{"id":508,"date":"2011-05-30T18:01:59","date_gmt":"2011-05-30T18:01:59","guid":{"rendered":"http:\/\/fresnolawyerblog.com\/?p=508"},"modified":"2011-05-30T18:01:59","modified_gmt":"2011-05-30T18:01:59","slug":"william-penn-partnership-there-are-no-winners","status":"publish","type":"post","link":"https:\/\/fresnolawyerblog.com\/?p=508","title":{"rendered":"William Penn Partnership – There are No Winners"},"content":{"rendered":"

The Delaware Supreme Court recently decided William Penn Partnership v. Saliba<\/strong>, a case in which there are no winners.\u00a0 In the case, one of the members breached his fiduciary obligations, but his conduct caused no damage.\u00a0 Nonetheless, the court awarded attorneys\u2019 fees as an \u201cequitable remedy.\u201d\u00a0 In this author\u2019s view, the award distorts the law of equitable remedies, creates uncertainty in the law, and rewards fruitless litigation.<\/p>\n

The facts were as follows.\u00a0 The parties were members of a limited liability company called Del Bay Associates, LLC.\u00a0 Del Bay built the Beacon Motel in Lewes, Delaware<\/a> in 1987, with 66 guest units.\u00a0 Later, some of the members (the Lingos) wanted to \u201cend their business relationship\u201d with the other members.<\/p>\n

The Lingos concocted a story about their need to dissolve the limited liability company and sell the motel to fulfill obligations under a section 1031 tax-deferred exchange.\u00a0 Explained the court, \u201cOn June 10, 2003, the Lingos convinced Hoyt to sign the contract immediately so they could present it to the JGT board. The Lingos told Hoyt that if he did not sign the contract, JGT might back off.\u201d<\/p>\n

The court found that the representations were not true.\u00a0 Instead, the Lingos controlled both sides of the transaction \u2013 seller and buyer.\u00a0 For example, \u201cThe Lingos manipulated the sales process through misrepresentations and repeated material omissions such as (1) imposing an artificial deadline justified by \u2018tax purposes;\u2019 (2) failing to inform Saliba and Ksebe that they were matching their offer by assuming the existing mortgage; [and] (3) failing to inform Saliba and Ksebe that they had already committed to selling the property to JGT, an entity the Lingos controlled.\u201d<\/p>\n

So, we have a transaction in which one member abused his fiduciary duties to the other members.\u00a0 More bluntly, \u201cThe Lingos here acted in their own self interest by orchestrating the sale of Del Bay’s sole asset, the Beacon Motel, on terms that were favorable to them.\u00a0 By standing on both sides of the transaction \u2013 as the seller, through their interest in and status as managers of Del Bay, and the buyer, through their interest in JGT\u2013 they bear the burden of demonstrating the entire fairness of the transaction.\u201d<\/p>\n

\"\"<\/a>Such proof of \u201centire fairness\u201d was a burden the Lingos could not meet.\u00a0 \u201cThe concept of entire fairness consists of two blended elements: fair dealing and fair price.\u00a0 Fair dealing involves analyzing how the transaction was structured, the timing, disclosures, and approvals.\u00a0 Fair price relates to the economic and financial considerations of the transaction.\u00a0 We examine the transaction as a whole and both aspects of the test must be satisfied; a party does not meet the entire fairness standard simply by showing that the price fell within a reasonable range that would be considered fair.\u201d<\/p>\n

In fact, the price did fall with \u201ca reasonable range.\u201d\u00a0 The buyer paid $6,625,000 for the Beacon Motel, while the trial court found that the \u201cretained appraisal valued the property at $5,480,000.\u201d\u00a0 Thus, the price paid by the buyer was greater than the fair market value for the motel, meaning that the non-controlling members suffered no compensable injury.<\/p>\n

The court found that this result was not satisfactory.\u00a0 \u201cMerely showing that the sale price was in the range of fairness, however, does not necessarily satisfy the entire fairness burden when fiduciaries stand on both sides of a transaction and manipulate the sales process.\u201d<\/p>\n

OK, but we have no basis on which to award damages.\u00a0 \u201cSaliba and Ksebe were left without a typical damage award because the Court’s appraisal of the property came in at a value lower than the sale price.\u201d<\/p>\n

What to do?\u00a0 This court decided to award attorneys\u2019 fees to the non-controlling members.\u00a0 \u201cThe Chancellor concluded it would be unfair and inequitable for Saliba and Ksebe to shoulder the costs of litigation arising out of improper prelitigation conduct attributable to the Lingos that amounted to a violation of their fiduciary duties.\u201d<\/p>\n

Although there was no statutory or contractual basis for an award of attorneys\u2019 fees, the Delaware Supreme Court held that \u201cThe Chancellor’s decision to award attorneys’ fees and costs was well within his discretion and is supported by Delaware law in order to discourage outright acts of disloyalty by fiduciaries.\u00a0 Absent this award, Saliba and Ksebe would have been penalized for bringing a successful claim against the Lingos for breach of their fiduciary duty of loyalty.\u201d<\/p>\n

Which perhaps would have been the better result.\u00a0 This litigation was surely driven by the attorneys, not by the injured parties, with substantial attorneys\u2019 fees.\u00a0 The court\u2019s award of attorneys\u2019 fees on equitable grounds will only foster litigation in the future, which is hardly an optimal result.<\/p>\n

William Penn Partnership v. Saliba<\/strong><\/a> (Del. Supreme Court Feb. 9, 2011) 2011 Del. LEXIS 91<\/p>\n","protected":false},"excerpt":{"rendered":"

The Delaware Supreme Court recently decided William Penn Partnership v. Saliba, a case in which there are no winners.\u00a0 In the case, one of the members breached his fiduciary obligations, but his conduct caused no damage.\u00a0 Nonetheless, the court awarded attorneys\u2019 fees as an \u201cequitable remedy.\u201d\u00a0 In this author\u2019s view, the award distorts the law […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3,4,8],"tags":[],"class_list":["post-508","post","type-post","status-publish","format-standard","hentry","category-case-law","category-corporations","category-real-property"],"_links":{"self":[{"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/posts\/508"}],"collection":[{"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=508"}],"version-history":[{"count":1,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/posts\/508\/revisions"}],"predecessor-version":[{"id":510,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/posts\/508\/revisions\/510"}],"wp:attachment":[{"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=508"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=508"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=508"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}