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Delaware Chancery Court Holds That (1) DUCATA Does Not Bar Contribution for All Intentional Torts, and (2) A Credit Under DUCATA Is Not Available for a Director’s Settlement If the Director Would Have Been Exculpated Under a Section 102(b)(7) Provision

10.31.14

(Article from Securities Law Alert, October 2014)

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On October 10, 2014, the Delaware Chancery Court determined damages following a post-trial decision holding RBC Capital Markets, LLC (“RBC”) liable to the shareholders of Rural/Metro Corporation (“Rural”) for aiding and abetting breaches of fiduciary duty by Rural’s board of directors in connection with Rural’s June 2011 acquisition by Warburg Pincus LLC.  In re Rural/Metro Corp. S’holdrs. Litig., 2014 WL 5280894 (Del. 2014) (Laster, V.C.) (Rural II).  The court found RBC liable for $75.8 million, “representing 83% of the total damages that the class suffered.”

In so holding, the court addressed two significant questions under the Delaware Uniform Contribution Among Tortfeasors Act (“DUCATA”).  First, the court found that DUCATA “does not establish a bright-line rule barring contribution for all intentional torts.”  Second, the court held that in order to claim a settlement credit under DUCATA with respect to a director’s liability, a non-settling defendant must establish that the director was not exculpated under a Section 102(b)(7) provision.

Background

On June 30, 2011, Warburg Pincus acquired Rural at a price of $17.25 per share (the “Merger”). Rural’s shareholders brought suit in connection with the acquisition.  Plaintiffs contended that Rural’s directors, including the company’s President and CEO (collectively, the “individual defendants”), had “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 … that [Rural] issued in connection with the Merger (the ‘Disclosure Claim’).” Plaintiffs also asserted aiding and abetting claims against RBC, Rural’s lead financial advisor, as well as Moelis & Company LLC, Rural’s secondary financial advisor.  

Prior to trial, plaintiffs reached an agreement in principle to settle their claims against the individual defendants and Moelis (collectively, the “Settling Defendants”).  The final settlement agreement foreclosed RBC’s right to seek contribution against the Settling Defendants but provided that the damages recoverable against RBC would be reduced to the extent of the pro rata liability, if any, of the Settling Defendants.  The case proceeded to trial against RBC only.  During the trial, RBC did not argue that the individual defendants had breached their fiduciary duties or that Moelis had aided and abetted the directors’ breaches.  RBC neither attempted to establish that the Settling Defendants were joint tortfeasors, nor contended that its share of potential liability should be reduced under the principles of relative fault.  RBC argued only that it should be entitled to a settlement credit based on the pro rata liability of the Settling Defendants if it were found liable.

On March 7, 2014, the Delaware Chancery Court issued a post-trial decision in the Rural/Metro case holding RBC liable for aiding and abetting breaches of fiduciary duty by Rural’s directors.  In re Rural Metro Corp., 88 A.3d 54 (Del. Ch. 2014) (Laster, V.C.) (the “Liability Opinion”). [1]  With respect to the Sale Process Claim, the court found that the individual defendants had breached their fiduciary duties, and that RBC had aided and abetted those breaches, in two respects.  First, the court held that “the initiation of a sale process in December 2010 fell outside the range of reasonableness.“  The court found that RBC and Christopher Shackelton, one of Rural’s directors, had “put Rural into play without Board authorization.”  The court further determined that RBC had timed the Rural sale process to run in parallel with the sale of Emergency Medical Services Corporation (“EMS”), Rural’s only national competitor in the ambulance business.  Significantly, the court found 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.”

Second, the court determined that the Board had “failed to provide active and direct oversight of RBC” during Rural’s final negotiations with Warburg.  At the time the Board 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.”  The court concluded that “[u]nder [these] circumstances, the Board’s decision to approve Warburg’s bid lacked a reasonable informational basis and fell outside the range of reasonableness.”  Moreover, the court found that “RBC [had] created the unreasonable process and informational gaps that led to the Board’s breach of duty.”

As to the Disclosure Claim, the court found that the plaintiffs had “proved at trial that the Proxy Statement contained materially misleading disclosures in the form of false [financial] information that RBC [had] presented to the Board.”  The court underscored that RBC had provided the Board with “false” information “in connection with its precedent transaction analyses,” and this “false information was repeated in the Proxy Statement.”

Significantly, the Liability Opinion did not “address or attempt to overcome the defendant directors’ potential entitlement to exculpation under Section 102(b)(7) of the Delaware General Corporation Law.”  Rural II, 2014 WL 5280894.  The court “did not fix an amount of damages” or “address RBC’s argument that if it were held liable, then the Delaware Uniform Contribution Among Tortfeasors Act (‘DUCATA’) … required that any damages award against RBC be reduced by the aggregate pro rata share of the liability of the defendants who had settled.” 

Rural II Court Holds RBC Is Entitled to a Settlement Credit Under DUCATA

On October 10, 2014, the Chancery Court in Rural II issued an opinion addressing RBC’s entitlement to a settlement credit under DUCATA and determining RBC’s damages.  DUCATA provides in relevant part as follows:

A release by the injured person of 1 joint tortfeasor … does not discharge the other tortfeasor unless the release so 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).  “Pending high court guidance” on this issue, the Rural II court held that “DUCATA does not establish a bright-line rule barring contribution for all intentional torts.”  The court found that “[a] defendant in RBC’s situation could seek contribution from other joint tortfeasors, so RBC is not barred from claiming DUCATA’s settlement credit.” 

The court first considered the text of the statute, and found that “[t]he plain language of DUCATA does not bar contribution for intentional torts.”  The court explained that “[t]he literal meaning of the words of DUCATA permits contribution among all tortfeasors.”  The court also found it significant that the drafting history of the Uniform Act of 1939, on which DUCATA was based, “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.”  Additionally, the court noted that other Delaware statutes “authorize[ ] contribution among intentional tortfeasors … in specific circumstances.”

The Rural II court then considered cases addressing the availability of contribution for intentional torts under Delaware law.  The court determined that the District of Delaware’s decision in McLean v. Alexander (McLean II), 449 F. Supp. 1251 (D. Del. 1978), rev’d on other grounds, 599 F.2d 1190 (3d Cir. 1979) “provides the most persuasive analysis and is closest to the facts of this case.”  In McLean II, the District of Delaware held that an accounting firm found liable for securities fraud and common law fraud in connection with the sale of a closely held company could bring a claim for contribution against defendants who had previously settled their claims with plaintiffs.  Finding “no limitation expressed within the terms of” DUCATA, the court held that “all wrongdoers may properly share in the apportionment of damages via claims for contribution.” McLean II, 449 F. Supp. 1251. 

Here, the court found that “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.”

Rural II Court Finds Unclean Hands Precludes RBC From Claiming a Settlement Credit

Plaintiffs contended that “the doctrines of in pari delicto and unclean hands should bar RBC from receiving a settlement credit.”  The Rural II court found that the in pari delicto doctrine “does not apply here because RBC did not engage in criminal or illegal conduct.”  However, the court found that “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.’”

The court explained that “[t]he 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.”  Here, the court observed that “[t]he Liability Opinion imposed liability on RBC for both the Sale Process Claim and the Disclosure Claim.”  Although “[t]he directors [had] breached their duties when approving the disclosures in the Proxy Statement and when approving the Merger …, they did so because RBC misled them.”  The Rural II court reasoned that “[i]f 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.”

The court found that RBC could still “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.”

Rural II Court Determines That Two Rural Directors Were “Joint Tortfeasors” Under DUCATA

The Rural II court next considered “whether RBC [had] met the requirements for the [settlement] credit” under DUCATA.  In Medical Center of Delaware, Inc. v. Mullins, 637 A.2d 6 (Del. 1994), the Delaware Supreme Court held that “[t]he credit provided for in the Delaware Uniform Contribution Law is applicable exclusively to ‘joint tortfeasors.’”  Mullins, 637 A.2d 6.  The Mullins court held that a defendant seeking contribution under DUCATA must establish “either judicially or by an admission, that the settling party was liable in tort, i.e., a tort-feasor.”  Relying on Mullins, the Rural II court held that “RBC bears the burden of establishing the joint tortfeasor status of each of the Settling Defendants.”  Rural II, 2014 WL 5280894.

The Rural II court then considered “the availability of exculpation under Section 102(b)(7).”[2]  The court observed that the issue of “[h]ow Section 102(b)(7) affects a right of contribution presents a question of first impression.”  However, the court emphasized that “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.”  Citing the Delaware Supreme Court’s decision in Lutz v. Boltz, 100 A.2d 647 (Del. Super. 1953), the Rural II court held that “if the director defendants would have been entitled to exculpation, then RBC could not obtain contribution from them and” therefore could not “claim the settlement credit.” 

The Rural II court explained that “[u]nder Mullins, … RBC [had] the burden of proving that the director defendants were jointly liable to the Class.”  “RBC therefore [had] 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.’”  In other words, the Rural II court found that RBC had to “establish that a disloyal state of mind contributed causally to [each] director’s breach of duty.” 

Based on the trial evidence, the Rural II court found that “exculpation would not have been available” to two of the Settling Defendants:  Christopher Shackelton, one of Rural’s board members, and Michael DiMino, Rural’s President and CEO.  The court held that RBS therefore was entitled to a settlement credit in light of the participation of Shackelton and DiMino in the settlement.

As to the remaining director defendants, the Rural II court deemed the trial evidence insufficient to establish that their actions fell within one of the exceptions to Section 102(b)(7).  The court further determined that “RBC and Moelis,” Rural’s secondary financial advisor, were “not similarly situated” as joint tortfeasors.  The court found that it did not “follow from the Liability Opinion’s finding [as to RBC’s advice] that Moelis’s advice was [also] necessarily tortious.”    

Rural II Court Apportions 83% of the Relative Fault to RBC

The Rural II court then turned to apportionment of liability.  As an initial matter, the court found that the Disclosure Claim and the Sale Process Claim could “can be weighted equally on the premise that each led to the same injury.”  Because the court found RBC “solely responsible for the Disclosure Claim,” the court allocated RBC “50% of the damages suffered by the [c]lass.”

With respect to the 50% remaining liability for the Sale Process Claim, the court noted that “[t]he Liability Opinion identified two sets of breaches of duty … : 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.”  The court found that “the two breaches can be weighted equally.”  Since the court had determined that the doctrine of unclean hands precluded RBC from claiming “any settlement credit for the breaches of duty that occurred during the final approval of the Merger,” the court allocated “an additional 25% of the responsibility for the damages suffered by the [c]lass to account for [these] breaches.”

The court explained that “[t]he remaining 25% of the responsibility for the damages suffered by the [c]lass 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.”  The court determined that this 25% share of damages must be apportioned among RBC and its joint tortfeasors, Shackelton, and DiMino.  While the court acknowledged that DUCATA’s “basic principle is to divide the damages for which the defendants are responsible equally among all defendants,” the court found that “the relative degrees of fault of the joint tortfeasors [must] be considered in determining their pro rata shares” in cases where “there is such a disproportion of fault among joint tortfeasors as to render inequitable an equal distribution among them.”  With respect to the 25% of the damages in connection with the initiation of the Rural sales process, the court allocated 10% of the responsibility to Shackelton, 8% to RBC, and 7% to DiMino.

The court determined that RBC was therefore entitled to a settlement credit of 17% of the damages suffered by the class.  The court explained that “RBC [was] 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.”  Since “the dollar value of the [17%] share of responsibility is greater than the settlement payments,” the court determined that “RBC’s liability is reduced by the former amount.”  The court entered judgment against RBC in the amount of $75.799 million (83% of the total damages suffered by the class).


[1]           Please click here to read our complete discussion of the Liability Opinion in the March 2014 edition of the Alert.

[2]          Section 102(b)(7) of the Delaware General Corporation Law provides that a Delaware corporation may include in its certificate of incorporation “[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,” subject to certain exceptions.  A Section 102(b)(7) provision may not limit a director’s personal liability for “any breach of the director’s duty of loyalty to the corporation or its stockholders;” “acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law;” or “any transaction from which the director derived an improper personal benefit.”


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