LAMB, Vice Chancellor.
Plaintiffs bring this purported class action on behalf of all holders as of May 13, 1998, of Kenetech 8¼% Preferred Redeemable Increased Dividend Equity Securities ("PRIDES"). Plaintiffs' first claim rests entirely on their contract rights, as plaintiffs say they "seek to litigate whether [Kenetch] was `winding up' when it carried out a program of selling off all its assets, paying all its debts, firing its employees and going out of any operating business." If so, plaintiffs say that they had a right under the PRIDES Certificate of Designations to receive $1,012.50 per share (or $20.25 per depositary share unit), plus accrued and unpaid preferred dividends, as a special distribution.
II. FACTUAL BACKGROUND
The nucleus of operative facts at issue here is the same as in Quadrangle Offshore (Cayman) LLC v. Kenetech Corp.
In May 1994, Kenetech sold 102,942 shares of PRIDES. Under the Kenetech
While the Certificate specifically provided that a sale of assets would not constitute a winding up, liquidation or dissolution, the Certificate did not otherwise define or differentiate these terms.
Beginning in 1995, Kenetech's business deteriorated significantly. The board of directors began selling off most of its assets and operations. In June 1996, Kenetech defaulted on approximately $99 million worth of its senior secured notes. Kenetech structured a plan to sell its remaining significant asset, a 50% stake in a power plant project in Puerto Rico called EcoElectrica. The board estimated that it could obtain $126 — $146 million for its interest at that time. Although Kenetech's creditors had the power to force the company into bankruptcy, they agreed to give Kenetech time to obtain certain regulatory approvals and financing for the EcoElectrica project. If Kenetech could satisfy those contingencies, the selling price for its interest in the project could increase dramatically, making complete satisfaction of the company's debt more likely.
In 1996 and 1997, Kenetech moved ahead with asset sales and reducing the staff. By 1997, Kenetech had fired most of its workers and stopped pursuing all new business ventures. The contemplated sale of EcoElectrica, however, met with substantial delays, although it is alleged that by early 1998, the Kenetech directors knew that EcoElectrica might be sold for a net amount in excess of that owed on the senior notes, thus leaving some ability to pay all or a part of the disputed preferential distribution and, perhaps, some value to the equity.
At no time before May 14, 1998, did Kenetech declare or pay the $1,012.50 disputed preferential distribution to the holders of PRIDES. Instead, on that date, "Kenetech purported to mandatorily convert the PRIDES into common stock, at the rate of one share of PRIDES for 50 shares of common stock."
In July 1998, Kenetech received an offer to purchase its EcoElectrica interest for over $237 million, and the transaction later closed for $252 million. The complaint alleges that the net proceeds of this sale were sufficient to eliminate Kenetech's capital deficit, pay the accrued PRIDES dividend and pay substantially all of the disputed preferential distribution.
III. THE PARTIES' CONTENTIONS
In this action, plaintiffs' first argue that before their PRIDES were mandatorily converted, Kenetech "engaged in a winding up within the meaning of that term in
Pointing to Vice Chancellor Steele's post-trial Opinion in Quadrangle II,
The standard on a motion to dismiss under Court of Chancery Rule 12(b)(6) is well known. The motion will be granted if it appears with "reasonable certainty" that the plaintiff could not prevail on any set of facts that can be inferred from the pleading.
Res Judicata or Collateral Estoppel Apply?
Defendants assert that res judicata and collateral estoppel provide a basis to bar the present suit. As was said in Foltz v. Pullman, Inc.:
The plaintiff in Foltz, a product liability action, had previously lost her claim for worker's compensation, which was brought against her deceased husband's former employer. The Industrial Accident Board concluded that the plaintiff had failed to
The court held that res judicata could not apply because the Foltz defendants were neither parties to the worker's compensation action nor were in privity with the former employer.
While Foltz suggests that Delaware does not require mutuality to apply collateral estoppel,
The Kohls were concededly not parties to the Quadrangle action.
In this regard, defendants argue that "if the interests of a party were adequately represented in a prior litigation, a finding of privity is appropriate."
While defendants' positions might carry the day in different circumstances,
Haphazard use of the term "privity" can lead to improper findings of preclusion. This is so because the term, except in reference to specific legal relationships, "is so amorphous that it often operates as a conclusion rather than an explanation."
Being fellow stockholders is plainly not the type of legal relationship that fits the second exception listed above. An individual stockholder is not, solely because of potentially aligned interests, presumed to act in the place of (and with the power to bind) the other stockholders. Also, the defendants do not claim that the Kohls knew about or actually did anything in connection with the prior litigation. Thus, defendants cannot assert that some affirmative conduct caused them to refrain from taking action to bind the present plaintiffs, or, for that matter, the other PRIDES holders, to that action.
Defendants' only remaining argument is that by virtue of Quadrangle's aggressive litigation approach, the other PRIDES holders are bound. This claim fails because it does not matter that Quadrangle would have been an adequate representative, had it been appointed to such role. A representative party must be granted such authority, either by the represented party itself (in accordance with agency principles) or, in the class action context, by the court.
B. Do the Plaintiffs State a Claim Upon Which Relief Can be Granted?
While neither res judicata nor collateral estoppel operates to preclude the Kohls' litigation of this action or its essentially factual underpinnings, the complaint is nevertheless subject to dismissal. This is so because the Kohls fail to distinguish their claims, either factually or legally, from those adjudicated by Vice Chancellor Steele in Quadrangle II. Normal respect for the principle of stare decisis and application of the general standard for deciding a motion under Rule 12(b)(6) require that I dismiss this complaint.
In other words, although plaintiffs are not literally bound by the judgment in Quadrangle II, they must still state a viable cause of action. Plaintiffs must differentiate the facts and/or legal theories of their case from valid and binding precedents. If, for example, they sought to litigate about an entirely different provision of the PRIDES contracts, they presumably could do so despite the fact that the plaintiff in Quadrangle would be barred from doing so by res judicata.
However, the plaintiffs in this case can only proceed if their claims are distinguishable from those adjudicated in Quadrangle II. In that regard, they say that Quadrangle II focused on two things: (i) whether the plaintiffs' right to the preferential distribution was triggered by a Kenetech "liquidation" and (ii) whether Kenetech breached the implied covenant of good faith and fair dealing by delaying in its efforts to sell EcoElectrica until after the mandatory conversion date.
Plaintiffs argue that although they:
I do not agree that Vice Chancellor Steele's opinion should be read so narrowly. Instead, his decision in Quadrangle II addresses the exact contract language upon which plaintiffs rest their claims, and, not surprisingly, considers the precise facts averred by plaintiffs.
Vice Chancellor Steele made numerous rulings that would apply with full force to this case. For example, he considered and rejected the notion that the Kenetech directors owed fiduciary duties to the PRIDES holders in relation to the contract terms of those securities. In that regard, he stated:
The court then considered whether Delaware recognizes any special duty of a fiduciary nature to PRIDES holders, distinct from duties to common stockholders:
Vice Chancellor Steele recognized, however, that "[t]he PRIDES shareholders' right to a liquidation preference places them in an economically antagonistic relationship with the common. Therefore, to the extent that the PRIDES shareholders enjoy liquidation rights preferential to those of the Kenetech common shareholders, those rights must be spelled out in the Certificate."
This analysis of the scope of a director's fiduciary obligations to preferred stockholders is well-reasoned and carefully grounded in valid precedent. While Vice Chancellor Steele eventually focused his analysis on whether the conduct of the Kenetech board comported with the implied covenant of good faith and fair dealing, it is clear that he addressed the question of fiduciary duty and held that the board did not violate any such obligation. For these reasons, plaintiffs' second claim, which rests on the existence of a fiduciary obligation to protect the rights of preferred stockholders when the company is near insolvency, cannot survive this motion.
Similarly, after discussing the four elements of liquidation recognized by Chancellor Brown in Rothschild Int'l Corp. v. Liggett Corp Inc.,
In the circumstances, it is clear that in Quadrangle II, this court considered all of the arguments here advanced and held contrary to plaintiffs' position. That opinion has now been affirmed by the Supreme Court and conclusively represents the law of this state. Allowing the parties to litigate about settled issues is an affront to both Courts.
In sum, I agree with plaintiffs that they are not barred by res judicata or collateral estoppel from litigating the claims asserted. Nevertheless, their complaint, read in accordance with the normal standard applied in the case of a motion to dismiss under Rule 12(b)(6), fails to state a claim upon which relief may be granted.