In this appeal, we affirm the trial court's award of attorneys' fees under the bad faith exception to the American Rule against fee-shifting. The Court of Chancery awarded attorney fees after making specific findings of bad faith. Limiting ourselves to the facts of this case, we are asked to decide whether these findings provide sufficient justification for the award. We find that they do.
We summarize briefly the facts as found by the Court of Chancery and refer to the various opinions of that court for a more complete statement.
In 1984, Miklos Vendel and H. Frederick Johnston formed Technicorp International II, Inc., a Delaware Corporation ("TCI II") as the acquisition vehicle for the purchase of Statek Corporation ("Statek"), a California-based manufacturer of micro-electronic components. After the acquisition of Statek as a wholly-owned subsidiary of TCI II, Johnston served as chairman of the board of directors, president and treasurer of TCI II. Similarly, Sandra Spillane, Johnston's long-time business associate, served as a director, vice president and secretary of TCI II. From the beginning, Vendel took no active role in the operation of TCI II and held his shares in TCI II through his corporate nominee, Arbitrium (Cayman Islands) Handels AG ("Arbitrium" and together with Vendel, "Vendel").
Over the next eight years, Vendel commenced several attempts to obtain financial information concerning TCI II. After discovering that Johnston and Spillane had secretly converted his voting shares to nonvoting shares through a 1985 charter amendment and that his stock certificate recited fewer shares than he believed he owned, he commenced a statutory "books and records" action (the "Section 220 action") in the Court of Chancery against Johnston and Spillane (the "Defendants").
After discovery, the parties settled the Section 220 action. Pursuant to the settlement, Vendel received documentation that proved he was TCI II's majority shareholder. Armed with this knowledge, Vendel executed a written consent removing the Defendants as directors and officers of TCI II. The Defendants refused to honor this written consent, forcing Vendel to bring an action against the Defendants and TCI II as a nominal defendant in the Court of Chancery under 8 Del. C. § 225 for a determination that he had validly removed them as directors and officers of TCI II. Vendel successfully
Pending the decision of the Court of Chancery, the parties executed a Standstill Agreement wherein the Defendants agreed that TCI II would not make any deals with the Defendants, or any entities controlled by or affiliated with the Defendants, without first giving Vendel seven days notice. Less than three months after the execution of the Standstill Agreement, the Defendants unilaterally repudiated it, claiming that the proceedings were taking too long and that they considered themselves no longer legally bound. After briefing this matter, the court found that the Defendants' position had "no basis in law" and was "entirely without factual support."
After conclusion of the trial, but before any ruling by the Court of Chancery, Vendel discovered that TCI II had recently awarded Johnston a $500,000 salary. In response to Vendel's claim that this violated the Standstill Agreement, Johnston repudiated his earlier testimony that he had never received compensation from TCI II, claiming instead that this award was in line with his previous compensation from TCI II.
On January 6, 1996, the Court of Chancery ruled that Vendel properly removed the Defendants as directors and officers of TCI II.
Following the adjudication of this claim, Vendel moved for an award of the attorneys' and expert witness fees incurred in successfully prosecuting the Section 225 action.
The court found that the Defendants' prelitigation conduct provided evidence and motive for their later bad faith tactics in delaying and obstructing Vendel's attempt to gain control of TCI II.
Specifically, the court found three instances of bad faith on the part of the Defendants.
On October 10, 1997, the Court of Chancery found that the total amount spent by the Defendants in fees ($1,114,566.57) would serve as the minimum amount for Vendel's recovery.
On March 30, 1998, after completion of discovery, the Court of Chancery awarded all but $51,886.72 of the fees requested by Vendel.
General Principles of Fee Shifting
Since the United States Supreme Court disallowed an award of attorneys' fees to the winning party in a 1796 admiralty matter,
The United States Supreme Court has used the bad faith exception to the American Rule to uphold the award of attorneys fees.
Application of Bad Faith Exception Here
This Court reviews the award of fees under exceptions to the American Rule to determine if the Court of Chancery abused its discretion in awarding such fees.
In this case, the Court of Chancery made definitive findings of fact showing bad faith. It pointed to specific instances during the course of the trial demonstrating that the Defendants' primary goal was to extend the litigation and therefore their control over TCI II. In addition, the court found that the Defendants' conduct prior to the litigation served as evidence of the motive and intent behind their delaying tactics.
The Defendants object to the use of the pre-litigation evidence in determining bad faith. They correctly point out that the bad faith exception does not apply to conduct that gives rise to the substantive claim itself.
Determination of Attorneys' Fees
The Defendants further object to the determination by the Court of Chancery of the reasonable attorneys' fees awarded to Vendel. They claim they needed further discovery to determine whether the fees claimed by Vendel and his attorneys were reasonable. They point to the fact that Vendel's attorneys never supported his claim with original time sheets even after a demand therefor that was denied by the court. Instead, Vendel's attorneys provided affidavits showing the hours spent on this matter by each attorney, with each attorney's hourly rate. In addition, the Defendants had the opportunity to, and did, depose Allingham regarding any further questions they had concerning the work product claimed by Vendel as his reasonable fees and expenses.
The Court of Chancery balanced several factors in determining that the fees charged were reasonable. First, it hesitated to permit
The Court of Chancery has broad discretion in fixing the amount of attorney fees to be awarded. Absent a clear abuse of discretion, this Court will not reverse the award.
In light of the foregoing, we find that the Court of Chancery applied the correct legal principle, properly applied it to the facts of this case and did not abuse its discretion in any regard. Accordingly, we affirm the award of fees and expenses to Vendel in the amount of $1,644,952.00.