 Del. C. § 73-605(b). If unclean hands barred contribution among defendants whenever
they acted fraudulently towards a plaintiff, the equitable doctrine would override the
statutory authorization of contribution. There is no tension if the unclean hands doctrine
examines conduct among the defendants themselves when assessing the availability of
contribution.
In this case, the doctrine of unclean hands bars RBC from claiming the settlement
credit to the extent RBC perpetrated what the Delaware Supreme Court has described as a
―fraud upon the board.” Mills Acq. Co. v. Macmillan, Inc., 559 A.2d 1261, 1283 (Del.
1988). ―In colloquial terms, a fraud on the board has long been a fiduciary violation
under our law and typically involves the failure of insiders to come clean to the
independent directors about their own wrongdoing, the wrongdoing of other insiders, or
information that the insiders fear will be used by the independent directors to take actions
contrary to the insiders' wishes.‖ In re Am. Int’l Gp., Inc. Consol. Deriv. Litig. (AIG I),
965 A.2d 763, 806-07 (Del. Ch. 2009) (Strine, V.C.). In Macmillan, the Delaware
Supreme Court took pains to note that the concept of a ―fraud on the board‖ extends to
47
advisors, such as the investment bank in that case who joined with two senior officers in
withholding information from the board: ―[I]t is bedrock law that the conduct of one who
knowingly joins with a fiduciary, including corporate officials, in breaching a fiduciary
obligation is equally culpable.‖ 559 A.2d at 1284 n. 33.
The Liability Opinion imposed liability on RBC for both the Sale Process Claim
and the Disclosure Claim. As to the latter, the Liability Opinion found that RBC provided
false information to the Board in its financial presentation. Liability Op., 88 A.3d at 104.
As to the former, the Liability Opinion identified two breaches of duty, one of which
occurred during the final approval of the Merger. During this period, the Board failed to
provide ―active and direct oversight‖ of RBC, did not detect its ―last minute efforts to
solicit a buy-side financing role from Warburg,‖ and did not identify the manipulation of
RBC‘s financial analyses or the false justifications proffered for certain changes. Id. at
94. Each instance involved a fraud on the Board. The Disclosure Claim involved
affirmative misrepresentations. The Sale Process Claim involved both affirmative
misrepresentations and failures to disclose. The directors breached their duties when
approving the disclosures in the Proxy Statement and when approving the Merger, but
they did so because RBC misled them, affirmatively in the case of the Disclosure Claim
and both affirmatively and by omission during the final approval of the Merger. If RBC
were permitted to seek contribution for these claims from the directors, then RBC would
be taking advantage of the targets of its own misconduct. This is a circumstance where
the unclean hands doctrine should apply.
The backdrop of Section 141(e) plays a role in assessing the equities for purposes
48
of applying the unclean hands doctrine. Section 141(e) states that
[a] member of the board of directors . . . shall, in the performance of such
member‘s duties, be fully protected in relying in good faith . . . upon such
information, opinions, reports or statements presented . . . by any other
person as to matters the member reasonably believes are within such other
person's professional or expert competence and who has been selected with
reasonable care[.]
8 Del. C. § 141(e). Directors may breach their duties and yet be ―fully protected‖ under
Section 141(e) if they reasonably rely on advisors. It would run contrary to the full
protection contemplated by Section 141(e) if RBC could assert a claim for contribution
back against the directors who relied on the false and materially incomplete information
that RBC provided.14
Because of its unclean hands, RBC cannot claim a settlement credit for the
Disclosure Claim or for the aspect of the Sale Process Claim relating to the final approval
of the Merger. RBC forfeited its right to have a court consider contribution for these
matters by committing fraud against the very directors from whom RBC would seek
contribution. By contrast, RBC can claim a settlement credit for the aspect of the Sale
Process Claim that did not involve misrepresentations and omissions by RBC towards its
fellow defendants.15
14
Section 141(e) could be introduced at a later stage of the analysis to achieve the
same result. The full protection offered by Section 141(e) is a defense to liability. Like
exculpation under Section 102(b)(7), it can defeat the requirement under DUCATA that
the party from whom contribution is sought be jointly liable in tort with the contribution
plaintiff. See Part II.E.1, infra.
15
Reasonable minds can differ about whether permitting a defendant like RBC to
obtain contribution or, in this case, a settlement credit undermines the policy goal of
49
deterring tortious conduct. Some posit that foreclosing contribution deters wrongdoing
more effectively because of a lottery effect in which a single tortfeasor could be forced to
bear the entire amount of the plaintiff‘s loss. See, e.g., Tex. Indus., Inc. v. Radcliff Mat’ls,
Inc., 451 U.S. 630, 636 (1981) (noting that ―[r]espondents and amici opposing
contribution point out that an even stronger deterrent may exist in the possibility, even if
more remote, that a single participant could be held fully liable for the total amount of the
judgment. In this view, each prospective co-conspirator would ponder long and hard
before engaging in what may be called a game of ‗Russian roulette‘‖); AIG II, 976 A.2d
at 882 n.21 (citing deterrence when applying doctrine of in pari delicto); Morente v.
Morente, 2000 WL 264329, *3 (Del. Ch. Feb. 29, 2000) (Strine, V.C.) (citing deterrence
when applying doctrine of unclean hands); Jake Dear & Steven E. Zipperstein,
Comparative Fault and Intentional Torts: Doctrinal Barriers and Policy Considerations,
24 Santa Clara L. Rev. 1, 18 (1984) (citing as a policy justification for denying
contribution in the case of intentional torts that ―by treating an intentionally acting
tortfeasor more harshly than his negligent counterpart, future conduct will be deterred‖).
Others contend that allowing contribution deters more effectively by increasing the
probability that each tortfeasor will bear at least some of the loss. See, e.g., Nw. Airlines,
Inc. v. Transp. Workers Union of Am., AFL-CIO, 451 U.S. 77, 88 (1981) (―[I]t is sound
policy to deter all wrongdoers by reducing the likelihood that any will entirely escape
liability.‖) (citing W. Prosser, Law of Torts § 50, pp. 305–306 (4th ed. 1971)); Blazovic v.
Andrich, 590 A.2d 222, 231 (N.J. 1991) (―Apportionment of fault between intentional
and negligent parties will not eliminate the deterrent or punitive aspects of tort
recovery.‖); Judson, 110 A.2d at 34 (―[I]f each intentional wrongdoer knew that his
conduct was exposing him to the risk of the certainty of liability in some amount, the
desired deterrent effect would be produced more surely than if contribution among the
wrongdoers is denied.‖). Under the latter view, extending contribution is consistent with
the general trend towards comparative fault, which scholars now regard as more efficient
than all-or-nothing fault-based regimes. Andrew R. Klein, Comparative Fault and Fraud,
48 Ariz. L. Rev. 983, 997-99 (2006); see, e.g., Daniel H. Cole & Peter Z. Grossman,
PRINCIPLES OF LAW AND ECONOMICS 222 (Prentice Hall 2005) (stating that ―comparative
negligence is arguably superior, from the perspective of economic efficiency, to other
fault-based tort regimes that treat cost allocation as an all or nothing proposition‖); Oren
Bar-Gill & Omri Ben-Shahar, The Uneasy Case for Comparative Negligence, 5 Am. L. &
Econ. Rev. 433, 434 (2003) (stating that scholars have demonstrated that comparative
fault necessarily leads to efficient outcomes in models that do not consider the possibility
of judicial error and that scholars are actively debating the question of which system is
most efficient when considering incomplete information). Empirical research supports the
broader proposition that increasing the certainty of punishment advances the goal of
deterrence by a greater margin than a proportional increase in the magnitude of the
penalty. See, e.g., Daniel Nagin, Deterrence in the 21st Century: A Review of the
Evidence, in CRIME AND JUSTICE: AN ANNUAL REVIEW OF RESEARCH (M. Tonry, ed.,
50
D. The Statutory Requirements For The Settlement Credit
Having determined that RBC is not barred entirely from claiming DUCATA‘s
settlement credit on statutory or equitable grounds, this decision must consider whether
RBC has met the requirements for the credit. The plaintiffs contend that RBC has not
proven that any of the Settling Defendants were joint tortfeasors, making the settlement
credit unavailable. RBC counters that the findings in the Liability Opinion establish that
the Settling Defendants were joint tortfeasors. This decision holds that (i) RBC had the
burden to establish that the Settling Defendants were joint tortfeasors, (ii) RBC did not
waive its right to contend that the Settling Defendants were joint tortfeasors, (iii) the
Settlement did not dispose of the need to determine whether the Settling Defendants were
joint tortfeasors, (iv) the agreements in principle and the Settlement did not prejudice
RBC.
DUCATA only recognizes a right of contribution among joint tortfeasors. 10 Del.
C. § 6302(a) (―The right of contribution exists among joint tortfeasors.‖). The statute
defines joint tortfeasor status in terms of common liability for money damages. Id § 6301
2013) (―[C]ertainty of apprehension, not the severity of the ensuing legal consequence, is
the more effective deterrent.‖); Horst Entorf, Certainty and Severity of Sanctions in
Classical and Behavioral Models of Deterrence: A Survey (Institute for the Study of
Labor (IZA), Discussion Paper No. 6516, 2012), available at http://ftp.iza.org/dp6516.pdf
(noting that many new surveys ―confirm what has been found by earlier studies, i.e. that
the deterrent effect of the certainty of sanctions far outweighs the severity of
punishment.‖). In my view, DUCATA resolves the general policy debate in favor of
contribution, and the plaintiffs have not provided case-specific reasons for reaching a
different conclusion about deterrence that would warrant applying the doctrine of unclean
hands to RBC.
51
(―defining ―joint tortfeasors‖ as ―2 or more persons jointly or severally liable in tort for
the same injury to person or property, whether or not judgment has been recovered
against all or some of them.‖); id § 6302(b) (recognizing a right of contribution only
when one joint tortfeasor has paid more than its proportionate share of ―the common
liability‖). The statutory focus on common liability departed from the common law rule,
which recognized joint tortfeasor status ―where there existed joint or concurring
negligence.‖ Clark v. Brooks, 377 A.2d at 368.
Delaware decisions have interpreted DUCATA‘s definition of ―joint tortfeasor‖ to
require that the party seeking contribution show that the proposed contributor could have
―common liability‖—in the sense of an obligation to pay money damages—for the injury
to the plaintiff. In the first decision to address the issue, the Delaware Superior Court held
that ―[i]t is clear from the very language of the statute itself that it has no application
unless there is a ‗common liability‘ to the injured person. . . . [T]here is no right to
contribution unless the injured person has a possible remedy against two or more
persons.‖ Lutz, 100 A.2d at 648. The Delaware Supreme Court has explained that
DUCATA ―comes into play only when the proposed contributor shares with the
defendant a ‗common liability‘ to the plaintiff. Absent such liability, no contribution may
be enforced.‖ Fields v. Synthetic Ropes, Inc., 215 A.2d 427, 430 (Del. 1965). ―Common
liability, not concurring negligence, is the sine qua non for the invocation of the Uniform
52
Contribution Act.‖ Ferguson v. Davis, 102 A.2d 707, 708 (Del. Super. 1954). Numerous
decisions recognize and apply these principles.16
The requirement of joint tortfeasor status has significant implications for the
settlement credit. The Delaware Supreme Court has held that ―[t]he credit provided for in
the Delaware Uniform Contribution Law is applicable exclusively to ‗joint tortfeasors.‘‖
Med. Ctr. of Del., Inc. v. Mullins, 637 A.2d 6, 8 (Del. 1994). Consequently, the joint
tortfeasor status of the party receiving the release is ―a prerequisite to claiming the
16
See, e.g., Youell v. Maddox, 692 F. Supp. 343, 350 (D. Del. 1988) (―In order for
an action for contribution to lie, however, the joint tortfeasors must share a ‗common
liability‘ to the injured party.‖); ICI Am., Inc. v. Martin-Marietta Corp., 368 F. Supp.
1148, 1151 (D. Del. 1974) (―Indispensible to a joint tortfeasor relationship [under
DUCATA] is a ‗common liability‘ either ‗joint‘ or ‗several‘ that two or more parties have
to the person injured. Without this dual liability . . ., no right of contribution can exist.‖);
Walker v. Patterson, 325 F. Supp. 1024, 1026 (D. Del. 1971) (―[I]t is clear that under
Delaware law there can be no contribution unless there is a common liability to the
injured person and unless the injured person has a possible remedy against two or more
persons.‖); Builders & Managers, Inc. v. Dryvit Sys., Inc., 2004 WL 304357, *2 (Del. Ch.
Feb. 13, 2004) (―The inherent requirement is that the parties are joint tortfeasors who
share a ‗common liability.‘‖); Pringle v. Scarberry, 1981 WL 383062, *1 (Del. Super.
Aug. 12, 1981) (―[It] is clear from the very language of the statute, itself, that it has no
application unless there is a common liability to the injured party. . . . [T]here is no right
to contribution unless the injured person has a remedy against two or more persons.‖);
see also Clark v. Brooks, 391 A.2d at 748 (holding that the party seeking contribution and
the proposed contributor must be ―at least ‗severally‘ liable for the same injury to
plaintiff‖). Courts in the other states that adopted the Uniform Act of 1939 have reached
the same conclusion. See, e.g., Walter v. Curry, 539 S.W.2d 264, 298 (Ark. 1976)
(―[T]here must be a common liability to an injured party, and the injured party must have
a possible remedy against both the party seeking contribution and the party from whom it
is sought.‖); Ozaki v. Ass'n of Apartment Owners of Discovery Bay, 954 P.2d 644, 650
(Haw. 1998) (A tortfeasor ―cannot be jointly and/or severally liable with another unless
[t]he person who has been harmed can sue and recover from both.‖) (internal quotations
omitted) (emphasis in original); Blessing v. Town of S. Kingstown, 1997 WL 839917, at
*4 (R.I. Super. 1997) (―[T]o constitute joint tortfeasors under the act, both parties must
have engaged in common wrongs.‖).
53
credit.‖ Id. If the released party is not a joint tortfeasor, then those parties who are liable
cannot claim any reduction in damages in the amount of the consideration paid for the
release by the settling party. Id.
As the leading decision in this area, Mullins warrants further discussion. The
plaintiffs were a husband and wife who filed a civil action alleging medical malpractice
against the Medical Center of Delaware (the ―Medical Center‖) and Ghassem I. Vakili,
M.D. On the first day of trial, Dr. Vakili agreed to pay the Mullins $100,000 in return for
a ―joint tortfeasor‘s release,‖ which the Mullins executed that day. ―The Release not only
extinguished the Mullins‘ claims against Dr. Vakili, but also assured Dr. Vakili of
complete ‗peace‘ by expressly incorporating the provisions of 10 Del. C. § 6304(b).‖
Mullins, 637 A.2d at 7. Dr. Vakili and the Medical Center had asserted cross-claims
against each other, and as the Delaware Supreme Court noted, DUCATA authorized the
Medical Center to reduce any judgment against it by the greater of the amount of the
consideration paid for the release or the pro rata share of fault attributed to the settling
tortfeasor. Id. The Medical Center opted to continue to prosecute its cross-claim against
Dr. Vakili for purposes of obtaining the reduction.
The jury was given a special verdict form with four questions. The first question
asked whether the jury found that the Medical Center ―was negligent in a manner that
proximately caused injury to the plaintiffs?‖ Id. The jury answered ―Yes.‖ The second
question asked whether the jury found that Dr. Vakili ―was negligent in the manner
contended by the defendant Medical Center, and that such negligence of Ghassem Vakili,
M.D. proximately caused injury to the plaintiffs?‖ Id. The jury answered ―No.‖ The third
54
question asked the jury to enter the amount of damages awarded each plaintiff. The jury
awarded $75,000 to the wife and $15,000 to the husband, for total damages of $90,000.
The final question asked the jury to enter the percentage of each defendant‘s liability, and
the jury assigned 100% of the liability to the Medical Center. The Medical Center sought
a credit against the judgment against in the amount of $100,000, equal to what Dr. Vakili
paid in settlement. The Superior Court denied the request.
On appeal, the Delaware Supreme Court framed the ―sole issue before this Court‖
as ―whether the judgment rendered against the Medical Center should be deemed
satisfied by reason of the credit provided for in [Section 6304(a)].‖ Id. After observing
that the credit is ―applicable exclusively to ‗joint tortfeasors,‘‖ the Delaware Supreme
Court concluded that ―the dispositive question in this appeal is whether Dr. Vakili is a
joint tortfeasor within the meaning of [DUCATA].‖ Id. at 8.
The Delaware Supreme Court held that the Medical Center, as the party seeking
contribution, had the burden of establishing that Dr. Vakili was a joint tortfeasor before it
could claim any credit against its own liability.17 In an effort to carry its burden, the
17
Id. (―The Medical Center was required to demonstrate Dr. Vakili's joint
tortfeasor status (i.e., that he was jointly liable in tort for the Mullins' injuries), as a
prerequisite to claiming the credit provided for by Section 6304(a).‖). The Restatement
(Third) endorses this allocation of the burden of proof: ―Since it is the defendant who
alleges that the settling tortfeasor bore some or all of the responsibility for plaintiff's
injury, the defendant has the burden of proof that the settling tortfeasor's tortious conduct
was a legal cause of plaintiff's injury . . . and that defendant would otherwise have a valid
contribution claim against the settling tortfeasor.‖ Restatement (Third) § 16. Both the
Restatement (Second) and the Restatement (Third) endorse the rule that if the settling
party was not liable to the plaintiff, then the settling party is not liable for contribution
and a non-settling defendant cannot claim a settlement credit. Restatement (Third) § 16
55
Medical Center argued that ―Dr. Vakili‘s status as a joint tortfeasor was established solely
by virtue of the settlement‖ and ―was conclusive after [his] release by the Mullins.‖ 637
A.2d at 8. The Delaware Supreme Court rejected this position, holding that the defendant
must establish joint tortfeasor status through a determination ―by some reliable means,‖
which could be ―either judicially or by an admission, that the settling party was liable in
tort, i.e., a tortfeasor.‖ Id.
The Delaware Supreme Court looked to the language of the release to see if it
contained an admission of liability. The release stated that
[i]f it should appear or be adjudicated in any suit, action or proceeding that
Dr. Vakili was guilty of joint or joint and several negligence with caused
injuries, losses or damages to the Releasors, in order to save Dr. Vakili, as
further consideration for said payment, [plaintiffs] will satisfy any decree,
judgment or award in which there is such a finding or adjudication
involving Dr. Vakili on his behalf, to the extent of his liability for
contribution, if it is held there is any liability for contribution.
Id. at 9 (emphasis in Mullins). The Delaware Supreme Court held that rather than
admitting liability or establishing that the Medical Center had an incontestable right to
the credit contemplated by DUCATA, the conditional language of the release made any
protection against potential claims for contribution from other joint tortfeasors
cmt. c (―If the factfinder later determines that the settling tortfeasor bore no responsibility
or on some other basis determined that the settling tortfeasor was not liable to the
nonsettling tortfeasor for contribution (e.g., because of an immunity), the nonsettling
tortfeasor receives no credit for that nonliable settling tortfeasor.‖); Restatement (Second)
§ 886A cmt. g (―If the one from whom contribution is sought is not in fact liable to the
injured person, he is not liable for contribution.‖).
56
―unambiguously dependent upon a subsequent judicial determination of Dr. Vakili‘s
liability as a joint tortfeasor.‖ Id.
The Delaware Supreme Court then considered whether Dr. Vakili‘s liability had
been determined by other reliable means. It had. The jury found that Dr. Vakili was not
liable for negligence, so Dr. Vakili was not a joint tortfeasor.
Because Dr. Vakili was not a joint tortfeasor, the collateral source doctrine
prevented the Medical Center from receiving any credit against its liability for the
amount of Dr. Vakili‘s settlement payment. Id. at 10 (―In the absence of a determination
that Dr. Vakili was a joint tortfeasor, under the collateral source rule, the Medical Center
had no right to a credit because the payment by Dr. Vakili to the Mullins constituted
compensation from an independent source.‖). The Delaware Supreme Court recognized
that this rule potentially resulted in a plaintiff receiving more in compensation than what
the fact-finder awarded for her injuries, because the plaintiff could obtain a settlement
payment from one defendant and still recover in full against another. This is precisely
what happened in Mullins, where the plaintiffs recovered $100,000 from Dr. Vakili, then
still could recover their full judgment in the amount of $90,000 from the Medical Center.
The plaintiffs thus obtained compensation equal to 211% of the amount of damages
determined by the trier of fact.
After weighing the policy issues raised by the rule, the Delaware Supreme Court
held that ―the collateral source rule resolves what may be competing equities in favor of
the innocent injured plaintiff receiving a windfall, rather than an admitted or adjudged
tortfeasor bearing less than the full cost of his or her negligent conduct.‖ Id. The
57
Restatement (Third) endorses this approach. Id. § 16, cmt. c (―If the factfinder later
determines that the settling tortfeasor bore no responsibility or on some other basis
determined that the settling tortfeasor was not liable to the nonsettling tortfeasor for
contribution (e.g., because of an immunity), the nonsettling tortfeasor receives no credit
for that nonliable settling tortfeasor.‖).
Under the foregoing principles, if the plaintiffs had proceeded to trial against all of
the defendants, and if all of the defendants were held liable, the plaintiffs still could have
recovered 100% of their damages from RBC. If RBC paid 100% of the judgment, it
would have been up to RBC to seek contribution from the other defendants. If fewer than
all of the defendants were held liable to the plaintiffs, then under DUCATA, RBC only
could seek contribution from those defendants who were held liable, i.e., the other joint
tortfeasors. 10 Del. C. § 6302(a) (―The right of contribution exists among joint
tortfeasors.‖). RBC would not be able to seek contribution from any defendant not held
liable to the plaintiff. Id. § 6301 (limiting joint tortfeasor status to those ―persons jointly
or severally liable in tort for the same injury to person or property‖).
Similar principles govern RBC‘s effort to claim a credit for the Settlement. Under
Mullins, the joint tortfeasor status of the Settling Defendants is a prerequisite to RBC‘s
ability to claim any credit. The joint tortfeasor status of the Settling Defendants must be
established by reliable means, such as an admission or a determination by the trier of fact.
As the party seeking the credit, RBC bears the burden of establishing the joint tortfeasor
status of each of the Settling Defendants.
58
1. The Effect Of RBC’s Failure To Assert At Trial That The
Settling Defendants Were Joint Tortfeasors
Because Mullins assigns to RBC the burden of proving that the Settling
Defendants were joint tortfeasors, the plaintiffs claim that RBC waived its right to make
that claim. Under this view, RBC had to assert at trial that the Settling Defendants were
joint tortfeasors, just as the Medical Center sought a special jury verdict on Dr. Vakili‘s
liability. RBC never did so. Its cross-claim did not contend that the Settling Defendants
were joint tortfeasors. Rather, it disavowed any such assertion. Likewise, RBC stated in
the Pre-Trial Stipulation that it would not be contending at trial that the Settling
Defendants were joint tortfeasors, and it did not do so in its post-trial briefs. It may be the
case that in a jury trial, the question of relative fault must be litigated during the trial on
the merits so that the jury may ―properly fulfill its role as trier of fact.‖ Ikeda v. Molock,
603 A.2d 785, 787 (Del. 1991). Three precedents suggest that the same strictures do not
apply in a bench trial, such that RBC did not lose its right to assert that the Settling
Defendants were joint tortfeasors.
The first ruling is a transcript decision by Chief Justice Strine, then a Vice
Chancellor. Teachers’ Ret. Sys. of La. v. Greenberg, C.A. No. 20106-VCS (Del. Ch. July
13, 2007). The underlying case was a stockholder derivative action that challenged as
self-interested transactions a series of insurance agency agreements between American
International Group, Inc., and C.V. Starr & Co., Inc., a corporation owned by AIG‘s CEO
Maurice R. Greenberg and other senior executives at AIG. The plaintiffs originally sued
all of the directors of AIG for breach of fiduciary duty. After Greenberg left the
59
company, the plaintiffs settled with various outside and inside directors of AIG, while
continuing with the suit against Greenberg and two senior executives who departed with
him. Greenberg and his codefendants sought to assert claims for contribution against the
directors who settled, and they argued that their claims for contribution should be heard
as part of the underlying action so as to preserve the possibility of disproportionate fault
under DUCATA. Chief Justice Strine rejected the application for practical reasons,
finding that it would be ―an awkward, weird trial to have‖ in which Greenberg would be
arguing for part of the trial that no one had done anything wrong and then for another part
of the trial that the other directors had engaged in the wrongful conduct. Id. at 6-7. By
contrast, if Greenberg prevailed, there would be no need for a contribution action. The
court concluded that any contribution claims should be litigated, if at all, after the
resolution of the underlying proceeding, with the possibility of disproportionate liability
preserved. Id.
The second ruling is a decision by Chancellor Allen. Odyssey P’rs, L.P. v.
Fleming Cos., Inc., 1997 WL 38134 (Del. Ch. Jan. 24, 1997). Minority stockholders sued
the corporation‘s controlling stockholder and four out of five directors for allegedly
breaching their fiduciary duties by allowing the controller to foreclose on the
corporation‘s assets. After several months of discovery, the four directors moved to assert
a third-party claim for contribution against a fifth director (Banks) who had been
appointed by the minority stockholders. Chancellor Allen declined to permit the third-
party claim to go forward, explaining, ―[o]bviously, if the defendants are not liable, it
would be more efficient to save Banks the expenses associated with active party status.‖
60
Id. at *3. The third-party claim therefore offered ―only a very unclear claim of greater
efficiency and certainly represent[ed] an attempt to use the joinder of party rules to gain
tactical advantage.‖ Id. Like the Teachers ruling, the Odyssey Partners decision
contemplated that contribution issues could best be sorted out after the liability
determinations.
The third precedent is McLean II. In that case, Judge Schwartz did not hold that
the accountant and his firm could not claim the DUCATA settlement credit and argue
about unequal responsibility in post-trial proceedings. He first issued McLean I, in which
he found that the accountant and his firm were liable. He then issued McLean II, in which
he addressed the issues raised by DUCATA and the settlement credit.
Based on these precedents, it does not appear that RBC waived its right to argue
during post-trial proceedings that the Settling Defendants are joint tortfeasors and that
responsibility for the damage suffered by the Class should be allocated according to
relative fault. They simply had to do so based on the record created at trial and in light of
the factual findings in the Liability Opinion.
2. The Effect Of The Settlement
For its part, RBC contends that it need not now establish that the Settling
Defendants were joint tortfeasors, because the plaintiffs conceded that fact by entering
into the Settlement. Alternatively, RBC argues that the plaintiffs should now be estopped
to contend otherwise. Mullins forecloses both positions.
RBC argues that by executing the Settlement, the plaintiffs ―assumed the
contribution risk and RBC‘s damages must be reduced by the aggregate pro rata share of
61
the Rural/Metro Defendants and Moelis.‖ Dkt. 369 at 10. In Mullins, the Delaware
Supreme Court held that Dr. Vakili‘s settlement did not establish his status as joint
tortfeasor because it did not contain an admission of liability. 637 A.2d at 9. Subsequent
Delaware decisions have followed Mullins in holding that a settlement does not establish
the joint tortfeasor status of the settling party if it does not contain an admission of
liability.18 ―Rather, whether a party is a joint tortfeasor must be determined in a reliable
manner, either by a judicial finding by the trier of fact or by an admission.‖19
Like the release in Mullins, neither the agreements in principle nor the Settlement
Stipulation contained any admissions of liability on the part of the Settling Defendants.
Moreover, the language of the Settlement Stipulation and Partial Final Judgment
conditioned any reduction in RBC‘s damages on a subsequent determination that the
Settling Defendants were liable to the plaintiffs. The Settlement Stipulation contained the
following provision, which was repeated in the proposed implementing order: ―Pursuant
to 10 Del. C. §6304(b) the damages recoverable against non-settling defendant RBC and
18
See, e.g., Lemon v. Fairley, 2010 WL 4138555, at *1 (Del. Super. Oct. 20,
2010); Roca v. Riley, 2008 WL 1724259, at *2 (Del. Super. Apr. 10, 2008); Capano v.
Capano, 2003 WL 22843906, *2 (Del. Ch. Nov. 14, 2003); Harney v. Spencer, 1994 WL
750338, at *1 (Del. Super. Dec. 27, 1994).
19
Roca, 2008 WL 1724259, at *2; accord Capano, 2003 WL 22843906, at *2
(―[T]o qualify as a tortfeasor, there must have been some reliable determination, either
judicially or by admission, that the person was liable in tort.‖); Hall v. Gunzl, 723 A.2d
385, 387 (Del. Super. 1998) (―There must be a reliable means, even in an imputed
negligence situation, for there to be determined that the settling party, here Gibson, was a
tortfeasor.‖); see Johnson v. Kelly Servs. Ir., Ltd., 2003 WL 164289, at *3-4 (Del. Ch.
Jan. 8, 2003) (holding that admission of liability in pre-trial stipulation was reliable
means of establishing joint liability of settling tortfeasor).
62
any other alleged tortfeasor will be reduced to the extent of the pro rata shares, if any, of
Moelis and the Rural/Metro Defendants.‖ Dkt. 323, ¶ 13 & Ex. E. This provision
referenced Section 6304(b), under which any settlement credit is limited to joint
tortfeasors, and it spoke of the ―pro rata shares, if any‖ of damages for which Moelis and
the Rural/Metro Defendants otherwise would be liable. The words ―if any‖ recognized
that the Settling Defendants might not have any share of liability, or in other words that
Moelis and the Rural/Metro Defendants might not be joint tortfeasors. The Settlement
therefore did not establish the joint tortfeasor status of Moelis or the Rural/Metro
Defendants.
In a related argument, RBC contends that a combination of the Settlement and
principles of estoppel bar the plaintiffs from disputing that the Settling Defendants are
joint tortfeasors. Judicial estoppel applies in Delaware when (i) ―a litigant advances a
position inconsistent with a position taken in the same or earlier legal proceeding‖ and
(ii) ―the court was persuaded to accept the previous argument as a basis for its earlier
ruling.‖ VIII-Hotel II P Loan Portfolio Hldgs., LLC v. Zimmerman, 2013 WL 5785290, at
*3 (Del. Super. Ct. Sept. 19, 2013). The party‘s prior position will be considered a
―basis‖ for the court‘s ruling where (i) the prior position ―contributed to the court‘s
decision,‖ Julian v. E. States Const. Serv., Inc., 2009 WL 1211642, at *7 (Del. Ch. May
5, 2009); (ii) the court ―relied‖ on the party‘s prior position, Zimmerman, 2013 WL
5785290, at *3; or (iii) the party‘s newly inconsistent position ―contradicts‖ the court‘s
ruling, Banet v. Fonds de Regulation et de Controle Cafe Cacao, 2010 WL 1066993, at
*4 (Del. Ch. Mar. 12, 2010).
63
The doctrine of quasi-estoppel ―precludes a party from asserting, to another‘s
disadvantage, a right inconsistent with a position it has previously taken. Quasi-estoppel
applies when it would be unconscionable to allow a person to maintain a position
inconsistent with one to which he acquiesced, or from which he accepted a benefit.‖ Pers.
Decisions, Inc. v. Bus. Planning Sys., 2008 WL 1932404, at *6 (Del. Ch. May 5, 2008)
(internal quotation marks omitted). ―To constitute this sort of estoppel the act of the party
against whom the estoppel is sought must have gained some advantage for himself or
produced some disadvantage to another.‖ Id. ―A party does not need to show reliance for
quasi-estoppel to apply.‖ Barton v. Club Ventures Invs. LLC, 2013 WL 6072249, at *6
(Del. Ch. Nov. 19, 2013).
RBC observes that until the Settlement, the plaintiffs argued that the directors had
breached their fiduciary duties and that Moelis aided and abetted the breach. RBC
contends that the plaintiffs‘ arguments contributed to the court‘s decision in the Liability
Opinion, rendering judicial estoppel applicable. Alternatively, RBC contends that based
on the same arguments, the plaintiffs were able to extract the Settlement, rendering quasi-
estoppel applicable. Dkt. 369 at 13-16.
In my view, Mullins forecloses RBC‘s estoppel theories. In that case, the plaintiffs
originally asserted that Dr. Vakili was liable in negligence, and they extracted a
settlement from Dr. Vakili on that basis. The plaintiffs then reversed course and
maintained for purposes of the Medical Center‘s contribution claim that Dr. Vakili was
not negligent, and they prevailed on that basis. The Delaware Supreme Court did not
have any difficulty with the plaintiffs‘ course of action in Mullins. What transpired there
64
and in this case followed the normal progression of a lawsuit against multiple defendants
where there is a partial settlement. A plaintiff first asserts that all defendants are liable,
then later settles with a subset of the defendants. If principles of estoppel barred the
settling plaintiff from disputing the settling defendants‘ status as joint tortfeasors, that
analysis would, as a practical matter, overrule Mullins. Instead, Mullins holds that a
settlement is not enough unless it contains an admission of liability. The question of the
Settling Defendants‘ status as joint tortfeasors thus remained to be decided.
3. Prejudice To RBC From The Agreements In Principle
During oral argument, RBC pressed the theory that it should not have to establish
now that the Settling Defendants were joint tortfeasors because the timing of the
agreements in principle prejudiced RBC by depriving RBC of the opportunity to prove its
claims for contribution at trial. The situation that RBC faced is a function of being the
last non-settling defendant. It is endemic to the litigation process and not a predicament
that should relieve RBC of its burden to prove joint tortfeasor status under Mullins.
The Delaware Supreme Court has held that when parties to a case execute a
settlement that releases a defendant from liability for contribution and the defendant does
not admit liability, the released defendant must remain a party to the case for purposes of
trial to facilitate a determination of the released defendant‘s status as a joint tortfeasor.
Ikeda, 603 A.2d at 787. If the non-settling defendants wish to contend that the settling
defendant‘s pro rata share of liability, and hence any settlement credit, should be based
upon relative fault, then the non-settling defendants must file a cross-claim against the
settling defendant. Id. (stating that before disproportionate fault can be litigated, ―Section
65
6306(d) ―requires the filing of a cross-claim between parties to the litigation‖); see 10
Del. C. § 6306(d) (providing that if judgment has been entered against some or all of the
joint tortfeasors in a single action, then as to them, the rule of equal allocation applies
unless ―the issue of proportionate fault [was] litigated between them by cross-complaint
in that action‖).
Delaware cases offer examples of settlements involving codefendants that
occurred in close proximity to trial and left the remaining defendant to litigate the issue
of relative fault. See Ikeda, 603 A.2d at 785 (settling ―[s]everal days prior to trial‖);
Winker v. Balentine, 254 A.2d 849, 850-51 (Del. 1969) (settlement on the morning of
trial). These cases have not found that the non-settling defendant suffered prejudice.
On at least two occasions, this court has approved settlements in representative
actions with a subset of the defendants and permitted the action to continue against the
remaining defendants. One example is the Teachers decision, discussed previously. See
Part II.D.1, supra. Another is Frazer v. Worldwide Energy Corp., 1991 WL 74041 (Del.
Ch. May 2, 1991), where the plaintiffs were pursuing claims for breach of fiduciary duty
following a merger. The plaintiffs settled with the individual defendants for a payment of
$1 million and proposed to continue to litigate against the corporate defendants. As in
this case, the release extinguished the corporate defendants‘ right of contribution and
contemplated that the corporate defendants would receive the DUCATA settlement
credit. Unlike in this case, the corporate defendants objected to the settlement, in part
because of its effect on their contribution rights. Justice Jacobs, then a Vice Chancellor,
approved the settlement. Id. at *5-6.
66
In this case, consistent with Ikeda, the Settling Defendants remained parties to the
action for purposes of trial after the agreements in principle were reached. Also consistent
with Ikeda, RBC filed a cross-claim seeking contribution against the Rural/Metro
Defendants and Moelis, and RBC had the opportunity to develop a record to support its
contribution claims at trial. Three of the individual defendants testified at trial (DiMino,
Shackelton, and Walker). RBC could have issued trial subpoenas to compel the other
individual defendants to appear or to cause Moelis to appear through specified directors,
officers, or managing agents. In re Activision Blizzard, Inc., 86 A.3d 531, 551 (Del. Ch.
2014). The Settling Defendants were not released from the case until six months after
trial, when the court conducted a hearing on the Settlement and entered the Partial Final
Judgment. RBC did not object to the Settlement or the entry of the Partial Final
Judgment.
RBC was not prejudiced by the agreements in principle and has not been deprived
of its opportunity to assert that the Settling Defendants were joint tortfeasors. RBC had
the opportunity during trial to introduce evidence and develop a record in support of its
contribution claims. RBC retained the opportunity to claim the settlement credit
contemplated by DUCATA, which this decision addresses.
E. Joint Tortfeasor Status
Having disposed of the various reasons advanced by the parties as to why the joint
tortfeasor status of the Settling Defendants need not be determined, this decision must
confront the issue. Only two of the Settling Defendants—Shackelton and DiMino—
qualify as joint tortfeasors.
67
1. The Director Defendants
As to the director defendants, RBC claims that the Liability Opinion‘s
―determination that the Directors breached their fiduciary duties is ‗dispositive‘ of the
question of whether the Directors and RBC share a common liability—they now do.‖
Dkt. 369 at 17. Under DUCATA, joint tortfeasor status depends on common liability, not
joint culpability. The Liability Opinion established that the directors breached their
fiduciary duties. It did not determine whether, but for the Settlement, they were liable to
the Class.
a. Exculpation Under Section 102(b)(7)
To determine whether the directors were liable to the Class, this decision must
address the availability of exculpation under Section 102(b)(7). How Section 102(b)(7)
affects a right of contribution presents a question of first impression, but Delaware
decisions interpreting DUCATA have long held that if a statute or common law doctrine
would prevent a party from being held liable for money damages for the underlying harm
based on the claim being asserted, then the party is not a joint tortfeasor against whom an
action for contribution will be available.
The leading Delaware decision on this issue remains then-Judge, later Justice
Carey‘s opinion in Lutz, which was issued in 1953, just four years after the adoption of
DUCATA. Following a two-car accident, the driver of one of the cars (Lutz) and his
three passengers sued the driver of the second car (Boltz) for negligence. Boltz moved to
file a counterclaim against Lutz, seeking contribution in the event he was held liable for
the plaintiffs‘ injuries. The counterclaim sought contribution on the grounds that that
68
Lutz was negligent, and Justice Carey framed the issue for decision as ―whether a
tortfeasor may recover contribution from another, whose negligence concurred in
producing an injury, but who is himself not liable to the injured person.‖ 100 A.2d at 647.
Lutz could not be liable for negligence to his three passengers under the Delaware Guest
Statute, subsequently repealed in 1983, which stated:
No person transported by the owner or operator of a motor vehicle . . . as
his guest without payment for such transportation shall have a cause of
action for damages against such owner or operator for injury, death or loss,
in case of accident, unless such accident was intentional on the part of such
owner or operator, or was caused by his willful or wanton disregard of the
rights of others.20
Boltz‘s proposed counterclaim did not allege that Lutz caused the accident intentionally
or by willfully or wantonly disregarding the rights of others. 100 A.2d at 647. Judge
Carey held that ―it is joint [and] several liability, rather than joint or concurring
negligence, which determines the right of contribution.‖ Id. at 648. Boltz therefore had
not stated a claim for contribution against Lutz, and his motion to amend was denied. Id.
After Lutz, courts applying the Guest Statute consistently rejected claims for
contribution if the party seeking it only pled or proved negligence.21 Courts permitted
claims for contribution to go forward when the party seeking contribution overcame the
20
The Lutz decision does not quote the text of the since-repealed statute. Its
language can be found, among other places, in Winkler v. Balentine, 254 A.2d 849, 850
n.2 (Del. 1969).
21
See, e.g., Mumford v. Robinson, 231 A.2d 477, 478 (Del. 1967); Selheimer v.
Moore, 1986 WL 1258, at *3 (Del. Super. Jan. 28, 1986); Rigsby v. Tyre, 380 A.2d 1371,
1372-73 (Del. Super. 1977).
69
limitations of the Guest Statute by pleading and later proving that the accident was
caused intentionally or because of willful or wanton conduct.22 Courts also extended
Lutz‘s reasoning to other situations. 23 The decisions followed a pattern: the party seeking
contribution could not obtain it if the injured party could not have prevailed under the
theory set out in the cross-claim seeking contribution, but the party seeking contribution
could obtain it if the party pled and later proved facts supporting a theory under which the
injured party could have recovered.
In a case that provides an example of the latter scenario, the United States District
Court for the District of Delaware considered whether defendants could seek contribution
from the City of Wilmington to the extent they were held liable to the New Zealand
Kiwifruit Marketing Board for the loss in value of a shipment of kiwifruit that was
partially destroyed while in a warehouse operated by the city. N.Z. Kiwifruit Mktg. Bd. v.
City of Wilm., 825 F. Supp. 1180 (D. Del. 1993). The City argued that it could not be
22
See, e.g., Winkler, 254 A.2d at 849 (noting that cross-claim for contribution
alleged ―wanton conduct‖); Pringle, 1981 WL 383062, at *1 (same).
23
See Cox v. Del. Elec. Coop., Inc., 823 F. Supp. 241, 246 (D. Del. 1993) (barring
suit for contribution where defendant could not be ―liable in tort‖ to injured party under
Pennsylvania Workmen‘s Compensation Act); Walker v. Patterson, 325 F. Supp. 1024,
1027 (D. Del. 1971) (barring suit for contribution where defendant could not be liable to
injured party under Delaware Workmen‘s Compensation Act); Farrall v. Amstrong Cork.
Co., 457 A.2d 763, 768 (Del. 1983) (same); Stahorn v. Sears, Roebuck & Co., 123 A.3d
107, 109-10 (Del. Super. 1956) (barring suit for contribution claiming negligence against
father where injured party was his child, and common law barred child from suing parent
in tort in a case of ordinary negligence); Ferguson v. Davis, 102 A.2d 707, 708 (Del.
Super. 1954) (barring suit for contribution against husband where was injured party was
his wife, and wife could not sue husband under then-extant common law rule).
70
liable to the plaintiff because it was ―immune from suit on any and all tort claims seeking
recovery of damages‖ under Delaware‘s County and Municipal Tort Claims Act, 10 Del.
C. § 4011. The parties seeking contribution argued that they had alleged claims that fell
within exceptions recognized under 10 Del. C. § 4012. Kiwifruit, 825 F. Supp. at 1183-84.
The district court held that to state a claim for contribution, the legal theory had to fall
within one of the exceptions. Id. at 1187. The court then agreed with the parties seeking
contribution that they had pled such a claim. Id. at 1190 (―[T]he City, in turn, may still be
liable to codefendants for a claim of contribution for damage arising from those acts.‖).
In my view, exculpation under Section 102(b)(7) operates similarly to the Guest
Statute considered in Lutz and the Tort Claims Act considered in Kiwifruit, such that
Section 102(b)(7) should be treated similarly for purposes of DUCATA. Section
102(b)(7) states that the certificate of incorporation of a Delaware corporation may
contain
[a] provision eliminating or limiting the personal liability of a director to
the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, provided that such provision shall not eliminate
or limit the liability of a director: (i) For any breach of the director‘s duty of
loyalty to the corporation or its stockholders; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) under § 174 of this title; or (iv) for any transaction
from which the director derived an improper personal benefit.
8 Del. C. § 102(b)(7). Like the Guest Statute and the Tort Claims Act, Section 102(b)(7)
authorizes a broad entitlement to exculpation from monetary damages for breaches of
fiduciary duty. Also like the Guest Statute and the Tort Claims Act, Section 102(b)(7)
identifies exceptions where exculpation does not apply. Under the reasoning of Lutz,
71
Kiwifruit, and similar decisions, if RBC wishes to claim DUCATA‘s settlement credit for
one or more of the director defendants, then RBC must show that the director would be
liable, including by establishing that the claim against the director fell into one of the
exceptions recognized by Section 102(b)(7).
RBC attempts to avoid the Lutz line of authority by relying on Shiles v. Reed
Trucking Co., 1995 WL 790974 (Del. Super. Dec. 5, 1995), a case that considered what
would happen if the injured plaintiff had permitted the statute of limitations to run against
a joint tortfeasor. RBC also cites a different section of the Kiwifruit decision that
considered this issue. See Kiwifruit, 825 F. Supp. at 1186-87.
As a matter of formal logic, a joint tortfeasor can argue under Lutz that because a
plaintiff who had let the statute of limitations run could not recover against the joint
tortfeasor, a defendant seeking contribution should not be able to recover either. That
logic does not hold because the right of contribution does not arise until one defendant
has paid more than its pro rata share. 10 Del. C. § 6302(b); see RESTATEMENT (FIRST) OF
RESTITUTION § 82 (1937) (―A person . . . is entitled to contribution from the other when,
and only when, he has discharged more than his proportionate share . . . .‖). The lapse of
the statute of limitations in the underlying action therefore does not control the ability to
seek contribution. Restatement (Third) § 23, cmt. k; Restatement (Second) § 886A, cmt.
g. More generally, the purpose of creating a right of contribution was to alter the power
that the common law gave a plaintiff ability to impose a loss arbitrarily on certain
defendants simply by choosing to sue some and not others. Allowing a plaintiff to defeat
a defendant‘s right to contribution by permitting the statute of limitations to run would go
72
a long way towards restoring the disfavored common law rule. Shiles and Kiwifruit held
that a defense based on the running of the statute of limitations does not bar an action for
contribution. Kiwifruit, 825 F. Supp. at 1186-87; Shiles, 1995 WL 790974, at *2. So have
other Delaware cases.24
Rather than recognizing the narrow, limitations-based rule that emerges from
these decisions, RBC construes Shiles as (i) establishing a distinction between an
immunity and an affirmative defense, and (ii) holding that a claim for contribution is not
barred by an affirmative defense. Dkt. 378 at 15-16. RBC points out that Delaware
Supreme Court has described Section 102(b)(7) as ―in the nature of an affirmative
defense.‖ Dkt. 369 at 31 n.50 (citing Malpiede, 780 A.2d at 1092). According to RBC,
Section 102(b)(7) cannot bar an action for contribution, just like the affirmative defense
of the statute of limitations cannot bar the action. This reasoning dramatically expands
the statute of limitations analysis in Shiles and Kiwifruit. It also ignores the critical
distinction between a statute of limitations defense and other types of defenses, like
Section 102(b)(7). A statute of limitations defense arises because of the timing of the
filing of the lawsuit, which is within the control of the plaintiff. A defense based on
Section 102(b)(7) is a feature of substantive law that limits the scope of the claim. A
contribution-plaintiff should not be prejudiced by the failure of the plaintiff in the
24
Builders & Managers, Inc., 2004 WL 304357 at *4; Shinault v. Nationwide Mut.
Ins. Co., 1995 WL 270089, at *1 (Del. Super. Mar. 13, 1995); Royal Car Wash Co. v.
Mayor and Council of Wilm., 240 A.2d 144, 145 (Del. Super. 1968); Goldsberry v. Frank
Clendaniel, Inc., 109 A.2d 405, 407-08 (Del. Super. 1954).
73
underlying action to sue in timely fashion. A contribution-plaintiff does have to show that
the plaintiff could have recovered from the contribution-defendant on the merits.
Kiwifruit and Shiles did not change the principles of law developed by Lutz and
subsequent decisions. Under Lutz, if the director defendants would have been entitled to
exculpation, then RBC could not obtain contribution from them and cannot now claim the
settlement credit.
b. The Standard For Determining Whether Exculpation Is
Available
The Delaware Supreme Court has held that for an exculpatory provision to apply,
the court must find that ―the factual basis for [the] claim solely implicates a violation of
the duty of care.‖ Emerald P’rs v. Berlin (Emerald I), 726 A.2d 1215, 1224 (Del. 1999);
accord Emerald P’rs v. Berlin (Emerald II), 787 A.2d 85, 98 (Del. 2001) (holding that
defendant directors can obtain exculpation only if they prove that their breach of duty
was ―exclusively attributable to a violation of the duty of care‖). Liability is assessed on a
director-by-director basis. ―The liability of the directors must be determined on an
individual basis because the nature of their breach of duty (if any), and whether they are
exculpated from liability for that breach, can vary for each director.‖ Emerging
Commc’ns, 2004 WL 1305745, at *38; accord Venhill Ltd. P’ship ex rel. Stallkamp v.
Hillman, 2008 WL 2270488, at *23 (Del. Ch. June 3, 2008).
In a case where the standard of review places the burden of proof on the defendant
fiduciaries, the burden of making this showing ―falls upon the director.‖ Emerging
Commc’ns, 2004 WL 1305745, at *40; accord Gesoff v. IIC Indus., Inc., 902 A.2d 1130,
74
1164 (Del. Ch. 2006). Under Mullins, however, RBC has the burden of proving that the
director defendants were jointly liable to the Class. 637 A.2d at 8. RBC therefore has the
burden of proving that exculpation was not available because the factual basis for the
claim of breach did not ―solely implicate[] a violation of the duty of care.‖ Emerald P’rs,
726 A.2d at 1224. Stated affirmatively, RBC must establish that a disloyal state of mind
contributed causally to the director‘s breach of duty.
―[T]he duty of loyalty mandates that the best interest of the corporation and its
shareholders takes precedence over any interest possessed by a director, officer or
controlling shareholder and not shared by the stockholders generally.‖ Cede & Co. v.
Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993). Corporate fiduciaries ―are not
permitted to use their position of trust and confidence to further their private interests.‖
Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939). The duty of loyalty includes a
requirement to act in good faith, which is ―a subsidiary element, i.e., a condition, of the
fundamental duty of loyalty.‖ Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d
362, 370 (Del. 2006) (internal quotation marks omitted). A plaintiff can call into question
a director‘s loyalty by showing that the director was interested in the transaction under
consideration or not independent of someone who was.25 A plaintiff also can demonstrate
25
See Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). In Brehm v. Eisner, 746
A.2d 244 (Del. 2000), the Delaware Supreme Court overruled seven precedents,
including Aronson, to the extent they reviewed a Rule 23.1 decision by the Court of
Chancery under an abuse of discretion standard or otherwise suggested deferential
appellate review. Id. at 253 & n.13. The Brehm Court held that, going forward, appellate
review of a Rule 23.1 determination would be de novo and plenary. Id. at 253. This
75
that the director failed to pursue the best interests of the corporation and its stockholders
and therefore failed to act in good faith: ―A failure to act in good faith may be shown, for
instance, where the fiduciary intentionally acts with a purpose other than that of
advancing the best interests of the corporation.‖26
Directors must seek ―to promote the value of the corporation for the benefit of its
stockholders.‖27 When considering whether to pursue a strategic alternative such as a
merger, directors must act loyally, prudently, and in good faith for the purpose of
decision does not rely on any of those decisions for the standard of appellate review and
therefore omits the cumbersome subsequent history.
26
In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 67 (Del. 2006); accord Stone,
911 A.2d at 369 (―A failure to act in good faith may be shown, for instance, where the
fiduciary intentionally acts with a purpose other than that of advancing the best interests
of the corporation . . . .‖ (quoting Disney, 906 A.2d at 67)); see Gagliardi v. TriFoods
Int’l, Inc., 683 A.2d 1049, 1051 n.2 (Del. Ch. 1996) (Allen, C.) (defining a ―bad faith‖
transaction as one ―that is authorized for some purpose other than a genuine attempt to
advance corporate welfare or is known to constitute a violation of applicable positive
law‖); In re RJR Nabisco, Inc. S’holders Litig., 1989 WL 7036, at *15 (Del. Ch. Jan. 31,
1989) (Allen, C.) (explaining that the business judgment rule would not protect ―a
fiduciary who could be shown to have caused a transaction to be effectuated (even one in
which he had no financial interest) for a reason unrelated to a pursuit of the corporation‘s
best interests‖).
27
eBay Domestic Hldgs., Inc. v. Newmark, 16 A.3d 1, 34 (Del. Ch. 2010); accord
N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101 (Del.
2007) (―The directors of Delaware corporations have the legal responsibility to manage
the business of a corporation for the benefit of its shareholder[ ] owners.‖ (internal
quotation marks omitted)); Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955
(Del. 1985) (citing ―the basic principle that corporate directors have a fiduciary duty to
act in the best interests of the corporation‘s stockholders‖); see also Leo E. Strine, Jr., et
al., Loyalty’s Core Demand: The Defining Role of Good Faith in Corporation Law, 98
Geo. L.J. 629, 634 (2010) (―[I]t is essential that directors take their responsibilities
seriously by actually trying to manage the corporation in a manner advantageous to the
stockholders.‖).
76
maximizing the long-term value of the corporation for the benefit of its residual
claimants, viz., the common stockholders.28 ―When deciding whether to pursue a strategic
alternative that would end or fundamentally alter the stockholders‘ ongoing investment in
the corporation, the loyalty-based standard of conduct requires that the alternative yield
value exceeding what the corporation otherwise would generate for stockholders over the
long-term.‖29 Importantly, ―[t]he duty to act for the ultimate benefit of stockholders does
28
See Gantler v. Stephens, 965 A.2d 695, 706 (Del. 2009) (holding that
―enhancing the corporation‘s long term share value‖ is a ―distinctively corporate
concern[]‖); Gheewalla, 930 A.2d at 101 (―The directors of Delaware corporations have
the legal responsibility to manage the business of a corporation for the benefit of its
shareholder[] owners.‖ (internal quotation marks omitted)); Unocal, 493 A.2d at 955
(citing ―the basic principle that corporate directors have a fiduciary duty to act in the best
interests of the corporation‘s stockholders‖); eBay, 16 A.3d at 34 (explaining that
directors must seek ―to promote the value of the corporation for the benefit of its
stockholders‖); TW Servs., Inc. v. SWT Acq. Corp., 1989 WL 20290, at *7 (Del. Ch. Mar.
2, 1989) (Allen, C.) (describing as ―non-controversial‖ the proposition that ―the interests
of the shareholders as a class are seen as congruent with those of the corporation in the
long run‖ and explaining that ―[t]hus, broadly, directors may be said to owe a duty to
shareholders as a class to manage the corporation within the law, with due care and in a
way intended to maximize the long run interests of shareholders‖); William T. Allen,
Ambiguity in Corporation Law, 22 Del. J. Corp. L. 894, 896-97 (1997) (―[I]t can be seen
that the proper orientation of corporation law is the protection of long-term value of
capital committed indefinitely to the firm.‖); Andrew A. Schwartz, The Perpetual
Corporation, 80 G. Wash. L. Rev. 764, 777-83 (2012) (arguing that the corporate
attribute of perpetual existence calls for a fiduciary mandate of long-term value
maximization for the stockholders‘ benefit).
29
In re Trados Inc. S'holder Litig. (Trados II), 73 A.3d 17, 37 (Del. Ch. 2013).
Compare Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34, 43-44 (Del.
1994) (holding it was reasonably probable that directors breached their fiduciary duties
by pursuing ostensibly superior value to be created by long-term strategic combination
when, post-transaction, a controller would have ―the power to alter that vision,‖ rendering
its value highly contingent), and Revlon, Inc. v. MacAndrews & Forbes Hldgs., Inc., 506
A.2d 173, 182 (Del. 1986) (holding that alternative of maintaining corporation as stand-
alone entity and use of defensive measures to preserve that alternative ―became moot‖
77
not require that directors fulfill the wishes of a particular subset of the stockholder
base.‖30 Directors must exercise their independent fiduciary judgment: ―Delaware law
confers the management of the corporate enterprise to the stockholders‘ duly elected
board representatives. The fiduciary duty to manage a corporate enterprise includes the
selection of a time frame for achievement of corporate goals. That duty may not be
delegated to the stockholders.‖ Time, 571 A.2d at 1154 (citation omitted).
once board determined that values achievable through a sale process exceeded board‘s
assessment of stand-alone value), with Paramount Commc’ns, Inc. v. Time Inc., 571 A.2d
1140, 1155 (Del. 1990) (holding it was not reasonably probable that directors breached
their fiduciary duties by pursuing superior long-term value of strategic, stock-for-stock
merger without a post-transaction controller), Unocal, 493 A.2d at 956 (holding it was
not reasonably probable that directors breached their fiduciary duties by adopting a
selective exchange offer to defend against a two-tiered tender offer where blended value
of offer was less than $54 per share and board reasonably believed stand-alone value of
corporation was much greater), and Air Prods. & Chems., Inc. v. Airgas, Inc., 16 A.3d
48, 108-09, 112, 129 (Del. Ch. 2011) (holding that board complied with fiduciary duties
by maintaining a rights plan to protect higher stand-alone value of corporation rather than
permit immediate sale).
30
Trados II, 73 A.3d at 38; accord In re Lear Corp. S’holder Litig., 967 A.2d 640,
655 (Del. Ch. 2008) (Strine, V.C.) (―Directors are not thermometers, existing to register
the ever-changing sentiments of stockholders. . . . During their term of office, directors
may take good faith actions that they believe will benefit stockholders, even if they
realize that the stockholders do not agree with them.‖); Paramount Commc’ns Inc. v.
Time Inc., 1989 WL 79880, at *30 (Del. Ch. July 14, 1989) (Allen, C.) (―The corporation
law does not operate on the theory that directors, in exercising their powers to manage the
firm, are obligated to follow the wishes of a majority of shares. In fact, directors, not
shareholders, are charged with the duty to manage the firm.‖), aff’d in pertinent part, 571
A.2d 1140; TW Servs., 1989 WL 20290, at *8 n.14 (―While corporate democracy is a
pertinent concept, a corporation is not a New England town meeting; directors, not
shareholders, have responsibilities to manage the business and affairs of the corporation,
subject however to a fiduciary obligation.‖).
78
c. Shackelton
The evidence convinces me that Shackelton would not have been entitled to
exculpation for his role in engineering a near-term sale of Rural. In making this finding, I
do not claim to have read Shackelton‘s mind or know his true intentions. As the Delaware
Supreme Court trenchantly observed, ―the members of the Court of Chancery cannot peer
into the hearts and souls of directors.‖ Allen v. Encore Energy P’rs, L.P., 72 A.3d 93, 106
(Del. 2013) (internal quotation marks omitted). Rather, this court must make factual
findings based on the evidence and its assessment of Shackelton‘s credibility as a
witness. Cf. State v. Anderson, 74 A. 1097, 1099 (Del. 1910) (recognizing that intent
―may be found by direct evidence, such as the admissions or declarations of the accused,
or by indirect evidence; that is by the rational inferences to be drawn from what the
accused is proven to have done or said, and from all the facts and circumstances involved
in the transaction‖). In this case, I find that when seeking successfully to put Rural into
play without Board authorization, Shackelton was sufficiently motivated by his personal
interests and those of his fund that exculpation would not have been available.
The Liability Opinion found that Shackelton‘s personal circumstances inclined
him to favor a near-term sale. Liability Op, 88 A.3d at 64. Shackelton was a managing
director of Coliseum Capital Partners, L.P. (―Coliseum‖), an activist hedge fund he co-
founded in 2006. Coliseum followed a business strategy of taking concentrated positions
in small-cap companies, obtaining influence, and then seeking to facilitate an exit within
approximately three to five years, and it employed this strategy with Rural. In 2007 and
2008, Coliseum accumulated approximately 12.43% of Rural‘s stock at an average cost
79
of around $4 per share. Shackelton became a director in April 2008. ―By 2010, Rural had
grown to 22% of Coliseum‘s portfolio—twice the target size for a core position—and the
unrealized capital gain represented Coliseum‘s most successful investment. Shackelton
saw an M & A event as the next logical step. . . .‖ Id.
The Liability Opinion found that Shackelton‘s interest in a near-term sale was
accentuated by DiMino‘s business plan. 88 A.3d at 65. In 2010, the Board hired DiMino
as CEO with a mandate to grow the Company, and DiMino planned to spend $50 million
per year on acquisitions over the next five years. DiMino‘s growth plan conflicted with
Coliseum‘s investment strategy, which favored companies with predictable cash flows,
avoided companies whose valuations relied on exceptional growth, and often penalized
companies for acquisitions. Id.
Perhaps most significantly, in late 2010, Coliseum was seeking to raise $150–$200
million of new capital, more than ever before. Id. A sale of Rural would be a feather in
Shackelton‘s cap and could be used to market the fund to new investors. Id.
Consistent with his personal interests and those of his fund, Shackelton initially
attempted to engineer a sale of Rural in October 2010, when a consortium of two bidders
approached expressed interest in acquiring Rural for $10.50 to $11.50 per share. Id. at 64.
The Board regarded that price as too low to justify engagement. After Shackelton
engaged, the consortium suggested it could raise the high end of its range to $15.00 per
share. Discussions ended when one of the two members of the consortium withdrew and
the remaining member declined to proceed alone. Id.
80
Shackelton‘s heated reaction to the consortium‘s withdrawal illuminated his desire
for a near-term sale. Shackelton came to believe that, during the management
presentations to the consortium, DiMino had intimated his preference for Rural to remain
independent. Shackelton was incensed that DiMino had undermined the process and
believed DiMino acted to protect his job. Liability Op., 88 A.3d at 66. Shackelton also
felt DiMino had engaged in ―completely unacceptable behavior‖ by reaching out to a
second private equity firm to validate the consortium‘s bid and potentially generate price
competition. Id. Based on the evidence presented at trial, I had a contrary impression of
DiMino‘s actions and believe he acted appropriately and in good faith based on his
assessment of the stand-alone value of the Company.
Shackelton resumed his campaign for a near-term sale in early December 2010,
when rumors began circulating that EMS was in play. On December 8, 2010, the Board
held a regular meeting. Shackelton segued from a discussion of the rumors about EMS
and into a full presentation about strategic alternatives. He explained why he felt market
conditions were conducive to M & A activity, then outlined what he saw as Rural‘s three
strategic alternatives:
(1) continue to pursue the Company‘s current standalone business plan
(including taking advantage of opportunities to purchase smaller
competitors); (2) pursue a sale of the Company; or (3) pursue a transaction
that would seek to take advantage of the synergies available via some form
of business combination transaction involving [AMR].
Id. at 67. Shackelton told the Board that he ―had not formulated a preference among the
three basic alternatives,‖ but he ―did recommend that the Company should move
expeditiously to retain appropriate advisers and obtain advice regarding an appropriate
81
course of action.‖ Id. The Board responded by re-activating the Special Committee and
charged it with retaining advisors and generating a recommendation on the best course of
action. The Board did not authorize the Special Committee to pursue a sale. Id.
Despite the Special Committee‘s limited mandate, Shackelton led the committee
in hiring RBC as the Company‘s lead banker. RBC‘s presentation focused on marketing
Rural to private equity firms. 88 A.3d at 68. RBC‘s internal, post-hiring communications
evidenced that the firm understood that it was hired to sell Rural. DiMino believed that
the Special Committee had hired RBC to sell Rural and emailed Tony Munoz, the lead
RBC banker, stating ―[w]ell done, let‘s get this baby sold!‖ Id. Shackelton and RBC then
proceeded to put Rural into play, without Board authorization. Id. at 69. ―At the time, the
Board had not authorized the Special Committee to hire a ‗sellside‘ advisor or start a sale
process.‖ Id. And Shackelton and RBC did so despite the ―the readily foreseeable
problems associated with trying to induce financial buyers to engage in two parallel
processes for targets who were direct competitors.‖ Id. at 70.
Ordinarily, Coliseum‘s large block of stock and Shackelton‘s duties to Coliseum
would align Shackelton‘s interests with those of Rural‘s stockholders.31 But in this case,
31
In re Dollar Thrifty S’holder Litig., 14 A.3d 573, 600 (Del. Ch. 2010) (Strine,
V.C.) (explaining that owning a ―material‖ amounts of stock gives directors a
―motivation to seek the highest price‖ and the ―personal incentive as stockholders to
think about the trade off between selling now and the risks of not doing so‖); Orman v.
Cullman, 794 A.2d 5, 27 n.56 (Del. Ch. 2002) (explaining that ―[a] director who is also a
shareholder of his corporation is more likely to have interests that are aligned with the
other shareholders of that corporation as it is in his best interest, as a shareholder, to
negotiate a transaction that will result in the largest return for all shareholders‖); Katell v.
Morgan Stanley Gp., Inc., 1995 WL 376952, at *12 (Del. Ch. June 15, 1995) (―Delaware
82
the evidence at trial established that Shackelton and his fund had unique reasons to favor
a near-term transaction that caused their interests to diverge from those of the Rural‘s
equity as a whole. Delaware cases recognize that a desire for liquidity is one ―benefit that
may lead directors to breach their fiduciary duties,‖ and stockholder directors may be
found to have breached their duty of loyalty if a ―desire to gain liquidity . . . caused them
to manipulate the sales process‖ and subordinate the best interests of the corporation and
the stockholders as a whole.32 A party cannot simply argue in the abstract that a particular
law presumes that investors act to maximize the value of their own investments.‖); In re
Mobile Commc’ns Corp. of Am., Inc. Consol. Litig., 1991 WL 1392, at *9 (Del. Ch. Jan.
7, 1991) (Allen, C.) (noting that directors‘ substantial stockholdings gave them ―powerful
economic (and psychological) incentives to get the best available deal‖), aff’d, 608 A.2d
729 (Del. 1992).
32
In re Answers Corp. S’holder Litig. (Answers I), 2012 WL 1253072, at *7 (Del.
Ch. Apr. 11, 2012); see McMullin v. Beran, 765 A.2d 910, 924-25 (Del. 2000) (reversing
grant of motion to dismiss where complaint alleged that controlling stockholder and its
director designees sacrificed value in a sale to achieve controlling stockholder‘s goal of
obtaining near-term liquidity and significant component of the transaction consideration
in cash); N.J. Carpenters Pension Fund v. Infogroup, Inc., 2011 WL 4825888, at *9-10
(Del. Ch. Sept. 30, 2011) (denying motion to dismiss where the plaintiff alleged that the
director who was also a large stockholder sacrificed value in sale because he needed
liquidity to satisfy personal debts and fund a new venture); In re TeleCorp PCS, Inc.
S’holders Litig., Cons. C.A. No. 19260-VCS, at 16 (Del. Ch. June 17, 2002)
(TRANSCRIPT) (Strine, V.C.) (―What [these large stockholders] weren‘t entitled to do
was to use their influence as fiduciaries to procure liquidity from AT&T Wireless on the
backs of public stockholders in an unfair merger.‖); see also In re S. Peru Copper Corp.
S'holder Deriv. Litig., 52 A.3d 761, 780 (Del. Ch. 2011) (Strine, C) (considering large
stockholder‘s desire for liquidity when evaluating performance of affiliated special
committee member as part of assessment of entire fairness of transaction with controller;
stating ―[a]lthough I am not prepared on this record to find that Handelsman consciously
agreed to a suboptimal deal for Southern Peru simply to achieve liquidity for Cerro from
Grupo Mexico, there is little doubt in my mind that Cerro's own predicament as a
stockholder dependent on Grupo Mexico's whim as a controller for registration rights
83
director has a conflict of interest because she is affiliated with a particular type of
institution, like an activist fund. There must be evidence sufficient to permit a finding that
the director in fact faced a conflict in the specific case.33 Here, the trial record provided
the necessary evidence.
But for the Settlement, Shackelton would have shared a common liability with
RBC to the Class for his actions in putting Rural into play. RBC is therefore entitled to a
credit under DUCATA in light of Shackelton‘s participation in the Settlement.
d. Davis
Whether Davis would have been entitled to exculpation, but for the Settlement,
presents a close case. There is evidence suggesting that selfish motives played a role in
Davis‘s actions. Critically, however, no one called Davis at trial, and I did not have an
influenced how Handelsman approached the situation.‖), aff’d sub nom Americas Mining
v. Therault, 51 A.3d 1213 (Del. 2012).
33
See In re Morton’s Rest. Gp., Inc. S’holders Litig., 74 A.3d 656, 667 (Del. Ch.
2013) (Strine, C.) (dismissing complaint challenging sale that was the product of a
lengthy and thorough pre-signing market check in which plaintiff conceded that ―all
logical buyers were made aware . . . and that they all had the time and fair opportunity to
bid‖ and rejecting allegation that private equity firm ―typically flips companies it invests
in every three to five years‖ and favored a sale to achieve liquidity for the investors in
one of its funds and to invest in a new fund); Trados II, 73 A.3d at 54 (―At trial, the
plaintiff could not rely on general characterizations of the VC ecosystem. The plaintiff
had to prove by a preponderance of evidence that Prang was not disinterested or
independent in this case.‖); In re Synthes, Inc. S'holder Litig., 50 A.3d 1022, 1036 (Del.
Ch. 2012) (Strine, C.) (applying general rule of equal treatment where controlling
stockholder received same consideration as minority in third party sale to dismiss
challenge to transaction; recognizing there could be ―very narrow circumstances in which
a controlling stockholder's immediate need for liquidity could constitute a disabling
conflict of interest irrespective of pro rata treatment‖ but rejecting liquidity-based interest
given lack specific allegations in complaint).
84
opportunity to evaluate his credibility. It my view, it would take a powerful and
persuasive evidentiary showing to permit a court to find in absentia that a director acted
disloyally or in bad faith. RBC had the burden to show that Davis was not entitled to
exculpation. On balance, RBC failed to meet it.
Like Shackelton, Davis had personal circumstances that inclined him towards a
near-term sale. In fall 2010, he served on a dozen public company boards, making him an
―over-boarded‖ director for purposes of an ISS voting policy. Davis was particularly
concerned about avoiding a recommendation against his re-election as the Chairman of
the Board of Atlas Air Worldwide Holdings, Inc. After a meeting with ISS facilitated by
Atlas Air, Davis agreed to reduce his number of directorships to six by April 2011. Davis
also had a potential interest in a sale because he often has joined boards as a hedge fund
nominee or as an outside director acceptable to stockholder activists. A near-term sale of
Rural would reduce Davis‘s number of board seats and let him exit on a professional high
note. It also would let Davis keep over $200,000 of Rural equity that would vest on a
change of control, but which he would lose if he resigned voluntarily. The trial record
indicated that Davis set a personal deadline of April 1 for Rural to announce a sale;
otherwise, he would resign from the Board. See Liability Op., 88 A.3d at 65.
Like Shackelton, Davis acted consistent with his personal interests. Most
significantly, after the aborted consortium process, Davis matched Shackelton‘s anger
towards DiMino and joined with Shackelton in disciplining Rural‘s CEO. Id. at 66. Davis
was a member of the Special Committee, and, during the sale process, he pushed for a
near-term outcome that would meet his personal deadline for leaving the Board. Id. at
85
103. But he was less involved than Shackelton and allowed Shackelton and RBC to drive
the sale process, primarily because he was busy with his other professional
responsibilities. Id. at 71, 73.
If Davis had testified at trial and performed poorly or been impeached on cross
examination, then I might have concluded that exculpation would have been unavailable.
In the end, the evidence introduced at trial was not sufficient to prove that Davis‘ actions
fell within one of the exceptions to Section 102(b)(7). RBC is therefore not entitled to
any credit under DUCATA as a result of Davis‘s participation in the Settlement.
e. DiMino
As with Shackelton, the evidence convinces me that DiMino would not have been
entitled to exculpation. Rather than supporting a near-term sale because it was in the best
interests of Rural‘s stockholders, DiMino did so in deference to Shackelton and Davis
and because it advanced his personal financial interests. As discussed, DiMino had
opposed the consortium‘s bid, but, after being chastised by Shackelton and Davis, he fell
into line. ―From that point on, DiMino supported a sale and deferred to Shackelton.‖
Liability Op., 88 A.3d at 66. Davis testified that self-interest contributed to DiMino‘s
change of heart:
[T]he light bulb finally went over his head that [a private equity buyer
would] probably ask him to run it, and given the way that his relationship
with the Board—our Board had deteriorated, I think at some point, he came
to the conclusion he would be better off with a different Board, and a new
owner would bring a different Board, on top of which he was going to
prematurely cash out on the equity that he had received less than a year
earlier. And probably if he was given the job back, would get more equity.
It was a very good deal for him. He finally figured it out.
86
Id. After the Special Committee decided to hire RBC, DiMino emailed Munoz, saying
―[w]ell done, let‘s get this baby sold!‖ Id. at 68. After the Merger closed, DiMino
emailed a friend to say that he now had ―new bosses‖ and that it was ―[b]etter to be a
private company than public‖ with ―[a]ll good news here.‖ JX 589.
As with Shackelton, I cannot claim to have read DiMino‘s mind or know his true
intentions. But having heard him testify and considered the evidence, I believe that his
support for a near-term sale stemmed in large part from his desire to go along with
Shackelton and Davis, facilitated by the financial benefits he would receive from a
transaction. RBC has carried its burden to show that DiMino would not have been
exculpated, and that, but for the Settlement, he would have shared a common liability
with RBC to the Class. RBC is therefore entitled to a credit under DUCATA in light of
DiMino‘s participation in the Settlement.
f. Walker, Holland, and Conrad
Walker, Holland, and Conrad were disinterested and independent. Walker differs
from Holland and Conrad only because he served on the Special Committee. Having
heard Walker testify at trial, I believe he acted in good faith. Holland and Conrad did not
testify at trial, and there is no evidence that either of them acted disloyally. Had the case
proceeded to judgment against these directors, they would have been exculpated from
liability. RBC is therefore not entitled to any credit under DUCATA for their
participation in the Settlement.
87
2. Moelis
RBC contends that the reasoning advanced in the Liability Opinion for holding
RBC liable on the Sale Process Claim applies equally to Moelis, such that the Liability
Opinion has effectively held that Moelis and RBC are joint tortfeasors. RBC also argues
that if Moelis were not a joint tortfeasor, then the Liability Opinion could not have found
that the directors breached their fiduciary duties:
Given that the Directors relied jointly on RBC and Moelis, there could be
no finding of breach of fiduciary duty by the Directors if Moelis‘s conduct
here was not (in the Court‘s view) tortious. Otherwise, the Moelis advice
would have had the effect of giving the Directors an independent, non-
actionable basis for their actions. Thus, to the extent RBC is liable for
aiding and abetting, Moelis is a joint tortfeasor.
Dkt. 369 at 17-18. Neither argument is sufficient to carry RBC‘s burden of proof.
Taking the theories in reverse order, Moelis does not have to be a joint tortfeasor
for the directors to have breached their duties. Assume that Moelis gave sound advice,
but that, as the Liability Opinion found, RBC gave skewed advice tainted by self-interest.
The total mix of the advice contained the tainted advice, and the resulting combination of
advice was what led the Board astray. It does not follow from the Liability Opinion‘s
finding that Moelis‘s advice was necessarily tortious.
Nor does the reasoning advanced in the Liability Opinion for holding RBC liable
apply equally to Moelis. Contrary to RBC‘s position, the Liability Opinion distinguished
between the conduct and interests of the two investment banking firms. At the outset,
their pitch books approached the proposed engagement from different standpoints.
Moelis‘s presentation ―stressed its growing M & A franchise‖ and ―[t]he bulk of its
88
presentation examined a potential combination with AMR.‖ 88 A.3d at 68. Moelis placed
less emphasis on a sale of Rural. Id. Moelis noted that it would not seek to finance any of
the bidders. Id.
RBC, by contrast, ―devoted the bulk of its presentation to a sale and recommended
coordinating the effort with the EMS process.‖ Id. RBC did not disclose that it planned to
use its engagement as Rural‘s advisor to capture financing work from the bidders for
EMS. Despite advising that the credit markets were open for acquisition financing, RBC
proposed to offer staple financing to the potential buyers in any transaction. Id. When
laying out the structure of a potential sale process, RBC only discussed private equity
firms and cited its close relationships with private equity sponsors. Id. Focusing on
private equity firms, particularly those having existing relationships with RBC, helped
RBC achieve its goal of providing staple financing for the deal. Moelis did not face
similar conflicts.
The Special Committee decided to hire RBC, and RBC understood that it was
being given a mandate to sell Rural. Shackelton then decided to bring in Moelis as
secondary advisor. The Liability Opinion found that Moelis ―played a secondary role in
advising the Board.‖ 88 A.3d at 63; see id. at 69.
During the final negotiations, RBC pushed hard to be included in Warburg‘s
financing package. Moelis did not. The plaintiffs established at trial that the information
that RBC provided to Rural for the Proxy Statement contained materially false and
misleading information. No similar showing was made regarding Moelis, either by the
plaintiffs at trial or by RBC at any point.
89
In making the factual findings that resulted in the ruling against RBC, the court
―placed the least weight on the testimony of the two RBC managing directors who
appeared at trial‖ because the court found ―[t]heir accounts at times strained credulity,
and the plaintiffs successfully impeached their testimony on multiple occasions.‖ Id. at
63-64. No one from Moelis testified at trial, and the court did not make any adverse
findings regarding the credibility of any Moelis witness.
Based on the trial record and the findings in the Liability Opinion, RBC and
Moelis were not similarly situated, and the Liability Opinion‘s reasoning does not extend
to Moelis. RBC failed to prove that Moelis was a joint tortfeasor and cannot claim a
settlement credit under DUCATA relating to Moelis‘s participation in the Settlement.
F. Relative Fault
Under the foregoing analysis, RBC, Shackelton, and DiMino qualify as joint
tortfeasors for purposes of determining RBC‘s share of responsibility for the damages
suffered by the Class. RBC argues that, under DUCATA, responsibility must be allocated
pro rata, which RBC construes to mean equally. Under RBC‘s approach, each joint
tortfeasor would be allocated a one-third share, resulting in judgment against RBC for
one third of the damages suffered by the Class. That mechanistic approach does not
accord with how DUCATA operates.
Under DUCATA, a joint tortfeasor that pays more than its proportionate share of a
liability is entitled to seek contribution from the other joint tortfeasors. A joint
tortfeasor‘s entitlement to a money judgment for contribution arises when that joint
tortfeasor ―has by payment discharged the common liability or has paid more than his or
90
her pro rata share thereof.‖ 10 Del. C. § 6302(b). DUCATA contemplates two methods
for determining the prorated share that one joint-tortfeasor can seek from another. The
basic principle is to divide the damages for which the defendants are responsible equally
among all defendants; however, ―[w]hen there is such a disproportion of fault among
joint tortfeasors as to render inequitable an equal distribution among them of the common
liability by contribution, the relative degrees of fault of the joint tortfeasors shall be
considered in determining their pro rata shares.‖ Id. § 6302(d); see Askanase v. Fatjo, 148
F.R.D. 570, 575 (S.D. Tex. 1993) (―Title 10, § 6302 of the Delaware Code provides a
right of contribution among joint tortfeasors, determined either by calculating equal pro
rata shares or by taking into consideration the relative degrees of fault of the
tortfeasors.‖).
RBC cites one decision that has construed the term ―pro rata‖ to mean ―equal.‖
See In re Masters Mates & Pilots Pension Plan & IRAP Litig., 957 F.2d 1020, 1028 (2d
Cir. 1992) (―The pro rata rule apportions an equal share of the liability to each defendant
in a lawsuit.‖). DUCATA uses the term ―pro rata‖ to mean ―proportionate,‖ which is the
plain meaning of the term. See, e.g., American College Dictionary 1098 (3d ed. 1993)
(defining ―pro rata‖ as ―[i]n proportion; according to a factor than can be calculated
exactly‖); BLACK'S LAW DICTIONARY 1340 (9th ed. 2009) (―proportionately‖). During
the debates over the Uniform Act of 1939, Professor Gregory touched on this very point:
It had occurred to the Advisors and to me that the meaning of ―pro rata‖
was sufficiently understood so that it would not require separate definition .
. . Of course, it does not necessary imply equality. . . . You might have a
60-40 per cent. division for instance between two tortfeasors and it seems
91
to me no matter what the basis for dividing the loss is, there could be no
objection to the use of the phrase ―pro rata.‖ At least I cannot perceive any.
Discussion, supra, at 349-50. Consequently, ―if fault among ‗joint tortfeasors‘ is found to
be disproportionate, the pro rata share of those tortfeasors is determined by reference to
their relative degrees of fault.‖ Cox v. Del. Elec. Coop., Inc., 823 F. Supp. 241, 246 (D.
Del. 1993).
The Restatement (Third) embraces the principle of relative fault and explains at
length why it is superior to the primary alternatives. See Restatement (Third) § 23 &
Reporters‘ Note cmt. e. In the field of admiralty law, after extensive consideration of the
various alternatives, the United States Supreme Court adopted the rule of relative, or
proportionate fault. See McDermott, Inc. v. AmClyde, 511 U.S. 202, 211-21 (1994). The
PLSRA adopted the principle of relative fault based on percentage of responsibility. 15
U.S.C. § 78u-4(f). Commentators discussing this provision have explained its superiority
over alternative methods. See, e.g., Marc I. Steinberg & Christopher D. Olive,
Contribution and Proportionate Liability Under the Federal Securities Laws in
Multidefendant Securities Litigation After the Private Securities Litigation Reform Act of
1995, 50 SMU L. Rev. 337, 361-367 (1996).
The Liability Opinion imposed liability on RBC for both the Sale Process Claim
and the Disclosure Claim. RBC was solely responsible for the Disclosure Claim, which
could be viewed as an independent cause of the damages suffered by the Class and justify
imposing 100% of the damages on RBC. In terms of allocating a percentage of the
overall fault, however, the two claims can be weighted equally on the premise that each
92
led to the same injury. As the party solely responsible for the Disclosure Claim, RBC is
allocated 50% of the responsibility for the damages suffered by the Class.
This leaves 50% of the responsibility to be allocated for the Sale Process Claim.
The Liability Opinion identified two sets of breaches of duty that led to liability on the
Sale Process Claim: the breaches of duty that occurred when Shackelton and RBC
initiated the sale process without Board authorization and in conjunction with the EMS
sale and the breaches of duty that occurred during the final approval of the Merger. For
purposes of allocating a percentage of the 50% fault attributed to the Sale Process Claim,
the two breaches can be weighted equally.
This decision has held that, under the unclean hands doctrine, RBC cannot seek
contribution and is not entitled to any settlement credit for the breaches of duty that
occurred during the final approval of the Merger. RBC is therefore allocated an additional
25% of the responsibility for the damages suffered by the Class to account for the
breaches that took place during final approval.
The remaining 25% of the responsibility for the damages suffered by the Class
relates to the breaches of duty that occurred when Shackelton and RBC initiated the sale
process without Board authorization and in conjunction with the EMS sale. RBC carried
its burden of proof to show that, but for the Settlement, Shackelton and DiMino would
have been jointly liable to the Class for those breaches of duty. Shackelton warrants a
greater share of the responsibility than RBC and DiMino because he led this phase of the
process. RBC in turn warrants a greater share of responsibility than DiMino because RBC
eagerly supported Shackelton and helped push for a near-term sale. DiMino went along
93
after Shackelton and Davis educated him about who had power in the boardroom and
what they wanted to see happen. At the risk of implying a false precision to the analysis,
this decision allocates 10% responsibility to Shackelton, 8% to RBC, and 7% to DiMino.
Based on the foregoing allocation, 17% of the responsibility for the damages
suffered by the Class is attributable to Shackelton and DiMino, who were joint tortfeasors
who received releases from contribution in the Settlement. RBC is entitled to a reduction
in its liability equal to the greater of (i) the share of responsibility attributable to the joint
tortfeasors or (ii) the settlement payments made by the joint tortfeasors. See 10 Del. C. §§
6304(a) & (b); Mullins, 637 A.2d at 7; Farrall v. A.C. & S. Co., 586 A.2d at 664. The
17% share of responsibility has a dollar value of $15,525,004.28, which is greater than
the $11.6 million in settlement payments ($6.6 million by the directors and $5 million by
Moelis). Because the dollar value of the share of responsibility is greater than the
settlement payments, RBC‘s liability is reduced by the former amount.
If the dollar value of the 17% share of responsibility had been smaller than the
amount of the settlement payments, then this decision would have to wrestle with
whether RBC‘s liability should be reduced by the full amount of the settlement payments.
See Eggen, supra, at 1714-15. The Delaware Supreme Court held in Mullins that a
settlement payment by a non-joint tortfeasor constituted a payment from a collateral
source and would not result in a double recovery for purposes of the one satisfaction rule.
The Mullins court did not have to consider a situation where some of the settling parties
were joint tortfeasors and others were not. Under Mullins, it is possible that RBC only
could receive a deduction in the amount of its liability equal to the portion of the
94
settlement payment attributable to Shackelton and DiMino, and that RBC would not
receive a deduction in the amount of its liability for the portion of the settlement
payments attributable to the other five settling defendants, whose payments would
constitute a collateral source. Because of the dollar value of the joint tortfeasors‘ share of
responsibility relative to the total settlement payments, this decision need not confront
that possibility.
III. CONCLUSION
The Class suffered total damages of $91,323,554.61. RBC is responsible for 83%
of the damages. Judgment is entered against RBC in the amount of $75,798,550.33. Pre-
and post-judgment interest is awarded at the legal rate from June 30, 2011, until the date
of payment.
95