Israel Discount Bank of New York v. First State Depository Company, LLC, et al.
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
ISRAEL DISCOUNT BANK OF NEW
YORK,
Plaintiff,
v.
FIRST STATE DEPOSITORY
COMPANY, LLC and CERTIFIED
ASSETS MANAGEMENT, INC.,
Defendants.
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Civil Action No. 7237-VCP
MEMORANDUM OPINION
Submitted: March 7, 2013
Decided: May 29, 2013
Paul D. Brown, Esq., Joseph B. Cicero, Esq., Stephanie S. Habelow, Esq., COUSINS
CHIPMAN & BROWN, LLP, Wilmington, Delaware; Attorneys for Plaintiff.
Beth Moskow-Schnoll, Esq., David A. Felice, Esq., BALLARD SPAHR LLP,
Wilmington, Delaware; Attorneys for Defendants.
PARSONS, Vice Chancellor.
This action arises out of a dispute over the handling of collateral for a $10 million
loan consisting of rare coins and bullion. The primary lender, a New York bank, lent
money to its client as part of a revolving credit agreement. The client, in turn, issued
loans to various entities and took an interest in collateral for those loans. The New York
bank had an interest in this collateral as a result of its security interest in its client‘s
assets. Ultimately, the New York bank‘s client requested that the collateral be transferred
to a specific depository that offered better pricing. The New York bank, its client, and
the depository signed an agreement requiring that, upon receiving written notice from the
New York bank, the depository thereafter would refrain from releasing the collateral
without the written authorization of the New York bank. The depository also agreed to
allow the New York bank to inspect and remove the collateral on demand.
Despite adequate notice of the New York bank‘s exercise of its right to approve
any transfers by the depository, the depository continued, without consulting the bank, to
release the collateral to a debtor company with the same owner as the depository. A large
amount of the collateral was not returned to the depository, and the New York bank
claims to have suffered damages due to its resulting under-securitization. The New York
bank now seeks damages based on the unauthorized release of collateral by the
depository and the conversion of collateral by the related company. The depository and
related company have asserted a legion of defenses. They include that the New York
bank‘s claims are barred by laches, the doctrine of election of remedies, and the
invocation of an indemnification and hold harmless provision in a separate agreement.
1
Both sides also contend that they are entitled to an award of attorneys‘ fees as a result of
their adversary‘s bad faith and vexatious litigation conduct.
This Memorandum Opinion represents the Court‘s post-trial findings of fact and
conclusions of law. Having reviewed carefully the full record and the parties‘ extensive
post-trial briefs and oral argument, I find that the depository breached the agreement by
releasing collateral and interfering with the New York bank‘s consent, inspection, and
removal rights. I also find that the affiliated debtor converted collateral by impermissibly
possessing and disposing of collateral as if it were its own. Finally, I find that the
depository and affiliated company‘s conduct both before and during the litigation was
sufficiently egregious to justify an award against them of the plaintiff‘s reasonable
attorneys‘ fees and expenses.
I.
BACKGROUND
A.
The Parties
Plaintiff, Israel Discount Bank of New York (―IDB‖ or ―Plaintiff‖), is a bank
organized under the laws of the State of New York.
Defendant First State Depository, LLC (―FSD‖), a limited liability company
organized under the laws of Delaware, is a private depository that provides specialized
precious metals custody, shipping, and accounting services. Defendant Certified Assets
Management, Inc. (―CAMI‖ and, together with FSD, ―Defendants‖) is a Delaware
corporation that offers wholesale rare coin and marketing services.
2
Robert Higgins,1 a non-party, owns both FSD and CAMI. He is FSD‘s sole
member and CAMI‘s president and sole stockholder. Eric Higgins (―Eric‖), also a nonparty and Higgins‘s son, is the head of customer service at FSD. Another of Higgins‘s
sons, Steven Higgins (―Steven‖), worked at CAMI and served as CAMI‘s corporate
designee.
Facts2
B.
1.
The 2006 Revolver
On December 27, 2004, IDB loaned money to Republic National Business Credit
LLC (―Republic‖) as part of a revolving credit agreement.3 Republic is a limited liability
company organized under the laws of California that provides secured financing to help
facilitate the acquisition and distribution of precious metals for the coin and jewelry
industry.4 Ned Fenton is the managing director of Republic. On June 29, 2006, IDB and
Republic entered into an Amended and Restated Loan and Security Agreement (the
1
Because a few of the relevant actors share the surname Higgins, I refer to Robert
Higgins as ―Higgins,‖ and his family members by their first names, for clarity.
2
Because this case involves businesses that, by their nature, should keep accurate
and up-to-date records, the recitation of facts should be simple. Unfortunately,
that is not the case. A major reason is that the central figure in this dispute,
Higgins, is an unscrupulous businessman who used his businesses, FSD and
CAMI, to move around assets in the equivalent of a three-card monte scheme to
serve Defendants‘ ends and without regard to IDB‘s rights.
3
Stip. ¶ 8. Citations in the form ―Stip.‖ refer to the parties‘ stipulated facts from the
Joint Pre-Trial Order (Nov. 14, 2012).
4
Stip. ¶ 5.
3
―2006 Revolver‖), which increased the revolving loan to $10 million.5 The lending limit
could not exceed 85% of Republic‘s loan receivables minus reserves, which meant that
the loan-to-value ratio or ―LTV‖ of the 2006 Revolver was approximately 85%. 6 For any
one client, however, the eligible receivables could not exceed $5,000,000.7 That is, the
2006 Revolver contained a concentration cap that prevented Republic from borrowing
against a loan in excess of $5,000,000.8
The 2006 Revolver also granted IDB a first priority security interest in Republic‘s
―Collateral,‖9 which the 2006 Revolver defined broadly to include Republic‘s ―Client
Collateral‖ and ―Client Loan Documents.‖10
―Client Collateral‖ means ―property
pledged to [Republic] . . . to secure loans made by [Republic].‖11
―Client Loan
Documents‖ are ―[a]ll agreements, contracts, documents and instruments . . . evidencing,
pertaining or otherwise securing at any time any extensions of credit by [Republic] to
5
JX 6 § 1.1(k), (ww).
6
Id. § 1.1(k)(ii), (bb); Black‘s Law Dictionary 1022 (9th ed. 2009); Trial Transcript
(―Tr.‖) 13–14 (Landerer). Where the identity of the testifying witness is not clear
from the text, it is indicated parenthetically after the cited page of the transcript.
Neil Landerer is an account executive and first vice president at IDB.
7
JX 6 § 1.1(bb)(xi).
8
Tr. 13 (Landerer).
9
For purposes of this Memorandum Opinion, ―Republic‘s Collateral‖ refers to all
collateral pledged to Republic as security for Republic‘s loans or extensions of
credit.
10
JX 6 §§ 1.1(v), 3.1–3.4.
11
Id. § 1.1(s).
4
Clients.‖12 IDB monitored Republic‘s LTV by requiring Republic to provide borrowing
base certificates that disclosed Republic‘s borrowers, their collateral, and their LTV.13
2.
The loan to CAMI
On May 10, 2005, CAMI entered into a Revolving Loan and Security Agreement
with Republic (the ―CAMI Loan Agreement‖), which was undertaken ―[i]n connection
with financing [CAMI]‘s Numismatic Coins in the normal course of [CAMI]‘s
business.‖14 The CAMI Loan Agreement granted Republic a first priority interest in and
lien on Republic‘s Collateral.15 Moreover, Republic had a right to set a ―Collateral
Ratio,‖ which reflects the amount of collateral in proportion to outstanding advances.16
The CAMI Loan Agreement also provided that:
[Republic] may, in its sole discretion, transfer all or any part
of the obligations secured hereby and all or any part of the
Collateral or any interest in the obligations secured hereby or
in the Collateral, and shall be fully discharged thereafter from
all liability and responsibility with respect to such Collateral
so transferred, and the transferee shall be vested with all the
rights and powers of [Republic] hereunder with respect to
12
Id. § 1.1(t).
13
See Tr. 15 (Landerer); JX 103.
14
JX 3 at 1. Numismatic coins are rare coins, which are valuable as a result of their
scarcity rather than the value of their precious metal content. Tr. 6–7 (Landerer),
196–97 (Imhof). Todd Imhof is IDB‘s valuation expert and a vice president of
Heritage Numismatic Auctions, Inc.
15
JX3 §§ 3, 4.
16
Id. at 1 (―‗Collateral Ratio‘ shall mean the proportion, expressed as a percentage
that the dollar value of the Collateral held in the Collateral Account bears to the
outstanding Advances.‖), § 4.B.
5
such Collateral so transferred; with respect to any Collateral
not so transferred [Republic] shall retain all rights and powers
hereby given.17
In other words, Republic had the authority to transfer obligations and interests in its
collateral, including its right to set the Collateral Ratio.
3.
Bailment Agreement and Collateral Custody Account Agreements
Republic‘s loans to clients were collateralized primarily with numismatic coins
that were deposited with IDB or Delaware State Depository Company. 18 In 2006, Fenton
approached IDB and requested that certain collateral be transferred to FSD because FSD
offered better pricing.19 FSD, Republic, and three of Republic‘s ―clients,‖ CAMI, Vicki
Lott Reid (―Lott‖), who is Higgins‘s sister, and Donald Ketterling, a former business
partner of Higgins and former employee of CAMI, entered into Collateral Custody
Account Agreements (―CCAAs‖). The CCAAs governed the deposit of assets stored at
FSD. Those assets were deposited into four separate FSD accounts: (1) CAMI Collateral
One, Acct. No. COLC000900; (2) CAMI Collateral Two, Acct. No. COLC000901; (3)
Ketterling, Acct. No. COLI000902; and (4) Lott, Acct. No. COLI00091920 (collectively,
the ―Accounts‖).21
17
Id. § 12.
18
Tr. 24–25 (Landerer).
19
Id. at 25.
20
These CCAAs appear in the record at JX 7, 8, 12, 20, respectively.
21
The collateral linked with the Accounts is referred to hereinafter as the
―Collateral‖ or the ―Property.‖
6
FSD, Republic, and IDB entered into a separate bailment agreement (the
―Bailment Agreement‖) that protects IDB‘s rights in Republic‘s Collateral stored at
FSD.22 As part of that agreement, the parties acknowledged that IDB has a security
interest in Republic‘s assets
including, but not limited to, [Republic‘s] present and future
interest in property presently held by [FSD] and which may
be shipped to and stored with [FSD] from time to time in the
future . . . pursuant to separate agreements between [FSD],
[Republic,] and [Republic]‘s clients.23
The Bailment Agreement further provides:
Upon written notice from an officer of [IDB], [FSD] agrees
that it will hold all such Property subject only to [IDB]‘s
written instructions, and that [FSD] will release same to
[IDB] on demand, provided that [IDB] tenders to [FSD]
payment of any accrued charges on the Property being
released. [FSD] agrees that [FSD] will not hinder or delay
[IDB] in enforcing [IDB]‘s right in and to said Property.24
The Bailment Agreement also granted IDB other rights, including the right to examine
Republic‘s Collateral stored at FSD and discuss matters relating to FSD‘s performance
under the Bailment Agreement with FSD‘s officers.25
22
Tr. at 30–31 (Landerer); JX 9.
23
JX 9 § 1.
24
Id. § 6.
25
Id. § 2.
7
4.
FSD’s operations
FSD is a depository that stores precious metals on behalf of its clients.26
According to Eric, FSD ―almost gives [its clients] instant access. . . . You can real easily
get your metal from our facility to the person that you sold it to, or to the person you want
it to [go to] or to yourself with ease.‖27 FSD also has agreements regarding a number of
collateral accounts, which Eric described as
a three-party agreement where you have [FSD] as the place
where the metal is stored, you have a borrower and a lender,
and those three people entered into an agreement for the
purpose of . . . metal being stored at our facilities for the
benefit of where the borrower can use his metal to get funds
for whatever purpose he needs them for. The metal stays at
our facility until whatever deal is done and the metals are
authorized for release.28
Any collateral stored pursuant to a collateral account would only be released upon
authorization from the lender.29 Frequently, the borrower, in this case CAMI, then would
remove the coins to take them to trade shows.30 The borrower ―would do what they
26
Tr. 481 (Eric).
27
Id. at 481–82.
28
Id. at 490–91.
29
Id. at 492.
30
Tr. 500 (Eric) (―The coins were constantly coming in and out based on the trade
shows.‖).
8
need[ed] to do to prepare for the show, and we wouldn‘t see [the collateral] again until
they came back . . . .‖31
5.
Republic increases its loan to sham borrowers
In May 2007, Republic requested an increase in its credit facility with IDB from
$10 million to $20 million.32 IDB granted that request, in part, based on Republic‘s
representation that it was seeking to diversify its portfolio.33 Shortly thereafter, Republic
used its enlarged facility to increase a loan to Ketterling from $250,000 to $5,000,000.34
Ketterling is a crony of Higgins. He had assisted in the formation of CAMI and was a
former vice president of CAMI.35
Although Ketterling signed the loan documents,
Ketterling never owned the underlying collateral, never received the proceeds from the
loan, and never made principal or interest payments on the loan.36
Instead, CAMI
pledged the underlying collateral and made all the payments on the loan. 37 I find,
therefore, that CAMI used Ketterling as a sham borrower to avoid IDB‘s $5,000,000
concentration cap and obtain loans that it otherwise could not have.
31
Id.; see also id. at 537–38.
32
JX 14.
33
Tr. 20–22 (Landerer); JX 14 at 0258529.
34
JX 13.
35
JX 298, Ketterling Dep., at 11–13.
36
Id. at 29, 45, 64–65.
37
Id. at 45, 64–65; Tr. 611 (Steven Higgins).
9
Higgins‘s sister, Lott, an employee of FSD and former employee of CAMI,
entered into a similar arrangement in 2008.38 Although Lott‘s name was on the related
document, CAMI received the loan proceeds, provided the loan collateral, and paid the
loan.39 Republic increased its loan to Lott from $350,000 to $1,550,000.40
6.
IDB becomes concerned, tightens its controls, and sends notice to FSD not to
release Republic’s Collateral stored at FSD without IDB’s consent
On July 24, 2009, National Gold Exchange, Inc. (―NGE‖) filed a voluntary
petition for relief under Chapter 11 of Title 1 of the United States Bankruptcy Code.41
NGE was one of Republic‘s significant borrowers.
In fact, NGE itself owed
approximately $3,000,000 to Republic and its principal, Mark Yaffe, owed $2,773,000. 42
After one of NGE‘s lenders discovered that there was insufficient collateral to support
NGE‘s position, that lender seized all of NGE‘s collateral, including gold coins securing
Republic‘s loans to Yaffe, which had been released by FSD to be displayed at a coin
show.43
38
JX 298 at 45; Tr. 611 (Steven).
39
JX 299 at 39–42, 50–51, 72, 85–86.
40
JX 21.
41
For the factual and procedural history of NGE‘s bankruptcy, see In re Nat’l Gold
Exch., Inc., No. 08:09-bk-15972-MGW (Bankr. M.D. Fl.).
42
JX 25 at 031153.
43
Id. at 031153–54.
10
The seizure of collateral related to NGE led to a $4,816,000 overadvance from
IDB to Republic, i.e., Republic was under-collateralized by that amount.44 To ameliorate
that problem, Fred Weinberg, a friend of Fenton, agreed to assign to IDB 9,000
numismatic ―missing edge error coins‖ (the ―Error Coins‖) as additional collateral.45 An
internal IDB letter, dated July 30, 2009, noted that the Error Coins had an aggregate value
of $9,000,000.46
As a further result of the seizure of NGE‘s collateral, IDB began tightening its
controls and reducing its exposure to Republic. Ultimately, on December 23, 2009, IDB
sent a letter instructing FSD not to release Republic‘s Collateral stored at FSD without
IDB‘s consent (the ―December 2009 Notice‖).47 Landerer, an account executive and first
vice president at IDB, previously had communicated to Fenton that IDB would be giving
notice to FSD that IDB‘s consent would be required before FSD could release any of
Republic‘s Collateral stored at FSD.48 Although IDB‘s recent interactions with FSD had
been with Eric Higgins, the December 2009 Notice was addressed to FSD to the attention
44
Id. at 031154.
45
Id. at 031145; JX 29; Tr. 38 (Landerer).
46
JX 25 at 031154.
47
JX 38.
48
JX 37.
11
of Michael B. Clark, who had signed the Bailment Agreement and CCAAs as FSD‘s
President in August 2006.49
At trial, Landerer testified that he remembered sending the December 2009 Notice
because Michael Kerneklian, a first vice president at IDB who was taking over
Landerer‘s duties, had been on vacation that week.50 Landerer testified that he sent the
December 2009 Notice in accordance with his typical procedures and that he had never
had a problem with addressees receiving his correspondence. Those typical procedures
included ―print[ing] the letter out,‖ ―hav[ing] it cosigned,‖ and ―giv[ing] it to [his]
assistant to mail out.‖51 IDB did not provide any additional documentary evidence, such
as a return receipt.
Eric, on the other hand, denied receiving the letter.52 He stated that he and FSD
would have changed the way they handled the Accounts had they received the December
2009 Notice.53 Further questioning about FSD‘s handling procedures, however, revealed
49
Tr. 106–07, 121 (Landerer); JX 38. Unbeknownst to IDB, Clark reportedly ceased
to be employed by FSD around 2006 or 2007. Tr. 478, 547 (Eric).
50
Tr. 49 (Landerer).
51
Id. at 50.
52
Id. at 546–47, 568 (IDB‘s Counsel: ―You testified that you did not receive a copy
of a December 23rd, 2009 letter at that time?‖ Eric: ―I did not.‖).
53
Id. at 550–51 (Eric).
12
that Eric did not know who would have processed the letter had it been received by FSD
or whether a piece of mail addressed to Clark would have been returned to the sender.54
Despite Eric‘s testimony that he did not receive the December 2009 Notice, FSD
subsequently conformed its conduct to the notice. On May 7, 2010, Landerer provided
authorization to release certain collateral, and Eric acknowledged receipt of that
authorization.55 Similarly, on May 31, 2011, Kerneklian sent a letter to Eric stating, ―As
with all of the Republic related items at [FSD], IDB‘s consent is required prior to any
release—including new coins that are being processed.‖56
In sum, Landerer provided credible testimony that he sent the December 2009
Notice. FSD, on the other hand, did not adduce convincing evidence that FSD did not
receive the notice in or around December 2009. Moreover, on at least one occasion, IDB
conformed its conduct to the December 2009 Notice, and Eric did not express surprise
over that conduct. For these reasons and those stated in Part II.A.2.a infra, the weight of
the evidence shows that the December 2009 Notice was sent by IDB in accordance with
its normal procedures. The validity and enforceability of that notice is addressed further
in Part II.A.2.a.
54
Id. at 569–73.
55
JX 48 (―This message is authorization to release the collateral held for Encore
Gold.‖).
56
JX 65.
13
7.
FSD releases the Collateral without IDB’s consent
On September 12, 2011, FSD released the Collateral57 without IDB‘s consent so
CAMI could display the Collateral at a coin collectibles show in Philadelphia,
Pennsylvania (the ―Philadelphia Show.‖).58 The Collateral was valued by FSD at the
time of the release at $18,266,776.38.59 The Collateral evidently was not returned to FSD
after the Philadelphia Show, and was displayed for sale at a November 2011 show in
Baltimore, Maryland (the ―Baltimore Show‖).60
Indeed, Higgins did not return the
Collateral to FSD after September 12, 2011; instead, he deposited it into CAMI‘s safes.61
In September 2011, IDB vice president Kerneklian discovered an article about
error coins stolen from the United States Mint that ―seemed very similar to the‖ Error
57
The Error Coins were not released. See JX 80, 81; Tr. 501 (Defendants‘ Counsel:
―I mentioned. . . the error coins . . . . Did those coins go in and out?‖ Eric: ―No.
Those coins basically stayed in a corner. We referenced that as the secret
inventory. Those went into a corner of the vault and did not move.‖).
58
JX 80, 81, 139; Tr. 534 (Eric), 613–14 (Steven).
59
See JX 76 ($5,097,535.11 in CAMI Collateral One Account); JX 77
($3,771,885.75 in CAMI Collateral Two Account); JX 78 ($2,079,655.00 in Lott
Account); JX 79 ($7,317,700.52 in Ketterling Account); Stip. ¶ 11 (―The daily
Collateral Detail Reports generated by FSD on September 9, 2012 for the CAMI
One, CAMI Two, Ketterling and Lott accounts accurately reflect the assets
maintained in those accounts and located at the depository at that time.‖).
60
JX 139, 305; Tr. 614–15 (Steven).
61
Tr. 556, 558, 583, 584 (Eric); 614–15 (Steven). As previously noted, Higgins is
the sole stockholder of both FSD and CAMI. In addition, I note that although
FSD and CAMI were located in the same building, they maintained separate
offices.
14
Coins stored at FSD.62 Around the same time, IDB was becoming more apprehensive
about Republic‘s ability to repay its loan.63 As a result, on September 21, 2011, IDB
notified CAMI, Lott, and Ketterling that IDB was exercising its right to have all amounts
owed to Republic made payable directly to IDB.64
In addition to its own payments, CAMI also made payments for Lott‘s and
Ketterling‘s accounts.65
According to Kerneklian of IDB, this ―immediately raised
concerns that [Lott and Ketterling], indeed, were not separate borrowers,‖ which would
have put the aggregate loan to CAMI at $11,550,000, in direct violation of the
$5,000,000 cap on receivables from a single client.66 IDB therefore began speaking with
Republic‘s Fenton daily about this issue, and Fenton ultimately sought to reduce
Republic‘s loan portfolio to below $10,000,000.67
On or about October 31, 2011, Fenton advised Higgins that IDB is ―now aware
that [CAMI] is managing [the Lott] and Ketterling accounts because the interest checks
62
Tr. 308–09 (Kerneklian); JX 72 at 007303–04.
63
Tr. 311–12 (Kerneklian).
64
Id. at 312; JX 88.
65
Tr. 316 (Kerneklian).
66
Id. at 316–17.
67
JX 95 at 007260.
15
are all coming from [CAMI]. I explained that your role is similar to being a money
manager for these borrowers.‖68 Fenton also told Higgins that IDB
ha[s] asked specifically about the relationship between you
and Eric. I explained that [FSD] is a completely separate
company and there is a china [sic] wall separating the
depository from [CAMI] activities. [IDB is] now very
concerned about the overlapping family ties and are going to
[its] lawyers to insure [sic] that nothing leaves the depository
without their authorization.69
In response, Higgins emailed Fenton that:
Obviously there was nothing to be done when you assigned
the loans to them and payment had to be paid directly to
them, they were bound to find out the rest. Whether they
received wire‘s [sic] or checks it all came from [CAMI] and
they would have discovered [t]he secrets that were being kept
from them. Let‘s hope for everyone‘s sake that this all works
out. There is nothing more to say than what has already been
said. They are NOT [m]y Bank, they are yours. I have no
desire to talk to them about the fund or anything else, I have
told you what is needed and they need to allow the time for
this to happen, period! . . .
[FSD] is no longer involved with this and not answerable to
your bank. . . . I would not put [FSD] in the middle of this.
YOU need to handle this and give me the time to cure OR we
all will be unhappy of the outcome. I am not a monkey, I
don‘t do tricks, I am attempting to do the deal of a lifetime,
and it will be good for all of us. They [IDB] NEED to
layback NOW and see this thru. THEY NEED TO DO
THIS!!!!! If they do anything to screw this up as I said before
I will do all that is possible to make them regret it. I know
what I need to do, let me do it.
68
JX 102 at 007120.
69
Id. at 007120–21.
16
I am done, I am going to do what I need to do, wish me
luck.70
Fenton informed IDB that CAMI was seeking to create a new fund, Certified
Asset Management International, LLC (―CAM International‖), with the hope that the
funds it raised could be used to repay the loans to IDB. 71 Fenton sent Kerneklian a draft
press release announcing the formation of CAM International. The draft stated that
Higgins was the president of the parent, CAMI, and that the assets of the fund would be
stored at FSD.72 Predictably, IDB became even more concerned that there was a direct
relationship between CAMI and FSD and that the Collateral was not being stored in an
independent depository.73
8.
IDB attempts to inspect the Collateral
On November 3, 2011, Kerneklian and Jeff Ackerman (Kerneklian‘s manager)
traveled to Delaware to review the Accounts at FSD. 74 Ackerman and Kerneklian called
Eric Higgins to see if they could access the Collateral, but Eric stated that FSD did not
have the staff or ability to accommodate their request.75 Ackerman and Kerneklian then
70
Id. at 007120.
71
JX 106; Tr. 320 (Kerneklian).
72
Tr. 320–22 (Kerneklian); JX 304 at 007182–83.
73
Tr. 322 (Kerneklian).
74
Id. at 327.
75
Id. at 327–29.
17
called Fenton, who convinced Eric to give them a tour of the depository.76 Eric did not
permit Ackerman and Kerneklian to review specific accounts or sample the Collateral,
however, claiming that IDB had not provided FSD proper notice.77 When Eric stated that
he was not familiar with IDB‘s right to inspect the Accounts under Republic‘s
authorization, Kerneklian assured him that IDB did have such rights.78 At no point
during the tour did Eric disclose that the Collateral had been released and was no longer
in the FSD depository.79 Indeed, it was Kerneklian‘s impression that the Collateral was
there, but that FSD just ―didn‘t have the staff to . . . allow [him] to inspect it.‖80
The next day, IDB sent formal notice to Eric reiterating IDB‘s rights under the
Bailment Agreement to inspect the Collateral and reaffirming that FSD could not release
the Collateral without IDB‘s written consent.81
Thereafter, IDB continued to make
requests to inspect and appraise the Collateral.82 In response, Fenton advised IDB that he
76
Id.
77
Id. at 329.
78
Id. at 329–30.
79
Tr. 330 (Kerneklian).
80
Id.
81
Id. at 335–36; JX 303.
82
Tr. 336–37 (Kerneklian).
18
was trying to obtain an inspection date from FSD, but could not coordinate that date due
to holidays and vacation.83
In reality, Higgins had no intention of allowing IDB to inspect the Collateral.
Higgins wrote to Fenton on December 14, 2011 that:
I have told you there will be no audit this month [i.e.,
December 2011], I will not subject the depository to having to
cover for the information that they have never been made
aware of. . . . If I deposit Inventory and they lock it up I am
screwed[.] So I guess this is all over and there is no reason to
deliver the monies tomorrow[.] Yes get the attorney‘s [sic]
out. There is no reason for them to come to [Delaware] there
will be nothing to audit, I give you my word.84
After continued back and forth between Fenton and IDB, on December 23, 2011, IDB
demanded access to inspect the Collateral.85
Ultimately, Fenton agreed to an early
January 2012 date for the inspection.86 Yet, despite a flurry of emails between Fenton
and IDB‘s representatives, the parties were unable to arrange for that inspection.87 In a
January 12, 2012 letter, IDB again demanded that FSD comply with IDB‘s right to
inspect the Collateral.88 Although Fenton then informed IDB that they could conduct
their inspection on January 20, Eric could not confirm the inspection and stated: ―I have
83
Id. at 337.
84
JX 134.
85
JX 141.
86
Tr. 337 (Kerneklian).
87
JX 150, 152–156.
88
JX 157.
19
forwarded this email to [FSD]‘s Director as this is not for me to authorize.‖ 89 Because
Higgins did not provide that consent, the January 20 inspection did not occur.90
On January 20, 2012, IDB sent formal notice to FSD that ―[a]s a result of your
failure and refusal to comply with the terms of the Agreements by providing us access to
inspect and examine the [Collateral,] we have made a decision to exercise our right to
remove the [Collateral] from your facilities.‖91 On January 23, FSD, Republic, and
CAMI discussed the possibility of entering into an agreement whereby IDB would be
repaid by February 9, 2012.92 Based on that offer, IDB deferred its plan to remove the
Collateral on January 24, but reserved its right to do so if the parties were unable to enter
into an acceptable agreement.93 When the parties failed to come to an agreement, IDB
again demanded, on January 26 and 27, 2012, that it be permitted to inspect and remove
the Collateral.94
The parties had come to another agreement that called for IDB to inspect the
Collateral on February 10, 2012.95 On January 27, however, IDB informed FSD that it
89
JX 158, 161.
90
JX 165; Tr. 342–43 (Kerneklian).
91
JX 166.
92
JX 167.
93
JX 170.
94
Stip. ¶ 21; JX 173.
95
JX 171.
20
intended to remove the Collateral on February 3, 2012. 96 IDB then changed its position
again, and on January 31, informed FSD that on February 3 it simply would inspect the
Collateral, rather than removing it.97 Higgins responded that February 3 was unavailable
due to scheduling conflicts and staffing shortages, but that February 10 was still
available.98 In this context, I consider it important that throughout the entire time period
from October 2011 until early February 2012, Defendants and their principal, Higgins,
knew that the Collateral was not at FSD, but intentionally led IDB to believe otherwise.
On February 2, IDB again notified FSD that it would be exercising its right to
remove the Collateral.99 Higgins forwarded that email to Fenton stating ―[y]ou need to
stop this or I have to spill the beans.‖100 Higgins also rejected IDB‘s demand stating that
FSD had been notified of a ―conflict of interest‖ and would not grant entrance to FSD
until that conflict was resolved.101
In any event, on February 3, when Richard Miller, a first vice president in the
managed assets department of IDB, visited FSD, Eric informed him that Higgins had
96
JX 173.
97
JX 174, 176.
98
JX 179.
99
JX 184.
100
JX 182 at 000479.
101
JX 184. There is no evidence that Higgins, in fact, believed there might have been
such a conflict of interest.
21
directed him to not let IDB into the facility.102 On February 6, 2012, IDB notified FSD
that it intended to visit FSD again on February 10 to remove the Collateral. 103 On
February 9, however, FSD‘s counsel advised IDB that it needed time to review the
Bailment Agreement to determine IDB‘s rights under that agreement and that, in the
interim, IDB would not be permitted to access the Collateral.104 IDB responded by
demanding that FSD honor its contractual obligations.105 On the morning of February 10,
FSD‘s counsel notified IDB again that it would not be allowed to access the Collateral
and warned that he had instructed FSD to call the police to prevent IDB‘s ―goon squad‖
from breaching the peace.106 IDB still proceeded to visit the facility and again was turned
away by Eric.107
9.
Plaintiff seeks a temporary restraining order
On February 13, 2012, IDB commenced this action by filing a complaint (the
―Complaint‖) and a contemporaneous motion for a temporary restraining order (the
―TRO Motion‖). FSD opposed that motion and argued that the CCAAs, as opposed to
the Bailment Agreement, governed the accounts at issue and that IDB had no legal right
102
Tr. 429, 431, 439–41 (Miller).
103
JX 190.
104
JX 196.
105
JX 200 at 028541.
106
Id. at 028539.
107
Tr. 442–44 (Miller).
22
to a TRO over the Collateral under those agreements.108 FSD also argued that three of
the accounts in dispute, including Lott‘s, no longer existed for the benefit of Republic and
had been repaid in full.109
On February 21, 2012, I entered a TRO enjoining FSD, its directors, officers,
employees, agents, and representatives, from removing from FSD‘s depository facility
―any property in which IDB possesses a security interest related in any way to‖ the
Accounts.110
Although FSD knew that most, if not all, of the Collateral had been
removed from FSD months earlier, they requested that IDB post a bond of $7,000,000.
Ultimately, I required that IDB post a secured bond of only $25,000.111 That same day,
February 21, CAMI sold Collateral in the form of gold bullion worth $368,095.30.112
One day later, CAMI sold more gold bullion for a price $5,001,247.60.113 Based on
FSD‘s collateral reports of September 9, 2011, FSD then held in the Accounts bullion
having values in this range.114 We now know that Higgins, through CAMI, removed the
Collateral from FSD on or about September 12, 2011 and did not return it.
108
Def. First State Depository LLC‘s Br. in Opp‘n to Pl.‘s TRO Mot. (―Def.‘s TRO
Opp‘n Br.‖) 10–13.
109
Id. at 10–11.
110
JX 216 ¶ 2.
111
See JX 209, 216 ¶ 3.
112
JX 222 at 065721–22, 065733–34.
113
Id. at 065745–46.
114
See supra note 59 and accompanying text.
23
On February 21, 2012, IDB also moved for a preliminary injunction and formally
requested to enter FSD‘s premise and inspect the Collateral.115 By February 28, the
parties had negotiated and signed a stipulated preliminary injunction order (the ―PI
Order‖) whereby Defendants, among other things, agreed to allow IDB to inspect the
Collateral on March 2, 2012 and represented that ―the Property,‖ which was defined as
property contained in or related in any way to the Accounts, was worth at least $12.5
million.116
On March 2, 2012, IDB representatives traveled to FSD to inspect the Collateral
and the Error Coins. The IDB representatives counted, bagged, and moved the Error
Coins to Diamond State Depository (―Diamond State‖).117 Before the representatives left
the depository, Eric gave them a tour of the FSD facility. 118 During the tour, the IDB
representatives discovered for the first time that the shelves where the Collateral should
have been stored were empty.119
On March 5, 2012, Plaintiff moved for contempt, seeking, among other things, an
order by this Court finding that FSD and CAMI had violated the PI Order, requiring that
the Collateral be returned to FSD, and sanctioning Defendants $10,000 a day for failing
115
See Mot. for Prelim. Injunction (Feb. 21, 2012); Pl.‘s Notice of Service of Pl.‘s
Req. for Entry upon Land and Inspection of Property (Feb. 21, 2012).
116
JX 221.
117
Tr. 445–48.
118
Id. at 446–50.
119
Id.
24
to return the Collateral.120 On March 16, after full briefing and a hearing on that motion,
I entered an order (the ―Contempt Order‖) granting IDB‘s requests and imposing a
monetary sanction of $5,000 per day.121
On March 21, 2012, the United States District Court for the Southern District of
New York issued a warrant for the seizure of coins stored at FSD.122 The next day,
Federal Bureau of Investigation (―FBI‖) agents raided both FSD and a CAMI booth at a
coin show in Baltimore.123
As previously discussed, the Collateral had been removed from FSD in September
2011 for use at the Philadelphia Show and the Baltimore Show, and thereafter was stored
in CAMI‘s offices within the same building that housed FSD.124 Consequently, when
FBI agents visited FSD on March 22, they did not seize any Collateral because the
Collateral was not there.125
During February and March 2012, despite this Court‘s orders, CAMI sold millions
of dollars of Collateral.126 Finally, beginning on March 27, 2012, CAMI returned some
120
Pl.‘s Mot. for Contempt.
121
Order (Mar. 16, 2012), the Contempt Order.
122
JX 244.
123
JX 245, 246; Tr. 615–16 (Steven).
124
Tr. 612–15 (Steven).
125
Id. at 616–17.
126
See supra notes 112–113; JX 255, 270.
25
of the Collateral to IDB.127 As of 4:23 p.m. on March 28, FSD still was scanning in coins
that were part of that Collateral.128 By the end of the day, Defendants had provided IDB
with partial depository reports for two of the four disputed Accounts.129
On March 29, 2012, IDB representatives, including Miller, visited FSD to inspect
and appraise the coins.130 While they were there, however, FBI agents arrived, asked
IDB‘s representatives to leave, and seized some of the Collateral stored at FSD. 131 On
April 4, 2012, FSD provided to IDB collateral reports on the Collateral that had not been
seized, which included some items that had not been listed on any previous collateral
report.132 The next day, IDB and its representatives conducted an inventory and appraisal
of the Collateral that remained at FSD. The results of that effort are memorialized on a
copy of a ―holdings detail report.‖133 The FBI seized additional Collateral from FSD on
or around May 8, 2012.134
127
JX 273 at 058300–29; Tr. 599–600 (Eric).
128
JX 252 (Higgins stated in an email to Fenton, ―I am in my 3rd tow truck of the day
headed to [Delaware], Eric & co are still scanning[.] I don‘t know the value.‖).
129
JX 253.
130
Tr. 453–55 (Miller).
131
Id. at 455–56 (Miller), 594–96 (Eric); JX 273 at 058335–70.
132
JX 259.
133
Tr. 353–55 (Kerneklian), 456–59 (Miller); JX 259, 260, 262.
134
Stip. ¶ 25; Tr. 563 (Eric).
26
10.
IDB files a lawsuit against Republic, Fenton, and others
On March 27, 2012, IDB filed a lawsuit against Republic, Fenton, and others in
the United States District Court for the Southern District of New York (the ―New York
Action‖),135 for ―breach[ing] . . . certain Loan Documents . . . and to put an end to
[Republic‘s] three-card monte game of hiding, moving, pledging, selling and
misidentifying [IDB‘s] collateral under those Loan Documents.‖136
The New York
Action sought $10,590,187.70 in damages for, among other things, breach of contract,
unjust enrichment, and conversion.
Notably, IDB asserted that it ―discovered that FSD and CAMI—upon information
and belief, with the authorization of Defendants Republic and Ned Fenton—have allowed
the Collateral to be removed from the depository and to be marketed for sale, and
possibly sold, without IDB‘s authorization or benefit.‖137
IDB also alleged in its
conversion claim that Republic had ―wrongfully exercised dominion and control over
property that [IDB] has a right to possess, thereby depriving [IDB] of its rightful
possession of the Collateral.‖138
On April 2, 2012, IDB obtained a consent order in the New York Action enjoining
the defendants from ―transferring, concealing, selling, using, pledging, assigning,
135
See JX 250.
136
Id. ¶ 1.
137
Id. ¶ 46.
138
Id. ¶ 79.
27
encumbering, or otherwise exercising dominion and control over the Collateral (as . . .
defined in the Loan Documents).‖139 On July 19, 2012, after accepting an offer of
judgment, IDB obtained a judgment against the defendants in the New York Action for
$11,327,488.92.140
C.
Procedural History
As previously recited, IDB commenced this action on February 13, 2012, seeking
damages and equitable relief based on a breach of contract claim against FSD and a
conversion of property claim against FSD and CAMI. I granted a TRO on February 21
and a stipulated preliminary injunction in favor of IDB on February 29, 2012. Shortly
thereafter, IDB filed a motion for contempt, which I granted on March 16, 2012. On
April 16, 2012, Defendants moved in the alternative to dismiss or to dissolve or amend
the preliminary injunction and contempt orders (the ―Motion to Dismiss‖). IDB then
filed a second motion for contempt on April 23. On June 1, 2012, I stayed IDB‘s second
motion for contempt and held it in abeyance until trial. In a Memorandum Opinion dated
September 27, 2012 (the ―September 2012 Opinion‖), I denied Defendants‘ Motion to
Dismiss.141
139
JX 257.
140
JX 279.
141
Israel Disc. Bank of New York v. First State Depository Co., 2012 WL 4459802
(Del. Ch. Sept. 27, 2012). I also denied a subsequent application for an
interlocutory appeal of the September 2012 Opinion. Israel Disc. Bank of New
York v. First State Depository Co., 2012 WL 5359296 (Del. Ch. Oct. 31, 2012).
The Supreme Court likewise refused to hear that interlocutory appeal. First State
28
From November 19 through 21, 2012, I presided over a three-day trial in this
action. After extensive post-trial briefing, counsel presented their final arguments on
February 21, 2013. Between then and March 7, 2013, the parties also filed supplemental
briefing on a few specific issues. This Memorandum Opinion constitutes my post-trial
findings of fact and conclusions of law.
D.
Parties’ Contentions
In Count I of the Complaint, IDB alleges that FSD breached the Bailment
Agreement by releasing Collateral without IDB‘s authorization and refusing to allow IDB
to inspect and remove the Collateral. Count II charges CAMI with converting the
Collateral by wrongfully exercising dominion and control over it without IDB‘s
authorization.
Defendants dispute IDB‘s allegations, including, for example, that FSD received
the December 2009 Notice, and urge the Court to deny IDB‘s claims in their entirety.
Defendants also have counterclaimed and seek a declaratory judgment pronouncing that:
(1) FSD never sold, traded, or offered to sell or trade its customers‘ property; (2) pursuant
to the CCAAs, IDB is responsible for FSD attorneys‘ fees; (3) IDB‘s only remaining
claim is one for a deficiency judgment; (4) the Bailment Agreement is void; and (5) the
December 2009 Notice is unenforceable. Finally, Defendants assert a plethora of other
Depository Co. v. Israel Disc. Bank of New York, 55 A.3d 838, 2012 WL
5513046, at *1 (Del. 2012) (TABLE).
29
defenses, including that IDB‘s claim is barred by the doctrine of laches, the Uniform
Commercial Code (―UCC‖), and the doctrine of election of remedies.
Both sides also seek an award of attorneys‘ fees. Specifically, each side accuses
the other of engaging in bad faith and vexatious litigation conduct and asserting frivolous
allegations.
II.
ANALYSIS
IDB bears the burden of proving its claims by a preponderance of the evidence.142
―Proof by a preponderance of the evidence means proof that something is more likely
than not. It means that certain evidence, when compared to the evidence opposed to it,
has the more convincing force and makes you believe that something is more likely true
than not.‖143 Under this standard, IDB is not required to prove its claims by clear and
convincing evidence or to exacting certainty.144
A.
Did FSD Breach the Bailment Agreement?
To prove a breach of contract claim, a plaintiff must show: ―the existence of a
contract, the breach of an obligation imposed by that contract, and resulting damages to
142
See United Rentals, Inc. v. RAM Hldgs., Inc., 937 A.2d 810, 834 n.112 (Del. Ch.
2007) (―The burden of persuasion with respect to the existence of the contractual
right is a ‗preponderance of the evidence‘ standard.‖ (citations omitted)); Gould v.
Gould, 2012 WL 3291850, at *7 (Del. Ch. Aug. 14, 2012) (―As the claimant, Jay
had the burden to prove his claim of conversion of these motors by a
preponderance of the evidence.‖).
143
Del. Express Shuttle, Inc. v. Older, 2002 WL 31458243, at *17 (Del. Ch. Oct. 23,
2002) (quoting Del. Super. P.J.I. § 4.1 (2000)).
144
Triton Constr. Co. v. E. Shore Elec. Servs., Inc., 2009 WL 1387115, at *6 (Del.
Ch. May 18, 2009), aff’d, 988 A.2d 938 (Del. 2010) (TABLE).
30
the plaintiff.‖145 IDB contends that one way in which FSD breached the terms of the
Bailment Agreement is by releasing Collateral without the written authorization of IDB.
FSD, on the other hand, denies any such liability, because: (1) the Bailment Agreement is
void; (2) the December 2009 Notice is unenforceable; (3) IDB‘s claim is barred by the
doctrine of laches; (4) the CCAAs require IDB to indemnify FSD and hold it harmless for
its actions; and (5) FSD is entitled to various statutory defenses under the UCC
1.
Existence of a contract
The first element of a breach of contract claim is the ―existence of a contract.‖146
It is undisputed that IDB, FSD, and Republic signed the Bailment Agreement on August
24, 2006. FSD nonetheless contends that the Bailment Agreement is void because: (1)
IDB is not qualified to transact banking business in Delaware; and (2) the Bailment
Agreement lacked consideration.
FSD first argues that IDB is not qualified to transact banking business in
Delaware, that IDB conducted banking business in Delaware, and that, as a result, the
Bailment Agreement is void. As a foreign bank organized under the laws of New
York,147 IDB is required to comply with the provisions of 5 Del. C. § 1402. Specifically,
Section 1402 provides:
145
Weichert Co. of Pa. v. Young, 2007 WL 4372823, at *2 (Del. Ch. Dec. 7, 2007)
(citing VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 612 (Del. 2003)).
146
Id.
147
Compl. ¶ 7 (―Plaintiff IDB is a bank organized under the laws of the State of New
York.‖).
31
(a)
No foreign banks shall transact a banking business or
maintain in this State an office for carrying on such business
or any part thereof, except as otherwise provided in
subchapter III of this chapter, unless such foreign bank has:
(1)
Been authorized by the laws under which it was
organized and by its charter to carry on such business;
(2)
Furnished to the Commissioner such proof as to
the nature and character of its business and as to its financial
condition as the Commissioner may require; and
(3)
Filed with the Commissioner an application
containing the information required by § 1403 of this title and
received a certificate of authority duly issued to it by the
Commissioner as provided in § 1403 of this title.148
FSD‘s argument, however, ignores Subsection (b) of 5 Del. C. § 1402, which provides in
pertinent part:
(b)
This section shall not be construed to prohibit foreign
banks which do not maintain an office in this State for the
transaction of the business from:
(1)
Making loans or issuing letters of credit in this
State secured by mortgages on real property, nor from
contracting in this State with a banking organization to
acquire from or through such banking organization a part
interest or the entire interest in a loan or evidence of debt
which such banking organization has heretofore or hereafter
made, purchased or acquired, for its own account or
otherwise, together with a like interest in any security or in
any security instrument proposed to be given or heretofore or
hereafter given to secure or evidence such loan or evidence of
debt;
(2)
Enforcing in this State obligations heretofore or
hereafter acquired by it in the transaction of business outside
148
5 Del. C. § 1402(a).
32
of this State, or in the transaction of any business authorized
by this section;
(3) Acquiring, holding, leasing, mortgaging,
contracting with respect to, or otherwise protecting or
conveying property in this State heretofore or hereafter
assigned, transferred, mortgaged or conveyed to it as security
for, or in whole or part, satisfaction of a loan or loans made
by it or obligations made by it or obligations acquired by it in
the transaction of business outside of this State, or in the
transaction of any business authorized by this section . . . .149
Subsection (b) explicitly permits a foreign bank to contract with respect to or otherwise
protect property that is assigned to it as security for loans made outside of Delaware. In
other words, Section 1402 does not prohibit IDB from contracting with respect to and
protecting Republic‘s Collateral, which served as security for the loan to Republic that
was made outside of Delaware. Therefore, I conclude that IDB‘s transaction of the
business challenged by Defendants was permitted by Section 1402(b) and that, as a
result, Section 1402 does not render the Bailment Agreement invalid.150
FSD next argues that the Bailment Agreement is void for lack of consideration.
That argument, however, was raised previously in FSD‘s Motion to Dismiss and
rejected.151 In my September 2012 Opinion, I wrote:
149
Id. § 1402(b) (emphasis added).
150
Even if I were to conclude that IDB did violate 5 Del. C. § 1402, FSD has
presented no authority, nor does this Court know of any authority, that supports
FSD‘s position that the Bailment Agreement, therefore, would be void.
151
Israel Disc. Bank of New York v. First State Depository Co., 2012 WL 4459802, at
*12 (Del. Ch. Sept. 27, 2012).
33
Consideration for the Bailment Agreement can be found in
the bargained for exchange that occurred when IDB loaned
money to Republic and accepted certain items as collateral in
return for Republic‘s and FSD‘s agreement that IDB would
maintain a measure of control over the collateral that IDB
agreed would remain stored with FSD.152
Defendants presented no convincing evidence or argument that would cause me to alter
that ruling. In that regard, and based on the evidence presented at trial, I find that the
Bailment Agreement provided FSD with the opportunity to perform fee-generating
services for Republic and IDB. In addition, I infer from the evidence that IDB would not
have given FSD that opportunity without receiving the degree of control provided for in
the Bailment Agreement.
Therefore, I reject FSD‘s argument that the Bailment
Agreement is void for want of consideration.153
2.
Breach of an obligation imposed by contract
Having concluded that the Bailment Agreement is a valid signed agreement
between IDB, FSD, and Republic, I next consider whether FSD breached an obligation
imposed by that contract. Section 6 of the Bailment Agreement provides that, if IDB
notifies FSD in writing that IDB is invoking its consent rights, FSD only can release
Collateral in accordance with IDB‘s written instructions.154 The Bailment Agreement
also states that IDB ―will be permitted during [FSD]‘s normal business hours to: (i)
152
Id.
153
For the reasons stated in this section, I also deny FSD‘s request for a declaratory
judgment that the Bailment Agreement is void.
154
JX 9 § 6.
34
examine the Property . . . , and; (ii) discuss matters relating to [FSD]‘s performance under
this [Bailment] Agreement . . . with any of [FSD]‘s officers, directors and employees
having such knowledge of such matters.‖155 The Bailment Agreement states that FSD
―will release [the Collateral] to [IDB] on demand.‖156 Finally, the Bailment Agreement
provides that FSD ―agrees that [it] will not hinder or delay [IDB] in enforcing [its] right
in and to‖ the Collateral.157
IDB asserts that FSD breached its obligations by: (1) releasing the Collateral
without IDB‘s written consent as required by the December 2009 Notice; (2) disregarding
IDB‘s right to inspect the Collateral; and (3) interfering with IDB‘s right to have the
Collateral released to it. I address each of these alleged breaches in turn.
a.
IDB’s right to limit release of the Collateral
IDB contends that the December 2009 Notice was valid and enforceable, and that,
therefore, FSD breached the Bailment Agreement by releasing the Collateral. FSD, on
the other hand, asserts that the December 2009 Notice is unenforceable because IDB has
not proved by a preponderance of the evidence that the notice letter either was sent by
IDB or received by FSD.
FSD argues that because IDB did not call as a witness at trial Landerer‘s assistant,
who was responsible for sending the December 2009 Notice, the Court should draw an
155
Id. § 2.
156
Id. § 6.
157
Id.
35
adverse inference against IDB and find that IDB has not shown that the notice was sent.
In Wheatley v. State,158 the Delaware Supreme Court stated, ―[a] missing-witness
inference is permissible only where it would be ‗natural‘ for the party to produce the
witness if his testimony would be favorable.‖159 Here, it would not have been ―natural‖
for IDB to call Landerer‘s assistant because ―[m]ailing can be prove[n] by office custom
without producing as a witness the person who personally placed the letter in [the United
States mails].‖160
Rather, a presumption exists under Delaware law ―that mailed matter, correctly
addressed, stamped and mailed, was received by the party to whom it was addressed.‖ 161
―This presumption may be strengthened, weakened or overcome by proof of attendant
pertinent circumstances.‖162 ―The addressee‘s mere denial of receipt of the notice is
insufficient to rebut this presumption.‖163
158
465 A.2d 1110 (Del. 1983).
159
Id. at 1111.
160
United States v. Hannigan, 27 F.3d 890, 894 (3d Cir. 1994) (alterations in
original) (quoting United States v. Joyce, 499 F.2d 9, 17 (7th Cir.), cert. denied,
419 U.S. 1031 (1974)).
161
Windom v. William C. Ungerer, W.C., 903 A.2d 276, 282 (Del. 2006) (quoting
State ex rel. Hall v. Camper, 347 A.2d 137, 138–39 (Del. Super. 1975)).
162
Id. (quoting Graham v. Commercial Credit Co., 194 A.2d 863, 865–66 (Del. Ch.
1963)).
163
Brown v. City of Wilm., 1995 WL 653460, at *3 (Del. Super. Sept. 21, 1995); see
also Straley v. Advanced Staffing, Inc., 2009 WL 1228572, at *3 (Del. Super. Apr.
30, 2009) (―Lack of evidence of any mailing error by the Department of Labor
36
There is no question that the December 2009 Notice was addressed to First State
Depository at its proper address.164
Moreover, Landerer testified that he sent the
December 2009 Notice in accordance with his normal procedures, which included
―print[ing] the letter out,‖ ―hav[ing] it cosigned,‖ and ―giv[ing] it to [his] assistant to mail
out.‖165 In Landerer‘s experience, this procedure always led to the mail being received
by its addressees.166 The most reasonable inference from the evidence and testimony,
therefore, is that mail sent through this procedure would have been stamped and mailed.
Accordingly, I conclude that the December 2009 Notice, which was sent using
Landerer‘s standard procedure, was properly addressed, stamped and mailed, thereby
creating a presumption that the December 2009 Notice was received. Eric Higgins‘s
testimony to the contrary, which amounted to a mere denial of receipt of the December
2009 Notice and a general, but inconclusive, description of FSD‘s mail procedures, was
insufficient to rebut that presumption.
FSD further failed to present evidence of a
supports the presumption that properly mailed and addressed mail was received.‖),
aff’d, 984 A.2d 124 (Del. 2009).
164
Specifically, the letter was addressed to:
First State Depository Company LLC
100 Todds Lane
Wilmington, DE 19802
Attention: Michael B. Clark
JX 38. FSD‘s ―principal place of business‖ is ―100 Todds Lane, Wilmington,
Delaware 19802.‖ Stip. ¶ 2.
165
Tr. 50 (Landerer).
166
Id.
37
mailing error.
Eric‘s denial that he ever saw the December 2009 Notice before
November 2011 may be true. Even so, however, the evidence indicates that more likely
than not Higgins saw the notice received by FSD and decided not to show it to Eric.
Indeed, the presumption that the December 2009 Notice was received is buttressed by the
parties‘ conduct after December 23, 2009, which conformed to the December 2009
Notice having been received.167 For these reasons, I conclude that FSD did receive the
December 2009 Notice and that, therefore, the December 2009 Notice was effective.168
The fact that the December 2009 Notice was addressed to the former president of
FSD, Michael Clark, is immaterial. The most reasonable inference from the evidence
presented is that FSD received the December 2009 Notice and that it was shown to at
least Higgins. Higgins most likely either ignored the letter because Clark no longer
worked for FSD or read it and decided not to comply with it. Either way FSD would be
responsible for Higgins‘s conduct.
The December 2009 Notice and the Bailment Agreement, therefore, limited FSD‘s
ability to release the Collateral absent IDB‘s consent. Nevertheless, on September 12,
2011 and without consent from IDB, FSD released all the Collateral to CAMI. In doing
167
See supra notes 55–56 and accompanying text.
168
State ex rel. Hall v. Camper, 347 A.2d 137, 138–39 (Del. Super. 1975).
(―Generally speaking, the law requires that notice be actually received in order to
be effective.‖). For the reasons stated in this section, I also deny FSD‘s request for
a declaration that the December 2009 Notice is unenforceable.
38
so, FSD breached the obligation imposed by the Bailment Agreement and December
2009 Notice to refrain from releasing the Collateral absent IDB‘s consent.
b.
IDB’s right to inspect the Collateral
Between November 3, 2011 and March 29, 2012, FSD disregarded numerous
requests by IDB to inspect the Collateral. Although FSD finally allowed IDB to visit the
facility on March 2, 2012 and to inspect what remained of the Collateral on March 29,
2012, FSD‘s actions unmistakably interfered with IDB‘s explicit right to ―examine the
Property.‖
By this Court‘s calculation, IDB asked on five separate occasions to inspect the
Collateral,169 visited FSD‘s facility three times to inspect the Collateral (and was turned
away on each occasion),170 sent three formal demands to inspect the Collateral,171 and
obtained a preliminary injunction on February 29, 2012, requiring FSD to permit IDB to
inspect the Collateral.172 Yet, FSD interfered and failed to comply with IDB‘s requests
until March 29, 2012. Therefore, I conclude that, beginning on November 3, 2011, FSD
repeatedly breached its obligation to allow IDB to examine the Collateral.
169
See supra notes 75, 81, 82, 97, & 105 and accompanying text.
170
See supra notes 74–80, 102, & 107 and accompanying text. IDB also visited the
facility to inspect and bag the Error Coins. See supra notes 117–119 and
accompanying text.
171
See supra notes 85, 88, & 94 and accompanying text.
172
See supra notes 115–116 and accompanying text.
39
c.
IDB’s right to release of the Collateral
Similarly, between January 20, 2012 and March 2012, FSD violated its obligation
to release the Collateral to IDB on demand. During that time period, IDB made no less
than five requests and one formal demand to remove the Collateral. 173 FSD‘s scheme of
postponement and delay clearly interfered with IDB‘s right to remove the Collateral on
demand. Thus, FSD breached IDB‘s right to release of the Collateral, beginning on
January 20, 2012.
d.
IDB’s enforcement rights in the Collateral
Even if IDB had not sent, and FSD had not received, the December 2009 Notice,
FSD‘s conduct still would constitute an independent breach of FSD‘s agreement ―that [it]
will not hinder or delay [IDB] in enforcing [its] right in and to‖ the Collateral.174
FSD should have notified IDB about situations that were not in accord with FSD‘s
purported standard practice for the release and subsequent return of the Collateral, as
described supra Part I.B.4. For example, FSD could have alerted IDB that the Collateral
had not been returned from the Philadelphia and Baltimore Shows.
Instead, FSD
engaged in a corporate shell game whereby Higgins, as the common owner of FSD and
CAMI, abused the corporate form to avoid the technical requirements of the Bailment
Agreement and other relevant agreements. FSD further deceived IDB by creating the
173
See supra notes 91, 94, 96, 99, 103, & 105 and accompanying text. On another
occasion, IDB made a visit to FSD to remove the Collateral. See supra note 107
and accompanying text.
174
JX 9 § 6.
40
false impression that FSD continued to have possession of the Collateral in late 2011 and
early 2012. Finally, FSD delayed and prevented IDB from discovering the truth by
interfering with IDB‘s right to inspect and remove the Collateral. These acts collectively
constitute a separate and independent breach of FSD‘s obligations to not hinder or delay
IDB‘s enforcement rights under the Bailment Agreement.
3.
Damages
The third element of a breach of contract claim is ―resulting damages to the
plaintiff.‖175 As a result of FSD‘s breaches of the obligations imposed by the Bailment
Agreement, IDB has been damaged because it no longer has sufficient collateral to cover
its loan balance on the loans it made to Republic. Based on the evidence presented, I find
that IDB could have taken effective remedial action to preserve the Collateral in late
2011, if FSD had not breached the Bailment Agreement. Therefore, IDB has established
all three elements of its breach of contract claim. I address the calculation of damages
infra in Part II.C.
4.
Laches
In a short paragraph in its post-trial answering brief, FSD argues that IDB‘s breach
of contract claim is barred by the doctrine of laches. There are three generally accepted
elements to the equitable defense of laches: ―(1) plaintiff‘s knowledge that she has a basis
for legal action; (2) plaintiff‘s unreasonable delay in bringing a lawsuit; and (3)
175
Weichert Co. of Pa. v. Young, 2007 WL 4372823, at *2 (Del. Ch. Dec. 7, 2007).
41
identifiable prejudice suffered by the defendant as a result of the plaintiff‘s unreasonable
delay.‖176
Although FSD has identified a date, December 24, 2009, by which it alleges IDB
knew or should have known of the breach of the Bailment Agreement, it failed to present
probative evidence or argument regarding either unreasonable delay or identifiable
prejudice. As the Delaware Supreme Court has stated:
[I]ssues adverted to in a perfunctory manner, unaccompanied
by some effort at developed argumentation, are deemed
waived . . . . It is not enough merely to mention a possible
argument in the most skeletal way, leaving the court to do
counsel‘s work . . . . Judges are not expected to be
mindreaders. Consequently, a litigant has an obligation to
spell out its arguments squarely and distinctly, or else forever
hold its peace.177
Moreover,
―Delaware
courts
presume,
in
the
absence
of
exceptional
circumstances, that an action filed within the analogous limitations period was neither the
product of unreasonable delay nor the cause of undue prejudice.‖178 Here, Plaintiff filed
its Complaint within the three-year analogous statute of limitations for a claim of breach
176
Whittington v. Dragon Gp. LLC, 2008 WL 4419075, at *3 (Del. Ch. June 6, 2008)
(quoting Tafeen v. Homestore, Inc., 2004 WL 556733, at *7 (Del. Ch. Mar. 22,
2004)).
177
Roca v. E.I. duPont de Nemours & Co., Inc., 842 A.2d 1238, 1243 n.12 (Del.
2004) (quoting Turnbull v. Fink, 644 A.2d 1322, 1324 (Del. 1994)).
178
Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, – A.3d –, 2013 WL
911118, at *10 (Del. Ch. Feb. 22, 2013).
42
of contract.179 Because IDB filed its breach of contract claim within the analogous
limitations period and FSD has failed to demonstrate the existence of either prejudice or
unreasonable delay, there is no merit to FSD‘s defense of laches.
5.
The CCAAs’ indemnification and hold harmless provisions
FSD next argues that the CCAAs, which contain indemnification and hold
harmless provisions, apply to IDB and absolve FSD of any liability. Those provisions
state that the parties, Republic and CAMI, agree to hold harmless and indemnify FSD for
disputes ―arising out of or related to any disputes of title, ownership, transfers of the
Assets, or [FSD]‘s acts or omissions, except to the extent such damages or liability result
from the willful misconduct of [FSD], its officers, directors, employees.‖ 180 At the
motion to dismiss stage, FSD advanced three reasons why the CCAA provisions should
apply to IDB‘s breach of contract claim, and I rejected each of those arguments.181
Undeterred, FSD now raises three fresh reasons for holding the provisions in the CCAAs
applicable to IDB‘s breach of contract claim. They are: (1) that two of the CCAAs and
the Bailment Agreement were executed on the same day; (2) that the CCAAs were made
part of the 2006 Revolver pursuant to the revolver‘s terms; and (3) that, because
179
10 Del. C. § 8106. The earliest time by which FSD avers that IDB should have
known of its claims is December 2009. Defs.‘ Answering Br. 9. The Complaint
was filed on February 13, 2012, well within the three-year analogous limitations
period.
180
JX 7 ¶¶ 9.C, 13.
181
Israel Disc. Bank of New York v. First State Depository Co., 2012 WL 4459802, at
*11–13 (Del. Ch. Sept. 27, 2012).
43
Republic‘s loans to CAMI, Lott, and Ketterling purportedly were assigned to IDB at
origination, agency principles dictate that IDB must be held to the terms of the CCAAs.
FSD‘s first argument is that because the two CAMI CCAAs allegedly were
interrelated and executed on the same day, they should be read together as forming one
contract.
In support of that proposition, FSD cites BAYPO Limited Partnership v.
Technology JV, LP182 and Karish v. SI International, Inc.,183 both of which relate to
arbitration provisions. In my September 2012 Opinion, I distinguished BAYPO and
rejected FSD‘s position that IDB is bound by the CCAAs‘ arbitration clause, reasoning
that ―the Bailment Agreement, unlike the ancillary license agreement between affiliates
of the MTA contracting parties at issue in BAYPO, supersedes and operates
independently of the CCAAs.‖184 Unlike the agreements in Karish and BAYPO, the
CCAAs and Bailment Agreement operate independently of one another in important
respects. As I observed in my September 2012 Opinion:
[T]he Bailment Agreement serves a purpose independent of
the CCAAs; it defines the relationship between FSD and IDB.
Importantly, the Bailment Agreement reflects the parties‘
clear intent that it override the CCAAs in certain respects that
are central to this litigation.185
I also noted that:
182
940 A.2d 20 (Del. Ch. 2007).
183
2002 WL 1402303 (Del. Ch. June 24, 2002).
184
Israel Disc. Bank of New York, 2012 WL 4459802, at *8–9.
185
Id. at *8.
44
FSD, IDB, and Republic could have, but did not, incorporate
the hold harmless or exculpation provision of the ―separate
agreements,‖ like the CCAAs, into the Bailment Agreement.
The Court, therefore, will not incorporate the hold harmless
provisions into the Bailment Agreement where the parties
failed to do so.186
Based on that reasoning, I reaffirm that the CCAAs and the Bailment Agreement should
not be read together so as to incorporate the CCAAs‘ indemnification provision and hold
harmless provision into the Bailment Agreement.
FSD next argues that the CCAAs were made part of the 2006 Revolver pursuant to
the Revolver‘s own terms. Specifically, the 2006 Revolver states that ―Agreement‖ is
defined as:
The contents hereof together with the contents of any and all
schedules and exhibits annexed hereto and all of which are
made a part hereof and all other writings and any
amendments, modifications, extensions, renewals and/or
supplements hereto submitted by the Borrower [Republic] to
Lender [IDB] pursuant hereto, all of which are incorporated
herein by reference as though fully set forth herein at
length.187
FSD asserts that the CCAAs fall within the category of Client Loan Documents, which
the 2006 Revolver defines as including all ―agreements, contracts, documents[,] and
instruments, pertaining or otherwise securing at any time any extensions of credit by
Borrower [Republic] to Clients.‖188 I find, however, that the CCAAs were not Client
186
Id. at *11.
187
JX 6 § 1.1(b).
188
Id. § 1.1(t) (emphasis added).
45
Loan Documents because the CCAAs did not involve ―extensions of credit‖ by Republic,
but rather governed the storage of the Collateral at FSD. That is, FSD has failed to show
that the CCAAs constitute Client Loan Documents within the meaning of the 2006
Revolver.
Moreover, I accord no weight to Landerer‘s contrary testimony that the
CCAAs would be such Client Loan Documents, because Landerer is not an attorney and
his lay opinion on this legal issue is not probative.
Finally, FSD argues that because Republic‘s loans to CAMI were assigned to IDB
at origination, agency principles require that Republic‘s actions bind IDB, including
Republic‘s actions in entering into the four CCAAs. While IDB conceded in its
interrogatories and at trial that the loans made to CAMI, Lott, and Ketterling were
assigned to IDB, IDB did not admit that the CCAAs, which govern the storage of
Collateral at FSD, were assigned to IDB.189 Indeed, the record is devoid of any evidence
that the CCAAs were assigned to IDB. Because FSD is unable to show that the CCAAs
were assigned to IDB, FSD seeks to rely on agency principles to create a presumption
that anything Republic did after it made the loans to CAMI, Lott, and Ketterling bound
FSD, including Republic‘s execution of the four CCAAs. FSD, however, cites no cases
nor does this Court know of any that have held that an assignment of a loan creates an
agency relationship whereby the assignor‘s other actions and other agreements bind the
assignee. Nor has FSD demonstrated that IDB was bound to the CCAAs as a result of
Republic having been authorized, or appearing to an unsuspecting third party to have
189
JX 277 at Interrog. No. 3; Tr. 400 (Kerneklian).
46
been authorized, to bind IDB.190
To the contrary, Republic appears to have acted
contrary to IDB‘s authority.191 Accordingly, I conclude that IDB is not subject to any
duties or obligations under the CCAAs based on ―agency principles.‖
Having concluded that the CCAAs do not apply to IDB, I need not reach the
question of whether FSD engaged in willful misconduct that would fall outside of the
indemnification and hold harmless provisions.
6.
UCC defenses
FSD further contends that two sections of the UCC, namely Article 7, Sections
404 and 603, provide statutory defenses to FSD as a bailee. FSD first argues that UCC
Article 7, Section 404, entitled ―No liability for good-faith delivery pursuant to document
of title,‖ absolves a bailee who ―in good faith has received goods and delivered . . . goods
according to the terms of a document of title‖ even if ―[t]he person from which the bailee
received the goods did not have authority . . . to dispose of the goods‖ or ―to receive the
goods.‖192 FSD avers that it complied with the terms of the CCAAs and the Bailment
Agreement, and is thereby shielded by the protections afforded in Section 404. As
previously discussed, however, the December 2009 Notice provided written instructions
to FSD not to release the Collateral without IDB‘s written consent.
Thus, FSD‘s
190
Heller v. Kiernan, 2002 WL 385545, at *4 (Del. Ch. Feb. 27, 2002), aff’d, 806
A.2d 164 (Del. 2002).
191
MetCap Secs. LLC v. Pearl Senior Care, Inc., 2007 WL 1498989, at *10 (Del. Ch.
May 16, 2007) (―Under agency law, the knowledge of an agent is generally
imputed to his principal except when the agent‘s own interests become adverse.‖).
192
6 Del. C. § 7-404.
47
argument assumes that IDB failed to send, or FSD did not receive, the December 2009
Notice. Because I have concluded that IDB did send and FSD did receive the December
2009 Notice, I find that FSD did not act in good faith or within its authority when it
released and delivered the Collateral to CAMI on September 12, 2011. FSD‘s failure to
insist that Higgins and CAMI return the Collateral to FSD‘s custody after the Baltimore
Show, together with FSD‘s actions to deceive IDB as to the whereabouts of the Collateral
in December of 2011 and early 2012, buttress my finding of a lack of good faith.
FSD further argues that UCC Article 7, Section 603 excuses a bailee from
delivery, where ―more than one person claims title to or possession of the goods,‖ until
the bailee ―has [had] a reasonable time to ascertain the validity of the adverse claims or to
commence an action for interpleader.‖193
FSD contends that there were conflicting
claims of title to or entitlement to possession of the Collateral, 194 and, as a result, it is
entitled to the protection of Section 603. Section 603, however, only excuses a bailee
from its obligation of delivery for a reasonable time until it takes some action, either to
ascertain the validity of the claims or to commence an action for interpleader. FSD
neither sought to ascertain the relative validity of IDB and Republic‘s allegedly
conflicting claims nor brought an action for interpleader in a reasonable amount of time.
Thus, FSD cannot avail itself of the protections of 6 Del. C. § 603.
193
Id. § 7-603.
194
FSD bases its allegations regarding the existence of conflicting claims on the
purported authorizations given by Republic pursuant to the CCAAs and the
directions provided by IDB in documents like the December 2009 Notice.
48
B.
Did CAMI Convert the Collateral?
Conversion is the ―act of dominion wrongfully exerted over the property of
another, in denial of his right, or inconsistent with it.‖195 In order to prove conversion, a
plaintiff must show that: (1) it had ―a property interest in equipment or other property‖;
(2) it had ―a right to possession of the property‖; and (3) ―the property was converted.‖ 196
In other words, ―[t]o make out a claim for conversion, IDB must prove that, at the time of
the alleged conversion, (1) IDB had a property interest in the allegedly converted
property, (2) IDB had a right to possession of such property, and (3) Defendants
wrongfully possessed or disposed of such property as if it were their own.‖197
As previously discussed, IDB had a property interest (specifically, a security
interest) in the Collateral. Moreover, IDB had a right to set the Collateral Ratio, which
required CAMI to maintain a certain amount of collateral against advances. Finally, IDB
had a right to have the Collateral stored at FSD.
On September 12, 2011, in
contravention of IDB‘s rights and interests in the Collateral, CAMI took possession of the
195
McGowan v. Ferro, 859 A.2d 1012, 1040 (Del. Ch. 2004) (quoting Arnold v.
Soc’y for Savs. Bancorp, Inc., 678 A.2d 533, 536 (Del. 1996)).
196
B.A.S.S. Gp., LLC v. Coastal Supply Co., 2009 WL 1743730, at *8 (Del. Ch. June
19, 2009).
197
Israel Disc. Bank of New York v. First State Depository Co., 2012 WL 4459802, at
*13 (Del. Ch. Sept. 27, 2012) (citing Cornell Glasgow, LLC v. LaGrange Props.,
LLC, 2012 WL 3157124, at *5 (Del. Ch. Aug. 1, 2012) and Jarvis v. Elliott, 2010
WL 761089, at *4 (Del. Ch. Mar. 5, 2010)); see also Gen. Video Corp. v. Kertesz,
2008 WL 5247120, at *26 (Del. Ch. Dec. 17, 2008) (―One who uses a chattel in a
manner which is a serious violation of the right of another to control its use is
subject to liability to the other for conversion.‖ (quoting Restatement (Second) of
Torts § 227 (2008))).
49
Collateral. Defendants deny that CAMI wrongfully took possession of the Collateral. I
have found that FSD released the Collateral to CAMI in violation of the Bailment
Agreement and the December 2009 Notice. In addition, the evidence shows that Higgins
controlled the actions of both FSD and CAMI as they relate to the Collateral at all
relevant times from September 12, 2011 to at least March 27, 2012. Therefore, I hold
that CAMI wrongfully took possession of the Collateral on September 12, 2011.
Moreover, even if the Collateral properly had been released to CAMI for the
Philadelphia and Baltimore Shows, as Defendants allege, the Collateral was not returned
to FSD, as required by the Bailment Agreement.
Instead, Higgins caused it to be
deposited into CAMI‘s safes.198 Indeed, CAMI was the last party in possession of the
Collateral and continued to sell the Collateral through March 2012.199 Only a small
portion of the Collateral ultimately was returned to FSD, only to be seized later by the
FBI.
―Generally speaking, any distinct act of dominion wrongfully exerted over the
property of another, in denial of his right, or inconsistent with it, is a conversion.‖200 By
taking possession of the property, selling the Collateral, and failing to return it, CAMI
wrongfully committed a distinct act of dominion over the Collateral as if it were its own.
Accordingly, IDB has satisfied the elements of conversion by showing that IDB had a
198
See supra notes 60–61 and accompanying text.
199
See supra notes 124–126 and accompanying text.
200
Drug, Inc. v. Hunt, 35 Del. (5 W.W. Harr.) 339, 354 (Del. 1933).
50
property interest in and right to possess the Collateral, and that CAMI wrongfully
possessed and disposed of the property as if it were its own.
CAMI denies any liability for its actions regarding the Collateral and raises
various defenses, including that: (1) Republic authorized CAMI‘s use of the Collateral;
(2) the Collateral was fungible; (3) no enforceable Collateral Ratio ever was set; (4) IDB
cannot recover under more than one theory of liability; and (5) IDB violated the UCC by
failing to enforce its rights in a commercially reasonable manner. I address each of those
defenses in turn.
1.
Republic’s authorization of CAMI’s use of the Collateral
CAMI first argues that it cannot be held liable for conversion because Republic
authorized and permitted CAMI to use the Collateral, including removing it from the
depository, marking it for sale, and selling it. Notably, Eric Higgins testified that he
received authorization from Fenton for the release of the Collateral ―a dozen or more‖
times from 2009 to 2011.201 According to Eric, those authorizations permitted CAMI to
remove the Collateral from storage at FSD, show the Collateral at a trade show, and
return the Collateral upon completion of a trade show.202
201
Tr. 548–50 (Eric). In addition, IDB admitted in the New York Action that ―FSD
and CAMI—upon information and belief, with the authorization of Defendants
Republic and Ned Fenton—have allowed the Collateral to be removed from the
depository and to be marketed for sale, and possibly sold, without IDB‘s
authorization or benefit.‖ JX 250 ¶ 46 (emphasis added).
202
Tr. 528–29, 537–38 (Eric).
51
CAMI‘s conduct on and after September 12, 2011, however, was not in
accordance with Republic‘s previous authorizations for CAMI to use the Collateral to be
shown at trade shows ―and thereafter returned to the depository.‖203 The Collateral was
removed from FSD and then allegedly displayed at the Philadelphia and Baltimore Shows
in September and November 2011, respectively. The evidence at trial demonstrated that
the Collateral was not returned to FSD after either of those shows or, indeed, before
March 2012. Instead, CAMI, through Higgins, caused the Collateral to be deposited into
CAMI‘s safes in its section of the same building where FSD is located.
CAMI further argues that Republic‘s authorizations for CAMI to use the
Collateral were not expressly prohibited by the Bailment Agreement because CAMI
never ―released‖ the Collateral. In that regard, CAMI relies on Black‘s Law Dictionary,
which defines ―release‖ as the ―[l]iberation from an obligation, duty, or demand; the act
of giving up a right or claim to the person against whom it could have been enforced.‖204
In the context of the Bailment Agreement, however, ―release‖ had a different meaning.
Webster‘s New World Dictionary defines ―release‖ as ―to set free as from confinement,
duty, work, etc.‖ and ―to let go or let loose.‖205 In that sense, the Bailment Agreement
and December 2009 Notice limited FSD‘s ability to let go of the Collateral by
relinquishing possession of the property. Therefore, I construe Republic‘s authorizations
203
Defs.‘ Opening Br. 9.
204
Black‘s Law Dictionary 1403 (9th ed. 2009).
205
Webster‘s New World Dictionary 1199 (2d ed. 1986).
52
for CAMI to use the Collateral to visit or participate in trade shows as being for a limited
time only with the understanding that the Collateral would be returned to FSD after the
conclusion of the show. Defendants failed to prove either that Republic authorized an
open-ended release or relinquishment in September 2011 or that such an authorization
and release would have complied with the Bailment Agreement. Furthermore, and in any
event, the September 2012 release had to be authorized by IDB, not just Republic.
For these reasons, I conclude that CAMI‘s conduct was not in accordance with
either the Bailment Agreement or Republic‘s purported authorizations. Therefore, CAMI
did convert the Collateral when it took possession of the Collateral in September 2011
and did not return it.
2.
Was the Collateral “fungible”?
CAMI next argues that because the Collateral is fungible, IDB cannot maintain a
claim for conversion.
Specifically, CAMI relies on this Court‘s statement that
―[g]enerally, an action in conversion will not lie to enforce a claim for the payment of
money.‖206
206
See Kuroda v. SPJS Hldgs., L.L.C., 971 A.2d 872, 890 (Del. Ch. 2009); see also
Capitaliza-T Sociedad De Responsabilidad Limitada De Capital Variable v.
Wachovia Bank of Del. Nat’l Ass’n, 2011 WL 864421, at *3 (D. Del. Mar. 9,
2011) (―A conversion claim based on money deposited in an account but not
returned is not recognized under Delaware law, which requires as an element of
conversion the taking of specific property.‖); Goodrich v. E.F. Hutton Gp., Inc.,
542 A.2d 1200, 1203 (Del. Ch. 1988) (―No Delaware court has apparently
recognized a cause of action for conversion of money, as opposed to goods.‖).
53
CAMI asserts that the Collateral was ―merely a means to a cash payment,‖ 207 and
that under both California law208 and the CAMI Loan Agreement,209 the Collateral is a
―fungible‖ and ―openly traded commodity.‖ Even so, CAMI‘s argument must fail. The
Delaware law on conversion does not focus on whether an asset is fungible, but rather on
whether the conversion claim relates to ―specific property.‖210 Delaware distinguishes,
for example, between money and tangible goods.211
Here, the Collateral, as either
numismatic coins or bullion, constituted specific, identifiable, and tangible property. The
detailed records kept by FSD before September 12, 2011 on the large number of specific
tangible items that made up the Collateral confirms this fact. Thus, I reject CAMI‘s
argument that because the Collateral might be considered fungible in some sense, it is not
sufficiently specific, identifiable, or tangible to be subject to a claim of conversion.
207
Defs.‘ Answering Br. 23 (citing Tr. 392 (Kerneklian)).
208
See Cal. Com. Code § 1201(b)(18)(B) (defining fungible goods as ―[g]oods that by
agreement are treated as equivalent‖). The CAMI Loan Agreement is required to
be construed under California law. See JX 3 ¶ 12L.
209
See JX 3 ¶ 12C (―[A]ll Collateral pledged under this Agreement is fungible and is
an openly traded commodity.‖).
210
Capitaliza-T Sociedad, 2011 WL 864421, at *3.
211
See Goodrich, 542 A.2d at 1203 (distinguishing between money and a ―trunk,‖
―specific equipment,‖ ―identified cars,‖ or ―specific stock certificates‖); see also
Carlton Invs. v. TLC Beatrice Int’l Hldgs., Inc., 1995 WL 694397, at *16 (Del.
Ch. Nov. 21, 1995) (―An action for conversion has traditionally applied to the
wrongful exercise of dominion over tangible goods.‖ (emphasis added)).
54
3.
Was there an enforceable “Collateral Ratio”?
CAMI also argues that because there is no evidence of an enforceable Collateral
Ratio, CAMI was not required to maintain a specific amount of collateral, and cannot be
liable for conversion. Specifically, CAMI contends that the loan-to-value ratio in the
2006 Revolver is not the same metric as the Collateral Ratio in the CAMI Loan
Agreement, and therefore does not evidence an enforceable Collateral Ratio.
The Collateral Ratio is defined in the CAMI Loan Agreement as ―the proportion,
expressed as a percentage that the dollar value of the Collateral held in the Collateral
Account bears to the outstanding Advances.‖212 The loan-to-value ratio was set by the
2006 Revolver‘s definition of ―Borrowing Base‖ as the lesser of ―the Maximum
Commitment‖ or 85% of eligible receivables (i.e., the loans due to Republic from the
client in question).213 Thus, the loan-to-value ratio meant that Republic‘s eligible loan
receivables or the Maximum Commitment could not exceed 85% of the value of
Republic‘s Collateral.214
CAMI recognizes the similarity between these two benchmarks in that the only
difference it identified between them was how they define ―Fair Market Value‖ and
―forced liquidation value.‖215 The CAMI Loan Agreement defines fair market value as
212
JX 3 § 1.
213
JX 6 § 1.1(k).
214
Id. § 1.1(k), (bb).
215
Defs.‘ Answering Br. 25.
55
the current price quoted on a recognized commodity exchange, whereas the 2006
Revolver states that ―[f]or purpose of determining collateral value, Numismatic Coins
will be valued at the price at which such coins could be sold at forced sale with prompt
payment.‖216 CAMI ignores, however, the 2006 Revolver‘s statement that ―a nationwide
computer system furnishes up to the minute bid and ask prices for thousands of
numismatic coins, thereby providing an active two-way market and a method to
accurately value the collateral.‖217 The 2006 Revolver set fair market value using a
recognized commodity exchange or national wholesale market.
Thus, the approved
approach prescribed in the 2006 Revolver comported with the definition of Fair Market
Value in the CAMI Loan Agreement. Moreover, the parties‘ conduct during the relevant
time period reflected their recognition of the existence of an enforceable Collateral Ratio.
For example, in August 2009, the Error Coins were assigned as additional collateral to
help alleviate and offset the overadvance to Republic.218
Steven Higgins also
acknowledged at trial that CAMI was required to maintain a Collateral Ratio. 219 For
these reasons, I conclude that IDB set an enforceable Collateral Ratio and Defendants‘
argument to the contrary lacks merit.
216
JX 3 § 1; JX 6 sched. 1.1(r).
217
JX 6 sched. 1.1(r).
218
JX 25 at 031145; JX 29; Tr. 38 (Landerer).
219
Tr. 612.
56
4.
Election of remedies
CAMI next argues that this Court should deny IDB‘s recovery because it elected
to pursue its damages under a contract theory of recovery in the New York Action and is
foreclosed by the doctrine of election of remedies from recovering under a conversion
theory in this case.
CAMI principally relies on Segovia v. Equities First Holdings, LLC220 for the
proposition that a plaintiff can recover under only one theory and must elect its damages.
In Segovia, the plaintiff had proven claims for the tort of conversion and for breach of
contract against the same defendant.221 Judge Slights concluded that a plaintiff ―may
recover only under one theory‖ and that ―allowing [the plaintiff] to recover twice ‗would
yield an unwarranted windfall recovery.‘‖222 Segovia, however, is distinguishable from
this case in that IDB‘s claims are directed against two different defendants. Indeed,
―[t]he doctrine of election of remedies is applicable only where inconsistent remedies are
asserted against the same party or persons in privity with such a party.‖223 ―The bar of an
election does not apply to the assertion of distinct causes of action against different
persons arising out of independent transactions with such persons.‖224 Because IDB has
220
2008 WL 2251218 (Del. Super. May 30, 2008).
221
Id. at *20.
222
Id. (quoting Fineman v. Armstrong World Indus., Inc., 980 F.2d 171, 218 (3d Cir.
1992)).
223
28A C.J.S. Election of Remedies § 13 (2010).
224
Id.
57
asserted independent causes of action against Defendants FSD and CAMI, the doctrine of
election of remedies is inapplicable.
Moreover, the Restatement (Second) of Judgments states that: ―A judgment
against one person liable for a loss does not terminate a claim that the injured party may
have against another person who may be liable therefor‖ and declares that the rules
regarding election of remedies are ―obsolete.‖225 Double recovery is foreclosed, but that
is accomplished ―by the rule that only one satisfaction may be obtained for a loss that is
the subject of two or more judgments.‖226 That rules states:
When a judgment has been rendered against one of several
persons each of whom is liable for a loss claimed in the action
on which the judgment is based:
...
(2)
Any consideration received by the judgment creditor in
payment of the judgment debtor‘s obligation discharges, to
the extent of the amount of value received, the liability to the
judgment creditor of all other persons liable for the loss.227
Accordingly, any recovery by IDB should be reduced pro tanto by any payment received
as a result of the New York action.228
225
Restatement (Second) of Judgments § 49 & cmt. a (1982).
226
Id. § 49 cmt. a.
227
Id. § 50.
228
IDB‘s counsel stated at argument that ―I think we [have] received $35,000 from
Mr. Fenton at this point.‖ Oral Arg. Tr. 24. To the extent that amount of
recovered damages pertains to the same loss alleged by IDB as part of its claims
for breach of contract and conversion in this action, it presumably will discharge
that amount of liability to IDB under a final judgment in this action.
58
5.
UCC defense
Finally, CAMI argues that IDB‘s recovery is barred by the UCC because IDB
failed to enforce its rights in a ―commercially reasonable manner.‖ Specifically, UCC
Article 9, Section 607 requires that a party collect or enforce obligations in a
commercially reasonable manner.
―If it is established that a secured party is not
proceeding in accordance with this article, a court may order or restrain collection,
enforcement, or disposition of collateral on appropriate terms and conditions.‖229
Here, CAMI alleges that IDB failed to act in a commercially reasonable manner
because it contacted the FBI and provided the FBI with the documents the FBI used to
seize part of the Collateral.230 Whether an act ―is commercially reasonable is a question
for the trier of fact and must be determined on a case-by-case basis,‖231 unless the act
―fits under one of the ‗safe harbor‘ exceptions of 6 Del. C. § 9-627(b) and (c).‖232 None
of the safe harbor exceptions provided for in Sections 627(b) and (c) apply in the
circumstances of this case. Accordingly, I must determine whether IDB acted in a
commercially reasonable way when it purportedly contacted the FBI in connection with
enforcing its rights.
229
6 Del. C. § 9-625(a).
230
Defs.‘ Answering Br. 25–26.
231
Edgewater Growth Capital P’rs LP v. H.I.G. Capital, Inc., – A.2d –, 2013 WL
1789462, at *7 (Del. Ch. Apr. 18, 2013); see also M & T Bank v. Bolden, 2012
WL 6628947, at *2 (Del. Com. Pl. July 11, 2012) (―Commercial reasonableness is
determined on a case by case basis.‖).
232
M & T Bank, 2012 WL 6628947, at *2.
59
Preliminarily, I note that the record is less than clear as to whether and, if so, how
IDB contacted the FBI.233 Nevertheless, even assuming that IDB did contact the FBI, as I
do, Defendants have failed to prove that any contacts IDB had with the FBI regarding the
Collateral were either commercially unreasonable or undertaken in bad faith.
The
evidence shows that Higgins intentionally concealed material facts regarding the loans,
the Collateral, and its whereabouts from IDB. FSD and CAMI also repeatedly stymied
IDB‘s efforts to discover the relevant facts regarding those issues both before and during
this litigation, and through formal and informal means. In such circumstances, it would
not be unreasonable for a litigant to contact law enforcement authorities for assistance.
Accordingly, I deny CAMI‘s UCC defense based on 6 Del. C. §§ 9-607 and 9-625.234
C.
Damages
1.
Standard
IDB must prove its damages by a preponderance of the evidence.235 Delaware
does not ―require certainty in the award of damages where a wrong has been proven and
233
At trial, IDB‘s counsel instructed Kerneklian not to answer questions regarding his
knowledge of who called the FBI to the extent that he had gained that knowledge
as a result of contact with outside or in-house counsel. Tr. 411–12, 466–67. After
I overruled that objection, Kerneklian testified that he did not know who contacted
the FBI, Tr. 466–67, but believed someone associated with IDB provided
documents to the FBI. Tr. 468. The record does not disclose, however, whether
IDB volunteered that information or provided it to the FBI upon request.
234
For the same reasons, I also deny CAMI‘s request that IDB‘s recovery be barred
by the doctrine of unclean hands as a result of IDB‘s contact with the FBI.
235
Great Am. Opportunities, Inc. v. Cherrydale Fundraising, LLC, 2010 WL 338219,
at *22 (Del. Ch. Jan. 29, 2010).
60
injury established.‖236 Indeed, ―[t]he quantum of proof required to establish the amount
of damage is not as great as that required to establish the fact of damage.‖237 Responsible
estimates of damages that lack mathematical certainty are permissible so long as the court
has a basis to make such a responsible estimate.238 Furthermore, public policy has led
Delaware courts to show a general willingness to make a wrongdoer ―bear the risk of
uncertainty of a damages calculation where the calculation cannot be mathematically
proven.‖239 Nevertheless, when acting as the fact finder, this Court may not set damages
based on mere ―speculation or conjecture‖ where a plaintiff fails adequately to prove
damages.240
236
Del. Express Shuttle, Inc. v. Older, 2002 WL 31458243, at *15 (Del. Ch. Oct. 23,
2002) (quoting Red Sail Easter Ltd. P’rs, L.P. v. Radio City Music Hall Prods.,
Inc., 1992 WL 251380, at *7 (Del. Ch. Sept. 29, 1992)).
237
Total Care Physicians, P.A. v. O’Hara, 2003 WL 21733023, at *3 (Del. Super.
July 10, 2003).
238
Del. Express Shuttle, 2002 WL 31458243, at *15 (quoting Red Sail Easter, 1992
WL 251380, at *7).
239
Great Am. Opportunities, 2010 WL 338219, at *23 (citing Duncan v. TheraTx,
Inc., 775 A.2d 1019, 1023 (Del. 2001), Henne v. Balick, 146 A.2d 394, 396 (Del.
1958), Gotham P’rs, L.P. v. Hallwood Realty P’rs, L.P., 855 A.2d 1059, 1067
(Del. Ch. 2003), and Dionisi v. DeCampli, 1995 WL 398536, at *18 (Del. Ch.
June 28, 1995)).
240
Medek v. Medek, 2009 WL 2005365, at *12 n.78 (Del. Ch. July 1, 2009) (quoting
Henne, 146 A.2d at 396).
61
2.
Damages calculation
This case is not an action to collect a deficiency judgment.241 Rather, IDB claims
to have been damaged by both FSD‘s breach of the Bailment Agreement and CAMI‘s
conversion of the Collateral to the extent it no longer has sufficient collateral to cover the
outstanding loan balance owed to IDB.
On September 9, 2011, three days before FSD‘s unauthorized release and CAMI‘s
subsequent conversion of the Collateral, IDB had sufficient collateral to cover its loan
balance against Republic. Indeed, the Collateral associated with the Accounts was valued
by FSD at $18,266,776.38.242 Around the same time, on October 6, 2011, Republic‘s
loan balance was $12.553 million, with loans to CAMI, Ketterling, and Lott accounting
for 92% or $11.551 million of that amount.243 Thus, IDB had ample collateral to cover
241
Defendants argue that IDB‘s only viable claim after liquidating the Collateral is
for a deficiency judgment against CAMI. In support of that proposition,
Defendants cite two UCC sections, 6 Del. C. §§ 9-608 and 9-615, which deal with
how proceeds of collateral are to be applied after collection, enforcement, or
disposition. These sections, however, assume that the secured party receives
proceeds through either collection, enforcement, or disposition, which includes the
sale, lease, license, or other disposition of collateral. See 6 Del. C. § 9-610.
Neither Section 9-608 nor Section 9-615 restricts a secured party from seeking
judgment in a court. Indeed, Section 9-601 permits a ―secured party‖ to ―reduce a
claim to judgment, foreclose, or otherwise enforce the claim, security interest, or
agricultural lien by any available judicial procedure.‖ See id. § 9-601. Here, IDB
is exercising its right to enforce its security interest in the Collateral and to reduce
its claim to judgment. Therefore, I deny Defendants‘ request for a declaration
―that IDB‘s only viable claim is for a deficiency judgment against CAMI in an
amount to be determined at a later date in a court of law.‖
242
See supra note 59 and accompanying text.
243
JX 95 (dated October 6, 2011).
62
the entire loan balance. As a result of CAMI and FSD‘s conduct, however, only a
fraction of that Collateral was returned to FSD, and IDB was left under-collateralized.
IDB bases its damages claim on the amount of Republic‘s outstanding loan
balance and does not seek to recover more than that from Defendants here. IDB‘s
damages are mitigated further by the value of any collateral IDB could execute on and
sell to satisfy the outstanding loan balance, including the Error Coins and any collateral
returned to FSD and later seized by the FBI.
Accordingly, to calculate IDB‘s damages, this Court must determine the amount
of the loan balance on its loan to Republic and offset against that amount the estimated
value of any remaining Collateral.
a.
The amount of the loan balance
IDB submits that the legal loan balance on its loan to Republic as of July 10, 2012,
the date of the judgment against Republic, is $11,327,488.92.244 Defendants do not
dispute that number. Therefore, I conclude that the legal amount of the loan balance is
$11,327,488.92.
244
See JX 279 (―[J]udgment is hereby entered in favor o[f] Plaintiff Israel Discount
Bank of New York and against Defendants [Republic], Ned Jay Fenton, Susan R.
Fenton and the R. Zvansky Trust, jointly and severally, in the amount of
$11,327,488.92, which sum includes interest and default interest pursuant to § 2.2
of the [2006 Revolver].‖ (emphasis omitted)). According to IDB, interest and
costs continue to accrue under the 2006 Revolver. Pl.‘s Opening Br. 38 n.18.
63
b.
Value of the remaining Collateral
The remaining Collateral (the ―Remaining Collateral‖) consists of three
components: (1) the first cache of coins retained by the FBI (―FBI‘s First Cache‖); (2) the
second cache of coins retained by the FBI (―FBI‘s Second Cache‖ and together with the
FBI‘s First Cache, the ―Seized Collateral‖); and (3) the Error Coins.
IDB was the only party that called an expert witness, Todd Imhof, to render an
opinion on the value of the Remaining Collateral. Imhof is a vice president of Heritage
Numismatic Auctions, Inc. (―Heritage‖), which is ―one of the largest rare coin companies
in the world, the largest collectibles auctioneer and the third largest auction house in the
world.‖245 In the past five years, Imhof has handled the sale of over $300 million in rare
coins at auction or via private sale.246 Imhof also has served as an expert and legal
consultant in other legal matters, including matters involving numismatics and the
valuation of rare coins and collectibles.247
Defendants urge this Court to exclude or ignore Imhof‘s testimony and report
because his opinions were based on his ―professional experience‖ and ―best guess,‖ as
opposed to a reliable methodology for valuing the Remaining Collateral.
Instead,
Defendants seek to rely on valuations conducted as part of IDB‘s ordinary course of
business. For the following reasons, I find that Imhof is a competent expert witness and
245
JX 286 ¶ 1.
246
Id. Ex. 1.
247
Id. ¶ 5.
64
that he employed a reliable method in reaching his valuation. Thus, I accept his opinions
for purposes of my damages calculation.
1.
Imhof’s methodology
Imhof based his valuation of the Remaining Collateral on three factors: (1)
scarcity, (2) demand, and (3) condition.248 Condition is determined on a numeric scale of
1 to 70.249
Although grading rare coins is somewhat subjective, Professional Coin
Grading Service (―PCGS‖) and Numismatic Guaranty Corporation (―NGC‖) provide
grading and third party certification information that frequently is recognized and
embraced by major dealers, collectors, and investors.250 A coin certified by either PCGS
or NGC is encapsulated in an inert coin case along with pertinent data such as date of
issue, mintmark, denomination, and grade. Although it is preferable to have a coin inhand, it is common to evaluate, buy, and sell coins ―sight-unseen,‖ relying entirely on the
third-party certification because of the accuracy and market acceptance of coins certified
by NGC and PCGS.251
In performing the appraisal, Heritage‘s staff, under Imhof‘s supervision, consulted
various published price guides, recent private sales, and auction prices realized for
248
Id. ¶ 17.
249
Id.; Tr. 213 (Imhof).
250
JX 286 ¶ 17.
251
Id.
65
comparable items, and considered the then-current market environment.252 According to
Imhof, his valuation would not have differed materially if he had evaluated the coins inhand. In that regard, he also stated that any deviation would have been limited to a 5%
upward or downward differential from his appraised values.253
In addition, Imhof made a handful of adjustments to better approximate fair
market value. Fair market value is defined as: ―The price that a seller is willing to accept
and a buyer is willing to pay on the open market and in an arm‘s-length transaction; the
point at which supply and demand intersect.‖254 Imhof testified that what the coins
would sell for at a large public auction best approximated fair market value.255
According to Imhof, ―most sellers of rare coins choose to sell via . . . auction because of
the ‗peace-of-mind‘ they get knowing that their coins were marketed to the widest
possible audience and that their items sold for a single bid increment more than anyone
else in the industry (dealers, collectors and investors alike) was willing to pay.‖256
252
Id. ¶ 18. This Court has recognized that a comparables analysis is a reliable
methodology for valuing assets where the assets being valued are comparable. Cf.
Le Beau v. M.G. Bancorporation, Inc., 1998 WL 44993, at *8 (Del. Ch. Jan. 29,
1998) (―Where the valuation exercise rests upon data derived from companies
comparable to the company being valued, it stands to reason that the more
‗comparable‘ the company, the more reliable will be the resulting valuation
information.‖), aff’d in part, rev’d in part, 737 A.2d 513 (Del. 1999).
253
JX 286 ¶ 19.
254
Black‘s Law Dictionary 1691 (9th ed. 2009).
255
JX 286 ¶ 20. In contrast, Imhof used a private sale value to value the Error Coins.
See infra Part II.C.2.b.3.
256
Id. ¶ 20.
66
Imhof‘s valuation also took into account transaction costs. For a typical auction,
Heritage, like other auction houses, charges a seller‘s fee of 10% and a buyer‘s fee of
17.5%.257 Based on the quality and quantity of the Seized Collateral, however, Imhof
assumed that Heritage would waive the seller‘s fee and reduce the buyer‘s fee to 15%. 258
Thus, in a hypothetical sale of a portion of the Seized Collateral for $100,000, Imhof
would expect IDB to be able to realize $85,000 toward the reduction of Republic‘s
outstanding loan balance.
2.
The Seized Collateral
The FBI‘s First Cache, which was seized on March 29, 2012, consists of 998
coins.259 On April 4, 2012, IDB compiled a list of the FBI‘s First Cache and provided it
to Imhof to conduct his appraisal. Imhof appraised the FBI‘s First Cache at a value of
$2,542,590 before any adjustment for transaction costs.260 The FBI‘s Second Cache,
which was seized on May 8, 2012, consists of coins pledged as collateral between
September 12, 2011 and April 4, 2012, and inspected by IDB on April 5, 2012. 261 Imhof
appraised the FBI‘s Second Cache at a value of $1,263,981.262
257
Id. ¶ 23.
258
Id.
259
See JX 205 Ex. A.
260
JX 286 Tab 2(c) Ex. A.
261
Tr. 353–55 (Kerneklian), 456–59 (Miller); JX 259–262.
262
JX 286 Tab 2(c) Ex. B.
67
Although Imhof valued the Seized Collateral in April 2012 as part of IDB‘s
second motion for contempt, Imhof and his staff conducted a market check in October
2013 to insure that no intervening conditions warranted a change in his prior valuation.
Specifically, Imhof testified that ―we did a significant amount of cross fact-checking,
going back and forth, both myself and probably three, four or five of my other staff,
reviewing everything to make sure that we still were comfortable with the valuations‖
and we ―looked to see if there were any updated trades or more recent trades, comparable
trades in the auction venues.‖263 Imhof ultimately concluded that ―there wasn‘t a whole
lot of movement in . . . precious metals‖ and that the indexes related to the rare coin
industry ―were pretty stable.‖264 That conclusion also comported with Imhof‘s opinion
that the coin market does not ―have really dramatic and violent short-term market
swings.‖265
Having considered the evidence presented by Imhof and Defendants‘ challenges to
it, I find that the methodology Imhof used was reasonable and reliable in the
circumstances of this case. Therefore, I accept Imhof‘s valuation of the Seized Collateral
at $3,806,571. When adjusted to reflect the 15% transaction fee, the net value of the
Seized Collateral following an auction would be $3,235,585.35.
263
Tr. 222.
264
Id.; see also id. at 223.
265
Tr. 217 (Imhof).
68
3.
The Error Coins
On March 2, 2012, FSD released the Error Coins to IDB, which moved them to
Diamond State Depository. On or around March 20, 2012, Imhof‘s colleague, Michael
Berkman, a rare coin trader, authenticator, and numismatist, counted and inspected the
Error Coins.
Relying on Berkman‘s work, Imhof attributed to the Error Coins an
―appraisal value of $800,000 to $1,200,000 if they were marketed and sold over the
course of one to two years in an orderly, controlled and gradual manner.‖266
In contrast to the Seized Collateral, Imhof asserts that the Error Coins will
generate a higher sale value through a series of private sales, rather than public auction.267
Imhof opined that selling the Error Coins via public auction would reduce their value
because ―the quantities of the Error Coins far exceed the current market capacity for such
coins and the market likely does not even realize that the Error Coins exist in such large
quantities.‖268 Indeed, Imhof reports that the number of certain Error Coins exceeds the
number of NGC certified coins in all grades of that type. Private retailers and marketers,
on the other hand, might purchase a large quantity of the Error Coins, invest time, effort,
money, and other resources in creating a large broad-based advertising campaign, and
thereby increase the demand for the Error Coins.269 IDB could obtain the highest value
266
JX 286 ¶¶ 12, 26; Tr. 212, 221 (Imhof).
267
JX 286 ¶ 21.
268
Id.
269
Id. ¶ 22.
69
for the Error Coins, therefore, by selling them to such private retailers and marketers.
Based on the overabundance of Error Coins in terms of current market demand, I accept
Imhof‘s opinion that a series of private sales to reputable private retailers and marketers
would best approximate fair market value.
In a series of large private sales, IDB would need to hire a broker to arrange the
transactions between IDB and the ultimate private sellers and marketers. 270
Imhof
predicted that Heritage would charge between a 10% to 15% commission, but for
purposes of the valuation he assumed a 10% commission that would be deducted from
the appraised value of the Error Coins.271 Applying that commission to the March 20,
2012 appraisal, the net appraised value of the Error Coins would be between $720,000
and $1,080,000.
Defendants, on the other hand, argue that the Court should use a 2009 valuation of
the coins by Allan Levy, an expert on error coins. Levy concluded that the Error Coins
would have a Forced Liquidation Value of $10,401,600. Although Defendants contend
that Levy‘s report is ―highly probative of the [E]rror [C]oins‘ valuation,‖272 Levy was
unavailable to testify at a deposition or at trial because he passed away in 2011.
270
Id. ¶ 24.
271
Id.
272
See JX 32, 310; Letter from David Felice, Defs.‘ Att‘y, to the Court (Mar. 7,
2013).
70
Consequently, IDB could not cross-examine Levy and the Court was unable to observe
his testimony.
IDB has objected to the inclusion of Levy‘s valuation report based on the
Delaware Rules of Evidence regarding authenticity and hearsay.
Under Rule 802,
―[h]earsay is not admissible except as provided by law or by these Rules.‖ 273 Hearsay is
defined as ―a statement, other than one made by the declarant while testifying at the trial
or hearing, offered in evidence to prove the truth of the matter asserted.‖274 Thus, for
evidence to constitute hearsay, it must (1) be a statement275 uttered (2) by a declarant276
(3) out of court and (4) offered in evidence to prove the truth of the matter asserted.
Levy‘s valuation report meets these criteria and, therefore, is hearsay.
Moreover,
Defendants offer Levy‘s valuation report precisely to prove the truth of the assertion in
his valuation report that the Error Coins have a value of $10,401,601. Because Levy‘s
report is hearsay, it is not admissible unless one of the hearsay exceptions applies.277
Having carefully reviewed the hearsay exceptions, I conclude that none apply in this
273
D.R.E. 802.
274
D.R.E. 801(c).
275
A statement is ―an oral or written assertion.‖ D.R.E. 801(a).
276
A declarant is ―a person who makes a statement.‖ D.R.E. 801(b).
277
Morris v. State, 795 A.2d 653, 663 (Del. 2002) (―The statements are therefore
inadmissible unless they fall within a recognized exception to the hearsay rule.‖).
71
case.278 I hold, therefore, that because Levy‘s valuation report is hearsay evidence to
which no exception applies, it is inadmissible and must be stricken.
In addition, Imhof asserts that Levy‘s valuation is ―fundamentally flawed and
grossly overstated because it does not factor in the supply/demand problem.‖279 Even in
supplemental briefing, Defendants were unable to explain whether Levy took into
account the supply and demand problem identified by Imhof.280 Accordingly, even if
Levy‘s valuation were admissible, I would give it little or no weight.281
For these reasons, I accept Imhof‘s valuation of the Error Coins and select
$1,000,000 as the value of the Error Coins net of expenses, which is within the range of
values expressed by Imhof and conforms to a price, as discussed infra, that IDB stated it
would be willing to sell the Error Coins for.
c.
Damages summary
The following table shows the amount that IDB is under-collateralized and,
therefore, damaged as a result of Defendants‘ conduct:
278
Defendants did not argue in their briefs that Levy‘s valuation report fit within any
particular exception to the hearsay rule.
279
JX 282 ¶ 27.
280
Letter from David Felice, Defs.‘ Att‘y, to the Court (Mar. 7, 2013).
281
I also find inadmissible and unpersuasive the valuations proffered by Defendants
by Bowers and Merena Auctions, JX 311, and Randy Karlin, JX 312. As in the
case of Levy, those appraisers were not deposed or called to testify. Furthermore,
Defendants did not address how either of those putative experts dealt with the
supply and demand issue raised by Imhof.
72
Loan Balance
Value of the Seized Collateral
Value of the Error Coins
Total Damages
$11,327,488.92
($ 3,235,585.35)
($ 1,000,000.00)
$ 7,091,903.57
Thus, IDB is entitled to a damages award of $7,091,903.57 against CAMI and
FSD, jointly and severally, for the wrongs they committed beginning on September 12,
2011.
d.
Defendants’ right to repurchase the Error Coins
Defendants contend that Imhof‘s valuation of the Error Coins drastically
underestimates their true value. To reduce the risk to Defendants of undervaluation, the
Court will afford Defendants thirty (30) days from the date of entry of the Judgment
resulting from this Memorandum Opinion to repurchase the Error Coins, which are in
possession of IDB or its agents, for $1,000,000.
If the Error Coins are indeed
undervalued, then Defendants can repurchase the Error Coins for a highly discounted
rate, resell the Error Coins, and recapture the value lost as a result of this Court‘s and
Imhof‘s purported undervaluation.282
Indeed, IDB‘s recovery likely will be the same under either scenario. In both
scenarios, IDB will receive a judgment against CAMI and FSD for $7,091,903.57. If
Defendants choose to exercise their repurchase right, IDB will be made whole because its
282
IDB is amenable to this solution. At argument, IDB represented that it would be
willing to sell the Error Coins to Higgins or Defendants for $1 million. Oral Arg.
Tr. 28 (The Court: ―So you would be willing to sell [the Error Coins] to Mr.
Higgins for [$]5 million.‖ IDB‘s Counsel: ―We would be willing to sell them to
anyone for the $1 million.‖).
73
damages will be mitigated and reduced by the amount it estimated the Error Coins were
worth.
e.
Prejudgment interest
IDB requested prejudgment interest in the Complaint and the Joint Pre-Trial
Order.283 Delaware law is settled that ―[a] successful plaintiff is entitled to interest on
money damages as a matter of right from the date liability accrues.‖284 Generally, the
legal rate of interest has been used as ―the benchmark for pre-judgment interest.‖285
Nevertheless, this Court ―has broad discretion, subject to principles of fairness, in fixing
the [interest] rate to be applied.‖286 Interest is awarded with two goals in mind, one of
which is ―to require the respondent to disgorge any benefit it received.‖287 Here, none of
the parties presented any evidence in favor of the use of a rate of prejudgment interest
other than the legal rate. In the exercise of my discretion, therefore, I award IDB
prejudgment interest at the legal rate from September 12, 2011 to the date of judgment,
compounded monthly.
283
Joint Pre-Trial Order § V.a.13; Compl. ¶ E.
284
Valeant Pharm. Int’l v. Jerney, 921 A.2d 732, 755 (Del. Ch. 2007) (quoting
Summa Corp. v. Trans World Airlines, Inc., 540 A.2d 403, 409 (Del. 1988)).
285
Summa Corp., 540 A.2d at 409.
286
Id.
287
Ramunno v. Capano, 2006 WL 1830080, at *1 (Del. Ch. June 23, 2006), aff’d, 922
A.2d 415 (Del. 2007) (TABLE). The other goal of prejudgment interest is to
compensate the plaintiff for the loss of the use of its money. Id.
74
Attorneys’ Fees and Costs
D.
1.
Attorneys’ Fees
Delaware follows the American Rule, under which each party must bear its own
litigation expenses, including attorneys‘ fees, absent certain exceptions that warrant a
shifting of such fees.288 One exception to this rule is that a court may award attorneys‘
fees in cases where the court finds that the losing party brought the action in bad faith or
that a party acted in bad faith or vexatiously to increase the costs of the litigation.289
Another exception is where the parties agree by contract to shift the costs and expenses of
litigation.290
―The bad faith exception is not ‗lightly‘ invoked.‖291 ―Rather, the party seeking
fee shifting must show by ‗clear evidence‘ that the party from whom fees are sought has
acted in subjective bad faith.‖292 ―There is no single standard of bad faith that justifies an
288
FGC Hldgs. Ltd. v. Teltronics, Inc., 2007 WL 241384, at *5 (Del. Ch. Jan. 22,
2007).
289
See, e.g., Openwave Sys. Inc. v. Harbinger Capital P’rs Master Fund I, Ltd., 924
A.2d 228, 246 (Del. Ch. 2007); Cove on Herring Creek Homeowners’ Ass’n v.
Riggs, 2005 WL 1252399, at *1 (Del. Ch. May 19, 2005).
290
Jackson’s Ridge Homeowners Ass’n v. May, 2008 WL 241617, at *1 n.3 (Del. Ch.
Jan. 23, 2008); see also Scion Breckenridge Managing Member, LLC v. ASB
Allegiance Real Estate Fund, – A.3d –, 2013 WL 1914714 (Del. May 9, 2013).
291
Auriga Capital Corp. v. Gatz Props., LLC, 40 A.3d 839, 880 (Del. Ch. 2012)
(citing Nagy v. Bistricer, 770 A.2d 43, 64 (Del. Ch. 2000)), aff’d, 59 A.3d 1206
(Del. 2012).
292
Id. at 880 (citing Arbitrium (Cayman Is.) Handels AG v. Johnston, 705 A.2d 225,
232 (Del. Ch. 1997), aff’d, 720 A.2d 542 (Del. 1998)).
75
award of attorneys‘ fees—whether a party‘s conduct warrants fee shifting under the bad
faith exception is a fact-intensive inquiry.‖293 ―The Court typically will not find a litigant
acted in bad faith for purposes of shifting attorneys‘ fees unless the litigant‘s conduct rose
to the level of ‗glaring egregiousness.‘‖294 ―[M]erely being adjudicated a wrongdoer
under our corporate law is not enough to justify fee shifting.‖295
―An award of counsel fees is also a proper consideration‖ for civil contempt.296
―To be held in contempt, a party must be bound by an order, have notice of it, and
nevertheless violate it.‖297
In a previous ruling in this case, I concluded that Defendants acted in bad faith and
vexatiously in negotiating and stipulating to the PI Order, and granted attorneys‘ fees and
costs associated with IDB‘s efforts in obtaining the Contempt Order and in drafting and
293
Id. (citing Beck v. Atl. Coast PLC, 868 A.2d 840, 851 (Del. Ch. 2005)).
294
eBay Domestic Hldgs., Inc. v. Newmark, 16 A.3d 1, 47 (Del. Ch. 2010) (citing
Kaung v. Cole Nat’l Corp., 2004 WL 1921249, at *6 (Del. Ch. Aug. 27, 2004),
aff’d in part, rev’d in part, 884 A.2d 500 (Del. 2005)).
295
Id. (quoting VGS, Inc. v. Castiel, 2001 WL 1154430, at *2 (Del. Ch. Sept. 25,
2001)).
296
Miller v. Steller Enters., Inc., 1980 WL 6432, at *3 (Del. Ch. Dec. 22, 1980); see
also Triton Constr. Co. v. E. Shore Elec. Servs., Inc., 2009 WL 1387115, at *7
(Del. Ch. May 18, 2009) (―Therefore, I grant Triton‘s motion for contempt against
Elliott and Eastern and award Triton its reasonable attorneys‘ fees and costs
associated with that motion.‖).
297
Aveta Inc. v. Bengoa, 986 A.2d 1166, 1181 (Del. Ch. 2009) (citing Arbitrium v.
Johnston, 1997 WL 589030, at *3 (Del. Ch. Sept. 17, 1997)).
76
negotiating the PI Order.298 To the extent that Defendants have not satisfied that order, I
reaffirm that award here.
Both parties contend they are entitled to attorneys‘ fees and costs based on the bad
faith exception to the American Rule. IDB avers that it is entitled to attorneys‘ fees as a
result of Defendants‘ litigation conduct, including: (1) ―hiding from IDB that the
Collateral was removed from the depository prior to the commencement of litigation and
misleading IDB and this Court that at least some of the Collateral was maintained in the
depository when opposing the TRO Motion‖; (2) ―misleading the Court about the
whereabouts of the Collateral and the identity of the individual possessing the
Collateral‖; and (3) ―creating unnecessary costs and delay by arguing that a blanket
protective order must be issued to prevent the depositions of Defendants‘ witnesses
because they in fact would be asserting the Fifth Amendment in response to all relevant
questions.‖299 FSD, on the other hand, seeks an award of Attorneys‘ Fees because IDB‘s
298
Israel Disc. Bank of New York v. First State Depository Co., 2012 WL 1021180, at
*4 (Del. Ch. Mar. 19, 2012). As a result of Defendants‘ failure to abide by the
terms of the Contempt Order, Defendants are required to pay a $35,000 fine to the
Court for not returning Collateral to the depository by March 20, 2012 and for
failing to generate complete depository reports and provide them to IDB by March
21, 2012. See Order (Mar. 16, 2013). IDB also incurred $65,415.54 in attorneys‘
fees, litigation expenses, and costs in connection with the negotiation of the PI
Order and the prosecution of the motion for contempt, which Defendants have
refused to pay.
299
Pl.‘s Opening Br. 40–41.
77
claim that FSD was selling Collateral ―relied on baseless, false and frivolous
allegations.‖300
a.
IDB’s request for attorneys’ fees
IDB first seeks an award of attorneys‘ fees because Defendants misled the Court
concerning the existence and whereabouts of the Collateral during the pendency of the
TRO Motion. IDB‘s TRO Motion sought to ―temporarily enjoin FSD from transferring
additional Assets from its depository in Delaware without the express authorization of
IDB or further order of this Court.‖301 FSD did not inform the Court that IDB‘s TRO
Motion was unnecessary because the Collateral no longer remained at FSD. To the
contrary, FSD created the false impression that the Collateral remained at FSD, through
statements, such as:
As for the Republic Account, there are no allegations alleged
by the Plaintiff that any of the items held in the Republic
Account have ever been removed from First State. The
allegation that First State, or its officers, will wrongfully
remove property that First State is contractually obligated to
hold in its accounts, is without merit. First State has never
moved, sold, traded or exchanged any assets in any of the
Accounts. To the extent that assets have been removed, it has
been with the authorization of all of the parties to the
applicable Collateral Custody Agreement and the customer
has removed it. There is no need for an injunction.302
300
Defs.‘ Opening Br. 19.
301
Pl.‘s TRO Mot. 14–15.
302
JX 209 at 14.
78
Likewise, at argument on IDB‘s TRO Motion, FSD‘s former counsel agreed with this
Court‘s statement that the Collateral is ―physically held at [FSD] when they‘re not out at
a show or something like that.‖303 Finally, FSD did not correct the Court when it
incorrectly surmised, based on Defendants‘ statements, that there was Collateral
remaining at FSD.304 By misleading IDB, FSD forced IDB to incur unnecessary time and
expense in pursuing the TRO Motion. By also misleading the Court, FSD succeeded in
rendering the TRO largely ineffectual. This problem was exacerbated by Higgins‘s
subsequent use of the separate corporate identities of FSD and CAMI to circumvent the
intent of the TRO.
Defendants also negotiated and entered into the PI Order under the false premise
that the Collateral had ―a market value of at least $12.5 million.‖305 That representation
ultimately proved to be untrue, and I found Defendants in contempt of the PI Order. I
also awarded attorneys‘ fees and costs associated with the Contempt Order because
―Defendants acted in bad faith and vexatiously in negotiating and stipulating to the PI
Order.‖306
303
TRO Mot. Tr. 32 (The Court: ―All right. And they‘re [i.e., the coins] physically
held at First State when they‘re not out at a show or something like that?‖ Daniel
Crossland, Defendants‘ Counsel: ―That is my understanding, Your Honor.‖).
304
Id. at 45–47.
305
JX 221 ¶ 4.
306
See Israel Disc. Bank of New York v. First State Depository Co., 2012 WL
1021180, at *4 (Del. Ch. Mar. 19, 2012); see also JX 241 ¶ 7.
79
Defendants misled IDB and the Court again regarding the whereabouts of the
Collateral and the identity of the individual possessing the Collateral in connection with
Plaintiff‘s first motion for contempt. At the hearing on that motion, I inquired as to
whether Defendants could comply with an order requiring the return of the Collateral to
FSD.307 After a short recess, Defendants‘ counsel stated:
Your Honor, I was able to talk to my client. I am told that the
property is in the possession of a third party. The third party
made my client aware earlier this week that they were going
to be gone for two weeks on a vacation, and that it would be
necessary for this to be a two-week time period if he‘s not
able to get in touch with them and be able to arrange a
suitable family member or whomever it would be that would
allow them access in order to comply.308
The ―client‖ presumably was Robert Higgins or Eric Higgins. In any event, the ―third
party‖ turned out to be Higgins, himself.309 Higgins, however, was not a true ―third
party,‖ in that he was the sole proprietor of both FSD and CAMI.
Defendants‘
representation that they needed an additional two weeks to comply with the Court‘s order
because the Collateral was in possession of a ―third party,‖ i.e., Higgins, was calculated
to mislead the Court.
Based on that misrepresentation, among other things, I entered a Contempt Order
giving Defendants five days to comply.310 Defendants later violated that order by: (1) not
307
JX 240 at 25–26.
308
Id. at 26 (emphasis added).
309
See JX 271; Tr. 584 (Eric), 617 (Steven).
310
JX 240 at 31.
80
returning the Collateral to FSD within two business days of the Contempt Order; 311 (2)
failing to generate and provide to IDB depository reports that listed the Collateral held at
FSD on or before March 21, 2012;312 and (3) not permitting IDB and its representatives
to appraise all of the Property held at the Depository by March 22, 2012.313
Defendants also caused IDB to incur unnecessary costs and delay by arguing for a
blanket protective order to preclude the depositions of Higgins, Eric, and Lott (the
―Witnesses‖) on the ground that the Witnesses needed protection under the Fifth
Amendment. Specifically, Defendants argued in their opening brief in support of their
motion for a protective order that: (1) ―the deposition testimony that IDB seeks will
undoubtedly implicate topics upon which the [Witnesses] will have to assert their Fifth
Amendment privilege against self-incrimination‖; (2) ―the [Witnesses] will invoke their
right to remain silent‖; (3) ―the deposition of an alternative 30(b)(6) witness will merely
result in the circumvention of the Witnesses‘ privilege against self-incrimination because
the Witnesses are the only individuals with relevant knowledge to this litigation.‖314 All
three Witnesses ultimately provided deposition testimony and only Higgins invoked the
Fifth Amendment privilege against self-incrimination.
Notably, although Higgins
provided almost nine hours of deposition testimony, he invoked the Fifth Amendment
311
JX 241 ¶ 4; see also supra note 298.
312
JX 241 ¶ 6.3.
313
Id. ¶¶ 6.5, 6.6.
314
Defs.‘ Op. Br. in Supp. of Mot. for Prot. Order at 1, 7 (emphasis in original).
81
only on the topic of the disposition of the Collateral after it was released on September
12, 2011.315 Moreover, Eric and Steven testified that they did not believe, and had no
reason to believe, that they were under investigation.316
Contrary to Defendants‘
representations to this Court, the Witnesses generally did not invoke their right to remain
silent. Thus, Defendants‘ motion for a protective order provides yet another example of
Defendants delaying the judicial process and imposing unnecessary costs and prejudice
on IDB through misrepresentations to IDB and the Court.
In Johnston v. Arbitrium (Cayman Islands) Handels AG,317 the Delaware Supreme
Court upheld a fee-shifting award of attorneys‘ fees under the bad faith exception, where
the defendants had: (i) defended the action despite their knowledge that they had no valid
defense; (ii) delayed the litigation and asserted frivolous motions; (iii) falsified evidence;
and (iv) changed their testimony to suit their needs.318 Similarly, in RGC International
Investors v. Greka Energy Corp.,319 this Court awarded attorneys‘ fees against the
defendant under the bad faith exception, because the defendant had forced the plaintiff to
engage in litigation that would not have been necessary if the defendants had acted with
even minimal responsibility, and because the multiple theories advanced by the defense
315
See JX 302 at 48, 59–60.
316
Tr. 605–06 (Eric), 623 (Steven).
317
720 A.2d 542 (Del. 1998).
318
Id. at 546.
319
2001 WL 984689 (Del. Ch. Aug. 22, 2001).
82
had ―minimal grounding in fact and law‖ and made the litigation more expensive than it
should have been.320
In this case, Defendants have: (1) misled the Court and IDB as to the whereabouts
and value of the Collateral;321 (2) failed to abide by the terms of the PI Order and
Contempt Order; (3) delayed the litigation and asserted frivolous motions, such as
Defendants‘ motion for a protective order; and (4) advanced multiple theories that had
―minimal grounding in fact and law.‖322 Accordingly, I hold that an order holding FSD
and CAMI liable for paying IDB‘s reasonable attorneys‘ fees and expenses is warranted
under the ―bad faith‖ exception to the American Rule.
b.
FSD’s request for attorneys’ fees
FSD argues that it is entitled to an award of attorneys‘ fees because IDB‘s claim
that FSD was selling Collateral purportedly was based on frivolous allegations. In its
Complaint, IDB alleged that FSD was marketing Collateral for sale without IDB‘s
authorization. On November 20, 2012, IDB informed the Court that it no longer would
320
Id. at *19 n.111.
321
Indeed, Higgins consciously deceived IDB as to the whereabouts of the Collateral,
as evidenced by his statement to Fenton on February 2, 2012 that ―[y]ou [i.e.,
Fenton] need to stop this or I have to spill the beans.‖ JX 182 at 000479.
322
Although Defendants made numerous technical legal arguments to avoid or deny
their obligations to IDB, the factual record demonstrates that Higgins understood
the obligations that Defendants owed to IDB and deliberately chose not to comply
with those obligations. See, e.g., JX 134 (―If I deposit Inventory and they [IDB]
lock it up I am screwed[.]‖); JX 102 at 007120 (―Whether they [IDB] received
wire‘s [sic] or checks it all came from [CAMI] and they would have discovered
[t]he secrets that were being kept from them.‖).
83
be pursuing its claim for conversion against FSD.323 Defendants emphasize that the
evidence at trial showed that there is no basis for finding that that FSD sold, traded, or
offered to sell IDB‘s property.324 Because IDB voluntarily dismissed its claim, a form of
amending its complaint, after a responsive pleading was filed, I consider that claim to
have been dismissed with prejudice.325
Dismissal with prejudice does not mean that the claim was necessarily frivolous or
that FSD is entitled to attorneys‘ fees. IDB‘s claim was based on allegations that Higgins
controls both FSD and CAMI.326 At the motion to dismiss stage, I concluded that
―[b]ased on the well-pleaded facts alleged in the Complaint, it is reasonably conceivable
that IDB could prove that CAMI or FSD, through Robert Higgins, wrongfully exercised
dominion and control over the collateral at issue in contravention of IDB‘s rights.‖327
323
Letter from Joseph Cicero, Pl.‘s Att‘y, to the Court (Nov. 20, 2012).
324
Tr. 483 (Eric: ―We do not buy, sell or trade anything.‖); Tr. 298–99 (Imhof). In
that regard, FSD seeks a declaration that FSD never sold, traded, or offered to sell
or trade its customers‘ property. Whether or not FSD ever sold other customers’
property is not a justiciable controversy properly before this Court. See Cartanza
v. Dep’t of Natural Res., 2009 WL 106554, at *2 (Del. Ch. Jan. 12, 2009)
(requiring the existence of an actual controversy between the parties).
Consequently, I decline to declare that FSD did not sell, trade, or offer to sell or
trade IDB‘s or other customers‘ property on the ground that the issue is not ripe in
the case of other customers and is moot as to IDB. No ruling in this Memorandum
Opinion depends on whether FSD sold, traded, or offered to sell or trade any of
the Collateral.
325
Ct. Ch. R. 15.
326
Compl. ¶ 27.
327
Israel Disc. Bank of New York v. First State Depository Co., 2012 WL 4459802, at
*13 (Del. Ch. Sept. 27, 2012).
84
Higgins, who was the sole owner of, and played a significant role at, both CAMI and
FSD, was seen selling Collateral at trade shows.328 On that basis, among others, it was
not unreasonable until late in these proceedings for IDB to have alleged that FSD was
converting the Collateral.
Therefore, IDB‘s allegations were not frivolous, and
Defendants‘ request for an award of attorneys‘ fees on that basis is without merit.329
2.
Costs
Under the American Rule, litigants are generally responsible for their own
expenses.330 Court of Chancery Rule 54(d), however, creates an exception to the general
rule whereby costs ―shall be allowed as of course to the prevailing party unless the court
otherwise directs.‖331
Under Rule 54(d), the ―prevailing‖ party is a party who
successfully prevails on the merits of the main issue or the party who prevailed on most
328
See JX 305.
329
IDB argues that Defendants‘ request for attorneys‘ fees was so ―baseless and
inflammatory‖ that the Court should order Defendants‘ counsel to pay IDB‘s
attorneys‘ fees for having to consider and respond to such a request. Pl.‘s
Answering Br. 3 n.2. I need not address this question because, as previously
discussed, Defendants‘ other litigation conduct was sufficiently egregious to
justify an award against them of IDB‘s attorneys‘ fees.
330
See FGC Hldgs. Ltd. v. Teltronics, Inc., 2007 WL 241384, at *5 (Del. Ch. Jan. 22,
2007).
331
For the purposes of Rule 54(d), costs include ―expenses necessarily incurred in the
assertion of a right in court, such as court filing fees, fees associated with service
of process or costs covered by statute. . . . [I]tems such as computerized legal
research, transcripts, or photocopying are not recoverable.‖ Id. at *17.
85
of her claims.332 Courts interpret the term ―prevailing‖ to mean that a party need not be
successful on all claims, but rather must succeed on a general majority of claims.333
In this case, IDB plainly is the prevailing party. Thus, IDB is entitled to recover
from CAMI and FSD its costs under Rule 54(d) to the extent those costs are recoverable
under Rule 54(d).
III.
CONCLUSION
For the reasons stated in this Memorandum Opinion, I find in favor of IDB.
Specifically, I find that FSD breached the Bailment Agreement by, among other things,
releasing the Collateral and interfering with IDB‘s rights under that agreement. I also
find that CAMI converted the Collateral by wrongfully possessing and disposing of the
Collateral as if it were its own. Therefore, I direct that judgment be entered against FSD
and CAMI, jointly and severally, in the amount of $7,091,903.57 plus prejudgment
interest from September 12, 2011 at the legal rate, compounded monthly. IDB also is
entitled to the return of the $25,000 that it posted in support of the TRO it obtained.
Finally, IDB is entitled to an award of its attorneys‘ fees and expenses for prosecuting
this action, including, without limitation, its costs under Rule 54(d).
As to Defendants‘ request for declaratory judgment, I deny that request in its
entirety. In terms of injunctive relief, any of Republic‘s Collateral that remains in the
possession, custody or control of Defendants must be turned over to IDB. Moreover,
332
See id.; Brandin v. Gottlieb, 2000 WL 1005954, at *27 (Del. Ch. July 13, 2000).
333
See FGC Hldgs., 2007 WL 241384, at *17.
86
IDB is entitled to inspect and to obtain the release of Republic‘s Collateral to the extent
any of it remains within the possession, custody, or control of either Defendants or their
agents.
Defendants also shall have thirty (30) days from the date of entry of the
Judgment resulting from this Memorandum Opinion in which to repurchase from IDB or
its agent the Error Coins for the sum of $1,000,000.
Counsel for IDB shall submit, on notice, a proposed form of final judgment
reflecting these rulings within ten (10) days of the date of this Memorandum Opinion.
Counsel for IDB also shall file within ten (10) days of the date of this Memorandum
Opinion an appropriately documented and detailed request for reimbursement of the
attorneys‘ fees and expenses they incurred in connection with this action. Defendants
shall have ten (10) days after their receipt of service of IDB‘s request to file any and all
objections to that request.
87
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