ISN Software Corportation v. Richards Layton & Finger, P.A.

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
AND MARK J. GENTILE,
ISN SOFTWARE CORPORATION, )
)
Plaintiff, )
)
v. ) C.A. N0. N18C-08-Ol6 MMJ
)
RICHARDS, LAYTON & FINGER, ) COMPLEX COMMERCIAL
P.A., RAYMOND J. DICAMILLO, ) LITIGATION DIVISION
)
)
)
Defendants.
Submitted: January 10, 2019
Decided: February 18, 2019
On Defendant’s Motion to Dismiss for F ailure to State a Claim
GRANTED
MEMORANDUM OPINION
Christopher H. Lee, Esquire (Argued), Blake A. Bennett, Esquire, Cooch and
Taylor, P.A., Timothy S. Perkins, Esquire, Underwood Perkins, P.C., Attorneys for
Plaintiff
P. Clarkson Collins, Jr., Esquire, Carl N. Kunz, III, Esquire, Kathleen A. Murphy,
Esquire, Morris J ames LLP., George M. Kryder, Esquire (Argued), Melissa L.
James, Vinson & Elkins LLP, Attorneys for Defendants
JOHNSTON, J.
PROCEDURAL AND FACTUAL CONTEXT
Defendants Richards, Layton & Finger, P.A., Raymond J. DiCamillo, and
Mark J. Gentile, seek dismissal of this legal malpractice action on the grounds that
the claims of Plaintiff, ISN Sofcware Corporation, are time-barred. For the reasons
detailed herein, this action is dismissed With prejudice.
Following is the timeline of undisputed facts.
o November 2012 - Plaintiff requested legal advice from
Defendants regarding Plaintiff’s options to buy back its own shares in
order to convert from a C-Corp to an S-Corp.
0 Defendants developed a merger designed to cash-out three of the
four non-qualifying stockholders at $38,317 per share. These
stockholders (holding a total of 356 shares) Would obtain appraisal
rights. The fourth stockholder (holding 544 shares) Would remain a
stockholder and Would not obtain appraisal rights.
0 Plaintiff’s Buyout Reserve held sufficient funds to purchase all
900 shares at $38,317 per share. Hovvever, if the Court of Chancery
determined at the conclusion of an appraisal action that the share value
Was greater than $38,317, the Buyout Reserve could be exceeded.
0 January 9, 2013 - Merger consummated
0 January 15, 2013 - Defendants notified Plaintiffs counsel that
the advice concerning appraisal rights Was erroneous. All four
stockholders in fact obtained appraisal rights.
0 January 16, 2013 - The four non-qualifying stockholders Were
notified of their appraisal rights.
o January 17, 2014 - One stockholder (holding 155 shares)
accepted the cash merger consideration of $38,317 per share.
0 January 30, 2013 - The other three stockholders indicated they
might seek appraisal
0 February 14, 2013 - Plaintiff and Defendants executed a conflict
consent agreement (“Consent Letter”).
o April 2013 - Appraisal action filed in the Court of Chancery.
o August 11, 2016 - The Court of Chancery issued its opinion
valuing the shares at $98,783 per share. The total share value exceeded
Plaintiff s Buyout Reserve by more than $67 million.
0 October 30, 2017 - August 11, 2016 decision affirmed by the
Delaware Supreme Court.
o August l, 2018 - Plaintiff filed this legal malpractice action
against Defendants.
In the Consent Letter, Defendants acknowledge that continued representation
of Plaintiff Would create a “potential conflict” because “litigating issues arising from
a law firm’s prior legal Work may generate a conflict of interest....” The Consent
Letter further states that “there may be an issue” concerning Defendants’ advice as
to “the availability of appraisal rights in connection With the merger....” HoWever,
Defendants opined that “the availability of appraisal rights is not likely to be at issue
in an appraisal proceeding.” Finally, the Consent Letter provides that neither
Plaintiff’ s “consent nor any other provision of this letter constitutes a Waiver or
release of potential causes of action [Plaintiff] may have against the firm, if any.”
MOTION TO DISMISS STANDARD
In a Rule l2(b)(6) Motion to Dismiss, the Court must determine whether the
claimant “may recover under any reasonably conceivable set of circumstances
susceptible of proof.”l The Court must accept as true all well-pleaded allegations.2
Every reasonable factual inference will be drawn in the non-moving party’s favor.3
If the claimant may recover under that standard of review, the Court must deny the
Motion to Dismiss.4
ANALYSIS
For purposes of this Motion to Dismiss, the cause of action is based on
erroneous legal advice provided by Defendants in connection with a merger. The
applicable statute of limitations, governing a tort such as legal malpractice, is three
years, pursuant to 10 Del. C. § 8106(a). The statute begins to run at the time of the
alleged malpractice Ignorance of the facts constituting a cause of action is not an
obstacle to the limitations period unless the injury is inherently unknowable and the
claimant is blamelessly ignorant of the wrongful act.5
1 Spence v. Funk, 396 A.2d 967, 968 (Del.1978).
2 Ia'.
3 Wilmington Sav. Fund. Soc ’v, F.S.B. v. Anderson, 2009 WL 597268, at *2 (Del. Super.) (citing
Doe v. Cahill, 884 A.2d 451, 458 (Del.2005)).
4 Spence, 396 A.2d at 968.
5B0erger v. Hez'mcm, 965 A.2d 671, 674 (Del. 2009).
4
Plaintiff argues that the statute of limitations began to run on August 11, 2016
- the date of the Court of Chancery opinion. Before that time, Plaintiff asserts, the
possibility of damages was merely speculative Before the appraisal decision, there
was no loss resulting from the alleged negligent act. Additionally, if the appraisal
action had resulted in a share value lower than the cash-out price, it is possible that
Plaintiff actually would have benefitted from the incorrect legal advice Further,
Defendants’ refusal to turn over the entire file to Plaintiff allegedly deprives Plaintiff
of access to evidence that might support tolling the statute of limitations. Finally,
Delaware public policy counsels against Defendants’ arguments.
The elements of a legal malpractice claim are: (1) an attorney-client
relationship; (2) a negligent act by the attorney; and (3) the negligent act proximately
caused resulting injury.6 The attorney must have caused more than theoretical
damage to the client. The mere breach of professional duty causing only speculative
harm is not sufficient to create a cause of action for negligence7
Accrual of a Legal Malpractice Cause of Action in Delaware
The three-year statute of limitations begins to run when the alleged
malpractice is, or should have been, discovered8 The time of discovery has been
6Rl'ch Realty, Inc.v. Meyerson & O’Neill, 2014 WL 1689966, at *3 (Del. Super.).
7Balinski v. Baker, 2013 WL 4521199, at *3 (Del. Super.).
8Boerger v. Heiman, 2007 WL 3378667, at *5 (Del. Super.).
5
defined as the point at which the client had knowledge of the potential for liability,9
Injury is the potential for measurable damages, or a known risk of harm or future
loss.
Time of discovery is an objective standard. Unless the injury is inherently
unknowable, and the client blamelessly ignorant, the test is when the malpractice
was discernable by a reasonably diligent plaintiff.10 Even when the client may not
know the precise legal significance of the attorney’s allegedly negligent act,
awareness of a defect or problem created by the attorney’s actions starts the running
of the statute of limitations.ll Subsequent cooperative efforts by the attorney and
client to resolve the problem do not toll the limitations period.12
A cause of action for professional malpractice accrues as soon as the wrongful
act occurs.13 It does not matter that at the time of the negligent act, the client has not
yet suffered a loss. Exposure to the risk of loss is sufficient injury to create an
actionable claim for application of the statute of limitations14 A final determination
9Id. at *6 (when alleged negligent corporate restructuring resulted in substantial tax liability, the
statute of limitations ran from the time the client had knowledge of the potential for tax liability,
not the time the actual tax liability Was realized).
lODarvia' B. Lilly Co., Inc. v. Fisher, 799 F. Supp. 1562, 1565-69 (D. Del. 1992), aj”d, 18 F.3d
1112 (3d Cir. 1994) (statute of limitations ran from the time the corporate restructuring became
final and the alleged negligent legal advice actually Was relied upon, not from the time the client
realized that the flawed corporate structure impeded its ability to obtain government contracts).
llNorl‘hern Delaware Aqualic Facilities, Inc. v. C00ch & Taylor, 2007 WL 4576347, at *5-6
(Del. Super.).
12ch (statute of limitations was triggered at the time the client Was on notice of a problem With
the deed, and was not tolled by the client obtaining the advice of new counsel).
13Albert v. Alex Brown Management Services, Inc., 2005 WL 1594085, at *18 (Del. Ch.).
14Ia'.
of the existence of damages, or the precise measure of damages, is not required for
accrual of a claim.15
In this case, the alleged wrongful act was Defendants’ advice that one of the
four non-qualifying stockholders would not be entitled to seek appraisal It is
undisputed that Plaintiff was on actual notice of the erroneous nature of the advice
on'January 15, 2013. In the February 14, 2013 Consent Letter, Defendants admitted
that “there may be an issue” concerning Defendants’ advice as to “the availability of
appraisal rights in connection with the merger....” Plaintiff does not dispute that it
was aware as of execution of the Consent Letter, that all non-qualifying stockholders
had appraisal rights. As of April 2013, an appraisal action was filed. Plaintiff knew
(or should have known) of the potential for financial loss if the appraisal action
resulted in a share valuation that would exceed the Buyout Reserve
The Court finds that Plaintiff s cause of action against Defendants accrued on
the date Plaintiff explicitly was informed of Defendants’ erroneous advice _ January
15, 2013. At the very latest, the statute of limitations began to run as of the filing of
the appraisal action in the Court of Chancery. At that time, Plaintiff was aware of
the potential for damages (appraisal in excess of the Buyout Reserve), even though
l5Isaacson, Stolper & C0. v. Artisan ’s Savl``ngs Bank, 330 A.2d 130, 131-32 (Del. 1974) (statute
of limitations began to run when plaintiff first received notice from the IRS of a “statutory
deficiency,” even though plaintiff contested the deficiency and there Was not yet a final
determination of taxes oWed).
there was not yet a determination of the precise measure of damages, or even whether
damages ultimately would be suffered. The risk of loss and potential damages
constitute the injury necessary to meet the third element of a legal malpractice action.
An injured client need not wait to bring a legal malpractice action until the client has
suffered a measurable financial loss.
Tolling the Statute of Limitations
The three-year statute of limitations may be tolled if the injury is inherently
unknowable and the client is blamelessly ignorant of the alleged wrongful act.16 The
attorney error constituting malpractice must be ascertainable to be actionable.'7
The burden of pleading facts sufficient to demonstrate tolling of the statute of
limitations is on Plaintif .18 Plaintiff must allege “an affirmative act of concealment
by a defendant - an actual artifice that prevents a plaintiff from gaining knowledge
of the facts or some misrepresentation that is intended to put a plaintiff off the trail
of inquiry.”19
Plaintiff’ s argument that the statute of limitations may be tolled by Haudulent
concealment is unavailing. Positing a “worst” case scenario, Plaintiff requests that
16Boerger, 2007 WL 3378667, at *5.
17See Young Conaway Stargatt & Taylor, LLP v. Oki Data Corp., 2014 WL 4102139, at *3 (Del.
Super.) (Court not willing to “stretch the statute of limitations” to find that the continuous
representation rule tolled the statute of limitations, however, the legal malpractice claim survived
summary judgment because the alleged issues surrounding document production could not be
resolved without discovery).
18All)ert, 2005 WL 1594085, at *19.
l9C01rsarlclr0 v. Bloodhound Techs., Inc., 65 A.3d 618, 647 (Del. Ch. 2013).
8
the Court infer that Defendants’ “advice to continue with the merger was self-serving
and nothing more than an effort to delay until the statute of limitations expired.”20
Even these purported facts do not demonstrate fraud for purposes of tolling.
Defendants informed Plaintiff of the erroneous advice within days of consummation
of the merger.
Further, upon close questioning by the Court during oral argument on its
Motion to Dismiss, Plaintiff conceded that, at this juncture, the fraud allegations are
speculative Plaintiff was unable to state even a tentative factual supposition in
support of fraud. Plaintiffs have failed to assert even a theoretical factual scenario
that might be confirmed by examination of those portions of the client file still
retained by Defendants.Z' Without such a showing, there is no basis for tolling the
statute of limitations on the grounds of Haudulent concealment22 All allegations of
fraud must be pled with particularity pursuant to Superior Court Civil Rule 9(b).
The Consent Letter provides that neither Plaintiff’s “consent nor any other
provision of this letter constitutes a waiver or release of potential causes of action
[Plaintiff] may have against the firm, if any.” The Consent Letter could have
20Plaintiff’s Ans. Br. at pp. 22-23.
2]Defendants have stated that they have turned over all portions of the file as required by the
Delaware Lawyers’ Rules of Professional Conduct and interpretive case law.
22See Oropeza v. Maurer, 2004 WL 2154292, at *l (Del.).
9
contained a tolling agreement, but it did not. Defendants acknowledged that Plaintiff
had a potential cause of action against the law firm.23
The appraisal case spanned more than three and one-half years. A malpractice
action could have been filed in this Court, well within the limitations period. The
malpractice action could have been stayed pending resolution of the appraisal value,
in order to ascertain the precise measure of damages.
23Defendants have not admitted liability for legal malpractice However, Defendants have not
disputed that the legal advice, regarding appraisal rights of one of the non-qualifying
stockholders, Was erroneous.
10
CONCLUSION
Plaintiff’s legal malpractice claim accrued as of the date Defendants notified
Plaintiff’s counsel of the erroneous nature of the legal advice - January 15, 2013.
At the latest, the statute of limitations began to run when the appraisal action was
filed in April 2013. The three-year statute of limitations set forth in 10 Del. C. §
8106(a) terminated no later than April 2016, over two years before this action was
filed. The Court finds that Plaintiff has failed to demonstrate any basis for tolling
the limitations period.
THEREFORE, Defendant’s Motion to Dismiss for F ailure to State a Claim
is hereby GRANTED. The applicable statute of limitations bars this action, which
is hereby DISMISSED WITH PREJUDICE.
IT IS SO ORDERED.
z
The Hoz§fable MWM. Johnston
11