DG BF, LLC v. Ray
| Decision Date | 27 June 2022 |
| Docket Number | Civil Action 2020-0459-MTZ |
| Parties | DG BF, LLC, et al. v. Michael Ray, et al., |
| Court | Court of Chancery of Delaware |
Andrew H. Sauder, Esquire Dailey LLP
David B. Anthony, Esquire Berger Harris LLP
Sean A. Meluney, Esquire Benesch, Friedlander, Coplan &Aronoff LLP
MORGAN T. ZURN VICE CHANCELLOR
Dear Counsel, I write to address the defendants' pending Motion to Recover Damages Resulting from Plaintiffs' Improperly Issued Injunction (the "Motion").[1] As the Motion is substantially independent of the merits of this action, I refer any readers seeking context to the many decisions that have preceded this one.[2] The Motion is denied for lack of subject matter jurisdiction.
Based on the parties' positions at argument, and applying Court of Chancery Rule 65(c), I determined an appropriate bond for the TRO would be $100,000. But the parties were unable to agree on a form of order or the type of bond, and required additional guidance from the Court.[6] The parties also briefed their positions on Count VII, and I heard argument on July 6 2020.[7]
That same day, I entered an order implementing the TRO.[8] That order observed:
Section 17.1 of the AGR Sixth Amended and Restated Limited Liability Agreement ("Operating Agreement") states that "Each Member hereby waives any requirement for security or the posting of any bond or other surety and proof of damages in connection with any temporary or permanent award of injunctive, mandatory or other equitable relief and further agrees to waive the defense in any action for specific performance that a remedy at law would be adequate." Neither party has raised this provision of the Operating Agreement, but given the dispute surrounding the bond and the unambiguous nature of the provision I determine a bond is not required to effectuate this Order.[9]
On July 9, I concluded that the Company's Operating Agreement did not require the Company to seek approval from the Series D Manager in order to issue the Series E financing, denied the plaintiffs' request for a declaratory judgment on their Count VII, and terminated the TRO.[10] The defendants filed their Motion seeking damages from the TRO on October 8, 2020.[11]
From there, the plaintiffs' claims were substantially narrowed on the defendants' motion to dismiss.[12] In particular, the parties agreed that the counts pertaining to the Series E financing were moot; other claims were dismissed for failure to state a claim.[13] The surviving claims were eventually dismissed due to the plaintiffs' litigation misconduct, and the defendants' fees were shifted to the plaintiffs under the bad faith exception.[14] While the litigation was bogged down in contentious and contumacious discovery, the defendants' Motion sat to the side. After dismissing the plaintiffs' claims and shifting fees, I gave the parties the opportunity to supplement their positions on the Motion, which they exercised by June 8, 2022.[15]
The Motion seeks $10,528 in salary costs for the time Company executives spent addressing the request to enjoin the Series E Financing between the June 26 hearing and the July 9 termination of the TRO.[16] I begin with the plaintiffs' argument that this Court lacks subject matter jurisdiction to award damages for an improvidently granted injunction when the parties had contractually agreed to waive the bond requirement.[17]
Until the enactment of Court of Chancery Rule 65.1, the Court of Chancery lacked subject matter jurisdiction to award damages even on a Rule 65 injunction bond.[18] In Morris v. Whaley, this Court noted, [19] MacFarlane v. Garrett provides an early example of a claim at law for wrongfully obtaining an unwarranted restraining order, which the Superior Court concluded must meet the elements for malicious prosecution.[20] Morris also noted that there is not a "warrant sustaining such a procedure in the practice of the English High Court of Chancery."[21] While the federal rules at the time included language providing the pursuit of surety liability without an independent action, Chancery's rules at the time did not.[22] Rule 65.1 followed, which "provides for proceedings against sureties in the Court of Chancery without need to resort to an independent action" including where security is given in the form of a bond, stipulation, or other undertaking.[23] Against that backdrop, I turn to whether this Court can award damages for an improvident injunction where the parties contractually agreed to waive the bond requirement. In my view, Delaware jurisprudence does not plainly answer that question. In 2008 in Concord Steel, this Court specified that a bond waiver was not a liability waiver.[24] Two years later, in Guzzetta v. Service Corporation of Westover Hills, the Delaware Supreme Court considered, as "the only issue on appeal," "whether the trial court abused its discretion in setting the amount of the injunction bond."[25] In considering that issue, the Court stated: "[A] wrongfully enjoined party has no recourse other than . . . the security," and "[a] party that is wrongfully enjoined may recover damages resulting from the injunction, but that recovery is limited to the amount of the bond."[26] In my view, Guzzetta did not address on all fours whether the Court of Chancery could grant damages if no bond was posted, although it supports the conclusion that it cannot.
Guzzetta was then applied to a bond waiver in Newell Rubbermaid v. Storm, which required a bond to be posted notwithstanding a contractual waiver "in order to assure [the enjoined party's] ability to recover damages if it turns out that the TRO was improperly issued."[27] This Court has since frequently enforced contractual bond waivers in entering injunctive relief, without comment on liability for an improperly issued injunction.[28]
Last year, in Concerned Citizens of Estates of Fairway Village v. Fairway Cap, LLC, the Delaware Supreme Court considered whether an enjoined party could recover damages after the Court of Chancery released a bond, in the absence of any objection from the still-enjoined party.[29] A preliminary injunction had been granted favoring two plaintiffs, one of which posted the requisite bond.[30] That plaintiff reached a settlement with the enjoined defendant, and upon that plaintiff's motion, the Court terminated the bond.[31] The remaining plaintiff and the defendant sparred over the amount of a replacement bond, but the plaintiff never posted a replacement bond, and the defendant did not move to lift the injunction.[32] The Court of Chancery noted the case was nearly over and did not require the second plaintiff to file a bond for the injunction to remain in place.[33] The trial court stated it did not intend to prevent the defendant from recovering damages in the event it had been wrongfully enjoined, and that the lack of a replacement bond did not bar the defendant's recovery.[34] After trial, the Court of Chancery found in the defendant's favor, and awarded the defendant damages from the wrongful injunction, all of which accrued after the bond was terminated.[35]
The plaintiff appealed. The Delaware Supreme Court began by pointing out the two purposes of Rule 65(c)'s bond requirement.
First, it assures the enjoined party that it may readily collect damages from the funds posted or the surety provided in the event that it was wrongfully enjoined, without further litigation and without possible insolvency of the assured. Second, it provides the plaintiff with notice of the maximum extent of its liability, since the amount of the bond is the limit of the damages the defendant can obtain for a wrongful injunction, provided the plaintiff was acting in good faith. This limitation on damages is sometimes referred to as the "Injunction Bond Rule."[36]
The defendant below argued to the Delaware Supreme Court that federal authority provides that when a trial court exercises its discretion to not require security for a preliminary injunction, the lack of security does not bar the enjoined party from later seeking damages.[37] On the facts before it the Delaware Supreme Court concluded that the defendant "remained enjoined but could not recover damages for a wrongful injunction" because the defendant failed to ask that the injunction be lifted when the second plaintiff declined to post a replacement bond.[38]The Court distinguished the facts before it from a situation where the trial court issued an order granting a preliminary injunction without security,...
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