Standard General L.P., et al. v. Dov Charney

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COURT OF CHANCERY OF THE STATE OF DELAWARE MORGAN T. ZURN MASTER IN CHANCERY LEONARD L. WILLIAMS JUSTICE CENTER 500 NORTH KING STREET, SUITE 11400 WILMINGTON, DE 19801-3734 April 11, 2017 Raymond J. DiCamillo, Esquire Matthew D. Perri, Esquire Richards Layton & Finger 902 North King Street Wilmington, DE 19801 Mr. Dov Charney 1809 Apex Avenue Los Angeles, CA 90026 Re: Standard General L.P., et al. v. Dov Charney C.A. No. 11287-CB Date Submitted: April 7, 2017 Dear Mr. Charney and counsel: On March 16, 2017, I held a teleconference to discuss Standard General’s objections and responses to Mr. Charney’s discovery requests, and the extent to which Standard General’s February 28, 2017, motion for judgment on the pleadings warranted a stay of discovery. I informed the parties that discovery pertaining to American Apparel’s bankruptcy, as well as all case scheduling deadlines enumerated as item “e” or higher on the governing scheduling order, C.A. No. 11287-CB April 11, 2017 Page 2 would be stayed while the Chancellor decides the motion for judgment on the pleadings. I suggested using the date of American Apparel’s chapter 11 bankruptcy filing to identify discovery pertaining to the bankruptcy, such that production of documents and responses post-dating October 5, 2015, would be stayed. I allowed Standard General to submit an alternative, concrete, descriptive category of discovery to be stayed. Standard General and Mr. Charney submitted letters. This is my report in response. Standard General asks for a stay of discovery of information after October 5, 2015, as well as to responses to certain of Mr. Charney’s discovery requests regardless of date, which Standard General asserts are relevant only in the context of the bankruptcy. Specifically, Standard General objects to Mr. Charney’s discovery requests pertaining to: a) Wilmington Trust, which served as the agent for the first lien lenders in the bankruptcy; b) American Apparel bondholders, which Mr. Charney has alleged colluded with Standard General to expedite the bankruptcy and reorganization; c) actual or prospective debtor in possession lenders; d) Hilco Capital, a restructuring advisor that assisted American Apparel in its restructuring as approved by the bankruptcy court; and e) American Apparel’s landlords, suppliers, and vendors. C.A. No. 11287-CB April 11, 2017 Page 3 Mr. Charney responds that a stay is not warranted or appropriate.1 He also asserts he needs documents relating to the bankruptcy but predating October 5, 2015, to prove his theory that Standard General failed to mitigate damages. Finally, he seeks discovery dated after October 5, 2015, that might illustrate Standard General’s incentives and attitude toward Mr. Charney personally and therefore might explain their actions within the bankruptcy and alleged failure to mitigate damages. I conclude the October 5, 2015, cutoff is likely both underinclusive and overinclusive with regard to the bankruptcy and Mr. Charney’s proffered defenses. Neither party is happy with the cutoff, which in my view is one indication it is fair. While I appreciate the parties’ efforts to tailor the discovery stay, I conclude that a more nuanced stay would only invite innumerable disputes as to whether specific discovery was subject to the stay, and thus defeat the efficiency the stay is designed to achieve. The date cutoff is much simpler to apply. If the date cutoff turns out to be either overinclusive or underinclusive in view of the Chancellor’s 1 In this report, I do not revisit the stay itself, which I informed the parties was directed by the Chancellor. I do note Mr. Charney’s complaint that Standard General has only produced discovery that Mr. Charney already possesses. Standard General responded that Mr. Charney’s lay assistant has not yet signed the confidentiality agreement as Standard General requested. I note that on the March 19, 2017, teleconference, Standard General and Mr. Charney agreed that Mr. Charney’s lay assistant would sign a confidentiality agreement and that Standard General would then produce confidential documents to Mr. Charney. I do not fault Standard General for requiring that agreement before producing confidential documents. C.A. No. 11287-CB April 11, 2017 Page 4 decision on Standard General’s motion for judgment on the pleadings, that can be remedied by additional discovery production or clawbacks. I recommend staying the production of discovery dated on or after October 5, 2015, pending a decision on Standard General’s motion for judgment on the pleadings. Please recall that pursuant to the Chancellor’s November 7, 2016, Order appointing me as a special master in this case, exceptions to this report must be filed within five business days. Sincerely, /s/ Morgan T. Zurn Master in Chancery