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  • Delaware Court Of Chancery Denies Litigation Financier’s Request For Litigation Fees, Notwithstanding Benefit To Company
     
    09/26/2016
    On September 19, 2016, Vice Chancellor Travis Laster of the Delaware Court of Chancery denied a fee application submitted by Preferred Spectrum Investments, LLC (“PSI”), a third-party that had funded successful shareholder litigation against Preferred Communication Systems, Inc. (“PCSI”).  Judy v. Preferred Communication Systems, Inc., Consol. C.A. No. 4662-VCL (Del. Ch. Sept. 19, 2016).  In rejecting PSI’s application, the Court held that litigation financiers that are not parties to the action lack standing to seek a fee award under Delaware’s “common benefit doctrine,” and that “parties cannot obtain an equitable fee award when they use litigation in support of a takeover.”

    According to the Court, the litigation arose out of a complex power struggle among PCSI’s founders and investors. One founder, Pendleton C. Waugh, formed PSI to regain control of PCSI after being frozen out of control by the CEO, Charles M. Austin.  PSI financed lawsuits brought by Michael Judy, an investor in PCSI, which, among other things, challenged various actions Austin had taken as breaches of fiduciary duty.  Judy’s lawsuits eventually resulted in the issuance of a preliminary injunction, barring Austin from interfering with the ultimately successful efforts of Waugh’s supporters to gain control of PCSI. 

    PSI intervened in the litigation brought nominally by Judy and contended that the litigation resulted in economic benefits to PCSI worth roughly $60 million because the takeover enabled PCSI to preserve its ownership of certain wireless license blocks.  PSI claimed that it was equitably entitled to one-third of that benefit, or $20 million, as “attorneys’ fees” (or, as a fallback, approximately $8 million in litigation expenses it claimed to have incurred). 

    The Court rejected PSI’s application.  First, it held that the common benefit doctrine—which may entitle litigants to an award of attorneys’ fees if a meritorious lawsuit results in the receipt of a substantial benefit by an ascertainable group—may only be invoked by a litigant or its counsel.  As Vice Chancellor Laster explained, the doctrine was designed to overcome collective action problems that would otherwise prevent socially beneficial litigation from being pursued.  Third-party litigation financiers like PSI, according to the Court, do not need the common benefit doctrine to provide an incentive to finance litigation because they are free ex ante to enter into agreements providing for repayment in exchange for funding. 

    Second, the Court held that any benefits conferred on PCSI by the litigation were incidental, given that PSI only funded Judy as part of its effort to wrest control of the PCSI from Austin.  This self-serving motivation, too, deprived PSI of any standing to assert an equitable entitlement to reimbursement. 

    Additionally, the Court found that because PCSI could have retained its licenses even without Judy’s litigation.  Thus, the causal chain between PSI’s funding of the litigation and any benefit to PCSI was too attenuated to support a fee award.
    CATEGORY: Attorneys’ Fees

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