Judy v. Preferred Commc'n Sys., Inc.
| Decision Date | 19 September 2016 |
| Docket Number | Consol. C.A. No. 4662-VCL |
| Parties | MICHAEL D. JUDY, Plaintiff, v. PREFERRED COMMUNICATION SYSTEMS, INC., a Delaware corporation, CHARLES M. AUSTIN, and GERALD E. SETKA, Defendants. |
| Court | Court of Chancery of Delaware |
Michael W. McDermott, David B. Anthony, BERGER HARRIS LLP, Wilmington, Delaware; Counsel for Plaintiff Michael Judy.
Joseph B. Cicero, CHIPMAN BROWN CICERO & COLE, LLP, Wilmington, Delaware; Counsel for the Special Committee of Defendant Preferred Communication Systems, Inc.
Brian M. Rostocki, John C. Cordrey, REED SMITH LLP, Wilmington, Delaware; Counsel for Intervenor Preferred Spectrum Investments, LLC.
Evan O. Williford, Andrew Huber, THE WILLIFORD LAW FIRM LLC, Wilmington, Delaware; Counsel for Intervenor Preferred Investors Association.
LASTER, Vice Chancellor.
Preferred Spectrum Investments, LLC ("PSI") seeks to recover $20 million as an award of attorneys' fees and expenses from Preferred Communication Systems, Inc. (the "Company" or "PCSI"). PSI claims it is entitled to this amount because it provided the funding necessary for plaintiff Michael Judy to pursue three pieces of litigation that were filed separately and then consolidated into this action: (i) a summary proceeding to obtain books and records, (ii) a summary proceeding to compel the holding of an annual meeting, and (iii) a plenary action challenging the authority of the individual then running the Company and the validity of certain actions he took.
PSI claims that because Judy prevailed in the litigation, the Company was able to preserve its ownership of two blocks of wireless licenses that constituted the Company's primary assets. The Company subsequently sold one block of licenses for $60 million, and PSI values the other block of licenses at $40 million. PSI contends it should receive one third of the after-tax value of the aggregate $100 million benefit. PSI posits a tax rate of 40%, yielding an after-tax benefit of $60 million, and an award of $20 million.
As a fallback, PSI contends it should recover $4,059.99.12, representing expenses that PSI claims to have incurred. PSI contends it actually incurred $8,257,717.52 in expenses, but during a period when individuals affiliated with PSI also held positions with the Company, it made partial payment of the amounts due, leaving the amount PSI now seeks.
The original $8,257,717.52 appears grossly inflated. Of the total amount, PSI claims to have expended $4,198,618.40 for lawyers and other law-related expenses, but PSI admits that not all of those fees and expenses were for Judy's litigation efforts in thisaction. A substantial portion of the fees went to fund lawyers for individuals who PSI encouraged to intervene and assert personal claims for equity or other securities from the Company. Another substantial portion of the fees were for lawyers who appeared in proceedings before the Federal Communications Commission (the "FCC"), where PSI took positions adverse to the interests of the Company.
The remaining $4,059,099.12 that PSI claims to have incurred is even worse. This amount includes virtually every business expense that PSI incurred to manage its operations over a period of eight years. It includes items such as the compensation that PSI paid to members of its management committee, commissions that PSI paid for its own financing transactions, and fees that PSI paid to hire an executive search firm. It includes routine corporate expenses such as accounting services, bookkeeping costs, banking fees, and office supplies. It even includes the interest PSI paid to borrow the funds that it used to pay for its other expenses.
For multiple reasons, PSI's motion is denied. First, PSI lacks standing to seek a fee award. PSI was neither the plaintiff nor plaintiff's counsel. PSI gratuitously financed litigation nominally being conducted by Judy. As a volunteer financier, PSI cannot seek an equitable fee award.
Second, PSI cannot obtain a fee award because it financed Judy's litigation as part of an attempt to take over the Company. This court has held that parties cannot obtain an equitable fee award when they use litigation in support of a takeover.
Third, PSI cannot establish the necessary causal connection between its litigation financing and the value of the licenses. There are too many intervening steps for PSI to be able to claim responsibility for $100 million in value.
Finally, PSI cannot recover a quantum meruit award, and in any event cannot recover all of the expenses it has claimed. Under no circumstances can PSI recover the amounts it spent to hire lawyers for individuals to pursue personal claims against the company or for lawyers to appear before the FCC and take positions adverse to the Company. Nor can PSI recover the myriad of ordinary business expenses that it has included in its petition.
PSI has made its fee application in a case that was litigated through trial to judgment. The facts are drawn from a combination of sources, including (i) the trial record and the court's earlier rulings in the case, (ii) the submissions made by the parties in connection with the application for an award of attorneys' fees and expenses, and (iii) pertinent public records that are subject to judicial notice.1
The factual background is lengthy because of the strange nature of PSI's application, which seeks in the first instance to obtain a "fee award" equal to one-third of the value of the Company's assets, and in the alternative to recover eight years worth of legal and business expenses. These broad claims make it is necessary to provide the background required to place those requests in context.
The Company is a Delaware corporation formed on January 15, 1998. It has a complex and troubled history.
The Company arose from a scheme by Pendleton C. Waugh to acquire a critical mass of specialized mobile radio licenses for sites located in the U.S. Virgin Islands and Puerto Rico, then flip them within six months to a year to Telecellular, Inc., an aspiring cellular telephone operator. At the time, Waugh was President and a director of Telecellular. Due to the various means by which the FCC historically licensed spectrum, many of the licenses that Waugh sought to acquire were held by individuals having varying degrees of financial and legal sophistication.
Waugh had a lengthy and checkered record in the cellular telephone industry. In 1990, he formed Express Communications, Inc. ("Express"), a company that also engaged in the business of acquiring wireless licenses. In 1993, federal authorities began investigating Express's activities. In 1994, Waugh was indicted in the United States District Court for the Northern District of Texas on one count of conspiracy to structure financial transactions to evade securities and banking reporting requirements and onecount of money laundering, both felonies.2 Waugh pled guilty to the conspiracy count, and the money laundering count was dismissed.3 In 1995, he was sentenced to twenty-one months in federal prison (later reduced to fifteen months), three years probation, and the payment of $20,000 in fines.4 In 1997, during the same period when Waugh was developing his plan for the Company, the United States District Court for the District of Columbia granted summary judgment against Waugh in a civil action brought by the SEC for securities law violations relating to Express. Waugh was ordered to disgorge nearly $13 million in illegally acquired funds and was enjoined permanently from violating various securities laws.5
Waugh brought Charles M. Austin into his buy-and-flip scheme. Austin previously had worked to acquire licenses for PCC Management Corp., another of Waugh's companies. Evidencing his own regard for legal compliance, Austin never bothered to file a state or federal income tax return between 1997 and 2010.
Waugh and Austin brought in Jay Bishop, whose record in the cellular industry rivaled Waugh's. In the early 1990s, Bishop was one of three stockholder principals in Continental Wireless Cable Television, Inc. ("Continental"), another company that engaged in the business of acquiring wireless licenses. In 1994, the SEC filed anenforcement action against Continental for defrauding investors, obtained a restraining order against Continental, seized its assets, and froze the bank accounts of the company and its principals.6 Bishop was eventually prosecuted by the IRS and convicted in 2001 of two felonies: conspiracy to defraud the IRS and attempted tax evasion while a principal of Continental. Bishop was sentenced to thirty months in federal prison.
Bishop added Charles Guskey to the mix. Guskey had worked for Continental as one of Bishop's accountants.
Among the four original participants, Austin's role was to serve as the front man for the Company. Earlier in this case, after trial, this court made the following finding of fact:
[B]ecause Bishop and Waugh were convicted felons, and because the FCC looks askance at felons and fraudsters controlling (directly or indirectly) cellular communications licenses, Waugh, Bishop, Guskey, and Austin sought to conceal Waugh and Bishop's involvement. To that end, Austin always acted as the front man for the group, and Waugh and Bishop never held any official positions with PCSI. Despite foregoing any official roles, Waugh and Bishop in fact acted as principals of PCSI, participated in its operations, and made decisions on behalf of PCSI.
Beginning in 1998, the Company successfully assembled eighty-six licenses to operate a cellular telephone business in Puerto Rico and the U.S. Virgin Islands (the"PR/VI Licenses"). Nine of the PR/VI Licenses subsequently expired for lack of renewal. The Company assembled the PR/VI Licenses by acquiring them from individuals in return for packages of consideration that typically...
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