Dawson v. Pittco Capital Partners, L.P.
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EFiled: Jan 31 2013 02:42PM EST
Transaction ID 49228022
Page 1 revised January 31, 2013
Case No. 3148VCN
COURT OF CHANCERY
OF THE
STATE OF DELAWARE
JOHN W. NOBLE
VICE CHANCELLOR
417 SOUTH STATE STREET
DOVER, DELAWARE 19901
TELEPHONE: (302) 739-4397
FACSIMILE: (302) 739-6179
January 31, 2013
Revised January 31, 2013
Paul A. Fioravanti, Jr., Esquire
Prickett, Jones & Elliott, P.A.
1310 King Street
Wilmington, DE 19801
Re:
Seth J. Reidenberg, Esquire
Tybout, Redfearn & Pell
750 Shipyard Drive, Suite 400
Wilmington, DE 19801
Dawson v. Pittco Capital Partners, L.P.
C.A. No. 3148-VCN
Date Submitted: October 11, 2012
Dear Counsel:
The merits of this action have been resolved.1
The Plaintiffs, Dale E.
Dawson and Bruce H. DeWoolfson, obtained a declaratory judgment confirming
their continuing rights under the Notes and the Security Agreement executed by
Defendant LaneScan, LLC. LaneScan had unsuccessfully asserted that the Notes
had been extinguished because of the Merger. LaneScan was not in default under
1
Dawson v. Pittco Capital P’rs, L.P., 2012 WL 1564805 (Del. Ch. Apr. 30, 2012) (the
“Memorandum Opinion”). For convenience, the terms defined in the Memorandum Opinion will
be used here. Familiarity with the Memorandum Opinion is presumed.
Dawson v. Pittco Capital Partners, L.P.
C.A. No. 3148-VCN
January 31, 2013
Page 2
the Notes because no payment is yet due. Principal and interest were deferred until
2014, even though the Notes were executed in 2004.
The Plaintiffs now seek to recover their attorneys’ fees and expenses. They
rely upon the Notes2 which, at Section 2.3, provide:
2.3 Remedies. Upon the occurrence of an Event of Default
hereunder (unless all Events of Default have been cured or waived by
Payee), Payee may, at its option, (i) by written notice to Maker,
declare the entire unpaid principal balance of this Note, together with
all accrued interest thereon, immediately due and payable regardless
of any prior forbearance, and (ii) exercise any and all rights and
remedies available to it under applicable law, including, without
limitation, the right to collect from Maker all sums due under this
Note. Maker shall pay all reasonable costs and expenses incurred by
or on behalf of Payee in connection with Payee’s exercise of any or all
of its rights and remedies under this Note, including, without
limitation, reasonable attorneys’ fees.
***
Certain familiar principles of contract law guide the Court’s reading and
application of the Notes.3 “It is the Court’s duty to enforce contracts according to
2
The Plaintiffs also point to the Security Agreement. Their claims under the Security
Agreement are addressed briefly, infra.
3
The Notes are to be construed under the law of Tennessee. Notes § 3.4. As a general matter,
the parties do not suggest that the law of Tennessee differs in any material fashion from the law
of Delaware. One possible exception is discussed infra.
Dawson v. Pittco Capital Partners, L.P.
C.A. No. 3148-VCN
January 31, 2013
Page 3
their plain terms.”4 In addition, “[i]f the language of the contract is clear and
unambiguous, the literal meaning controls the outcome of the dispute. In such a
case, the contract is interpreted according to its plain terms as written, and the
language used is taken in its plain, ordinary, and popular sense.”5 Agreements
permitting the prevailing party to recover its attorneys’ fees are enforceable, but
they are “strictly construed.”6
***
The first words of Section 2.3 of the Notes provide LaneScan with its
primary argument against payment of attorneys’ fees and expenses to the Plaintiffs.
Those words—“[u]pon the occurrence of an Event of Default”—are relied upon to
defeat the Plaintiffs’ claims because there has been no Event of Default. The
Notes define Event of Default, at Section 2.1, as a failure to pay principal or
interest when due and that failure continues for more than ten days after notice.7
Nothing in the Notes expressly provides for the payment of attorneys’ fees if
4
Cocke Cty. Bd. of Highway Comm’rs v. Newport Utils. Bd., 690 S.W.2d 231, 237 (Tenn. 1985).
Maggart v. Almay Realtors, Inc., 259 S.W.3d 700, 704 (Tenn. 2008) (internal quotation and
citation omitted).
6
Adkins v. Chrysler Fin. Corp., 344 Fed. App’x 144, 148 (6th Cir. 2009) (applying Kentucky
law).
7
Other events in the nature of bankruptcy and liquidation are also specified, but none has any
relevance to the current dispute.
5
Dawson v. Pittco Capital Partners, L.P.
C.A. No. 3148-VCN
January 31, 2013
Page 4
LaneScan should declare the Notes canceled and no longer of any force. The first
sentence of Section 2.3 provides holders of the Notes, such as the Plaintiffs, with
rights to exercise upon an Event of Default, including the ability to declare the
entire unpaid balance due. The Plaintiffs, however, do not focus upon the first
sentence of Section 2.3. Instead, they look to the second sentence which requires
LaneScan to pay the Plaintiffs, as holders of the Notes, “all reasonable costs and
expenses incurred by or on behalf of [the Note holders] in connection with [the
Note holders’] exercise of any or all of [their] rights and remedies under [these]
Note[s].”8 The Plaintiffs were not able to obtain payment on the Notes because the
Notes were not in default and payment was not due. They did, however, exercise
the inherent rights of a note holder to take timely action to avoid the consequences
of the debtor’s purported repudiation or cancellation without cause of the
documents establishing the debt obligation.
LaneScan improperly repudiated its obligations under the Notes. It is as if
LaneScan had anticipatorily breached its duty to make payments under the Notes.
LaneScan, in effect, announced that it would not pay the debts evidenced by the
8
The sentence goes on to make clear that “reasonable attorneys’ fees” are a primary objective of
this sentence.
Dawson v. Pittco Capital Partners, L.P.
C.A. No. 3148-VCN
January 31, 2013
Page 5
Notes. Its position essentially is that if the ten years and a few days had passed and
no payment had been made and a default notice had been issued, the Plaintiffs
would be entitled to an award of attorneys’ fees, but, because the right to attorneys’
fees is limited to a set of explicitly defined Events of Default and the Notes do not
address repudiation (or anticipatory breach), attorneys’ fees may not be recovered.
Thus, the question becomes whether the second sentence in Section 2.3,
which appears to provide for attorneys’ fees when Note holders must act to protect
their rights, is somehow limited by the introductory words of the first sentence of
Section 2.3, which expressly restrict the rights established, at least by that
sentence, to Events of Default.
The second sentence of Section 2.3 refers to various “rights and remedies”
accruing to Note holders under the Notes. Those rights and remedies are not
necessarily tied to an Event of Default, although they would, most likely, be
available if an Event of Default occurs. There are rights and remedies which exist
outside the context of an Event of Default. For instance, if LaneScan declared the
Notes invalid because of defects in their execution, but without a legal basis for
doing so, the right to have the benefits of being Note holders would effectively be
Dawson v. Pittco Capital Partners, L.P.
C.A. No. 3148-VCN
January 31, 2013
Page 6
denied to the Note holders. That denial of their rights would allow them to pursue
claims against LaneScan related to their rights under the Notes even though there
has been no Event of Default. For these reasons, the text of the Notes supports the
Plaintiffs’ reading.9 Thus, the Plaintiffs pursued their “rights and remedies” under
the Notes, and, by the second sentence of Section 2.3, are entitled to their
reasonable attorneys’ fees in that effort.
***
The Notes were secured by the Security Agreement which also addressed the
Plaintiffs’ rights to attorneys’ fees. At Section 10 of the Security Agreement,
LaneScan agreed to indemnify the Plaintiffs for “the amount of any and all costs
and expenses, including the fees and disbursements of the Secured Party’s
counsel . . . which Secured Party may incur in connection with . . . (iii) the exercise
or enforcement of any of the rights of Secured Party hereunder, or (iv) the failure
9
Article 2 of the Notes, which includes the provision allowing for attorneys’ fees under certain
circumstances, carries the heading “Defaults.” One could read the Notes as allowing an
application for attorneys’ fees only for some set of circumstances that fits under the heading of a
“default.” That argument fails by the express terms of Section 3.6 of the Notes which provides:
“The headings of sections in this Note are provided for convenience only and will not affect its
construction or interpretation.” Perhaps one could view the heading of an article as different
from a heading of a section, but the Court cannot ascribe such a hyper-technical reading to the
drafters’ intent.
Dawson v. Pittco Capital Partners, L.P.
C.A. No. 3148-VCN
January 31, 2013
Page 7
by the Grantor to perform or observe any of the provisions hereof.” 10
The
indemnification provision does not apply to matters arising out of the Secured
Party’s gross negligence or willful misconduct; that is not alleged to have occurred
here. Also, the Security Agreement has a provision (Section 8) that speaks of
attorneys’ fees but the introductory language which is applicable to all of the
“remedies upon default,” begins with language “[i]f an Event of Default shall have
occurred.”11
That type of language, had it been applied to all instances of
attorneys’ fees under both the Notes and the Security Agreement might have been
effective to deny Plaintiffs’ opportunity for attorneys’ fees.
Significantly,
language of that nature, does not apply either to the second sentence of Section 2.3
of the Notes or to Section 10 of the Security Agreement. Plaintiffs’ efforts to
maintain the validity of the Notes fall within subparagraphs (iii) and (iv) of
Section 10 of the Security Agreement because the rights under the Notes are the
critical foundation for any rights under the Security Agreement.
10
11
Security Agmt. § 10(b) (“Indemnity and Expenses”).
Security Agmt. § 8.
Dawson v. Pittco Capital Partners, L.P.
C.A. No. 3148-VCN
January 31, 2013
Page 8
***
The one possible material difference between Delaware law and Tennessee
law that LaneScan has identified is that, under Tennessee law, a declaratory
judgment does not give rise to a right to attorneys’ fees. LaneScan
relies
upon
Boiler Supply Co., Inc. v. Lunn Real Estate Investments, Inc.12 That decision
appears to turn on the fact that the declaratory judgment action had been brought to
confirm that certain rights did not exist; it was not an effort to undo a debtor’s
rejection of its obligation to make payments. Default, simply because of timing, is
not yet possible in this case.13 Moreover, the primary authority cited by LaneScan
involves Illinois law and not Tennessee law.14 Tennessee law does not appear to
support such a blanket preclusion of attorneys’ fees. In addition, the debate is not
so much over what the law of Tennessee provides, instead, it is about what the
Notes say about the agreement of the parties with respect to attorneys’ fees. The
12
1998 WL 684599, at *5 (Tenn. Ct. App. July 1, 1998).
Default and repudiation are not always simultaneous, but, under these circumstances, there is
no material difference with respect to the consequences for the Plaintiffs’ ability to recover the
debts due them. The Court rejects LaneScan’s notion that by repudiating the Notes instead of
taking advantage of the ten year grace period before it had to make a payment under the Notes, it
somehow avoided the clear intent of the parties that attorneys’ fees would be recovered when
necessarily expended to assure payment.
14
Wheeling Trust & Savings Bank v. Citizens Nat’l Bank of Downers Grove, 491 N.E.2d 866,
870 (Ill. App. Ct. 1986).
13
Dawson v. Pittco Capital Partners, L.P.
C.A. No. 3148-VCN
January 31, 2013
Page 9
provision in the Notes which authorizes an award of attorneys’ fees refers to
“rights and remedies” generally and does not offer a technical basis for treating a
declaratory judgment differently.15 In sum, an award of attorneys’ fees and costs is
not precluded by the law of Tennessee simply because this Court decided to use a
declaratory judgment.
***
As can be seen from a cursory review of the Memorandum Opinion, the
Plaintiffs failed to succeed on many of their claims.
They have no right to
attorneys’ fees incurred with respect to any of their claims that are not directly
related to the Notes. Separating out the time and effort devoted to failed claims in
the litigation that did not involve the Notes will no doubt be a difficult task. The
question for now, however, is whether Plaintiffs have a viable claim for attorneys’
fees incurred in asserting claims relating to the Notes that were not the specific
claims on which they prevailed. LaneScan would have the Court, if it ordered the
payment of any attorneys’ fees at all, limit the award to time spent pursuing the
15
In a sense, a declaratory judgment was selected by the Court in the exercise of its discretion in
order to craft the most appropriate remedy. How a court crafts its equitable remedies to
implement its decision should not necessarily be determinative of the question of attorneys’ fees,
especially where the parties have provided for attorneys’ fees in the written documentation of
their common understanding.
Dawson v. Pittco Capital Partners, L.P.
C.A. No. 3148-VCN
January 31, 2013
Page 10
precise claim upon which the Plaintiffs prevailed. Thus, the Plaintiffs would not
be able to recover attorneys’ fees for any claims related to the Notes, which they
lost or which the Court did not address. Although an item-by-item approach to the
payment of attorneys’ fees may be required by certain textual language, the Notes
suggest a primary focus on the reasonableness of the fees if they were incurred in
connection with the Plaintiffs’ efforts to vindicate their rights under the Notes.
The language chosen by the drafters of the Notes could have, but did not, limit the
award narrowly and strictly to matters upon which success was achieved. The use
of the phrases “all reasonable costs” and “in connection with [the Plaintiffs’]
exercise of any or all of [their] rights” demonstrates a recognition that a legitimate
litigation strategy may involve the assertion of claims or arguments upon which
victory is not obtained. The Court is not at the stage where the fees to be awarded
can be determined.
That effort requires some assessment of the overall
“reasonableness” of the fee application. All the Court can now resolve with
respect to this argument is that merely because Plaintiffs’ counsel dedicated time
and effort to claims or contentions (relating to the Notes) on which Plaintiffs did
not prevail is not a basis for denying those fees.
Dawson v. Pittco Capital Partners, L.P.
C.A. No. 3148-VCN
January 31, 2013
Page 11
***
Accordingly, for the foregoing reasons, the Plaintiffs are entitled to their
reasonable attorneys’ fees and expenses incurred in pursuing their claims to
confirm the continuing viability of the Notes, despite LaneScan’s efforts to
repudiate.16
IT IS SO ORDERED.
Very truly yours,
/s/ John W. Noble
JWN/cap
cc: Register in Chancery-K
16
A determination of those fees and expenses must await preparation of the necessary record.
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