Ramsey v. Georgia Southern University Advanced Development Center, et al., No. 305, 2017, C.A. No. N14C-01-287 ASB (Del. June 27, 2018).

On June 27, 2018, the Supreme Court of the State of Delaware issued a fifty-seven-page opinion in the above-mentioned case, creating new precedent for Delaware employer liability in secondary or “take-home” asbestos cases. Below is a summary of both the relevant factual and procedural background, as well as Chief Justice Strine’s opinion.

The plaintiff’s spouse, Robert Ramsey, worked for Haveg Industries, Inc. at its industrial plant for twenty-four years. From 1967 to 1979, Mr. Ramsey regularly handled asbestos-containing products manufactured by Georgia Southern University Advanced Development Center and Hollingsworth and Vose Company as part of his job as a maintenance worker at Haveg. Throughout this period his wife, Plaintiff, Dorothy Ramsey, washed Mr. Ramsey’s asbestos-covered clothing. Mrs. Ramsey eventually developed lung cancer, from which she subsequently died in 2015. Her estate sued the manufacturers of the asbestos products, alleging that the cancer was caused by Mrs. Ramsey’s exposure to her husband’s asbestos-riddled clothing. In granting the appellee manufacturers’ motions for summary judgment and dismissing the claims, the Delaware Superior Court relied primarily on two previous Delaware Supreme Court cases, Riedel v. ICI Americas Inc., 968 A.2d 17 (Del. 2009), and Price v. E.I. DuPont de Nemours & Co., 26 A.3d 162 (Del. 2011), in which the Delaware Supreme Court held that an employer owed no duty to non-employees, including their spouses, for failure to adequately warn of the dangers of handling clothing exposed to asbestos, minus a special relationship between the employer and the non-employee, because the failure to warn was nonfeasance rather than misfeasance. Mrs. Ramsey appealed, arguing that in distinguishing an employer from a manufacturer: 1) a manufacturer of asbestos products creates the danger of asbestos-related harm and therefore commits misfeasance by failing to warn foreseeable victims; and 2) to the extent the holdings in Riedel and Price would block recovery on take-home claims against manufacturers, those holdings should be overruled. The appellant defendants argued that Riedel and Price controlled, and prevented Mrs. Ramsey from recovering from manufacturers because they are even further removed from an employer’s spouse than the employer itself. Additionally, they argued that allowing such claims would impose upon manufacturers an essentially limitless duty to warn that would be both impractical and unfair.

The Supreme Court acknowledged the compelling arguments on each side, but ultimately agreed with Mrs. Ramsey. First, the Court held that manufacturers owe a duty to warn to reasonably foreseeable users of their products, stating that “[b]ecause the risk of harm from take-home asbestos exposure when laundering asbestos-covered clothing is reasonably foreseeable, a plaintiff in Mrs. Ramsey’s position has a viable claim against a manufacturer . . . . Ramsey. at p. 44 of 57. However, the Court limited this duty by stating that the “sophisticated purchaser” defense would cut off a manufacturer’s liability to ultimate end users once the manufacturer has warned the
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DelawareUnder Delaware law, when a derivative plaintiff loses its stockholder status as the result of a merger, the plaintiff usually also loses its standing to pursue a derivative suit on behalf of the corporation.  This rule is subject to only two limited exceptions: (1) when “the merger itself is the subject of a claim of fraud, being perpetrated merely to deprive shareholders of the standing to bring a derivative action,” and (2) when “the merger is in reality merely a reorganization which does not affect plaintiff’s ownership in the business enterprise.”  Lewis v. Ward, 852 A.2d 896, 902 (Del. 2004) (clarifying exceptions identified in Lewis v. Anderson, 477 A.2d 1040 (Del. 1984)).  In a decision revisiting a 2010 mining tragedy in which dozens of miners were killed, the Delaware Court of Chancery recently concluded that neither exception applied to preserve the standing of stockholders of Massey Energy Company (“Massey”) to bring derivative claims, and that plaintiffs had not brought direct claims for an “inseparable fraud.”  In re Massey Energy Co. Derivative & Class Action Litig., Consol. C.A. No. 5430-CB (May 4, 2017).

Backstory: The Court of Chancery Refuses To Enjoin The Massey-Alpha Merger

In 2011, stockholder plaintiffs attempting to enjoin a merger between Massey and Alpha Natural Resources, Inc. (“Alpha”) argued that Massey should be forced to assume and transfer derivative claims against certain Massey fiduciaries to a trust for the benefit of Massey stockholders, rather than allowing the claims to pass to Alpha.  While finding “little doubt” that plaintiffs’ derivative claims could survive a motion to dismiss, the Court also concluded that plaintiffs were likely to lose standing to pursue those claims if the merger was consummated.

The Court of Chancery noted that a corporation reasonably may conclude that the risks arising from a lawsuit outweigh the potential risk-weighted recovery, even when the corporation clearly has been harmed.  As a practical matter, a corporation with strong claims against former executives may choose not to pursue those claims for valid reasons, including a wish to avoid pleading formal admissions that potentially could be used against the corporation by third parties, such as insurance carriers, government agencies, and employees and other individuals with personal injury and other claims.  Delaware courts have declined to hold that these kinds of dilemmas – which arise because the corporation itself is conflicted, and not because the directors suffer a personally disabling conflict of interest – justify excusing a would-be plaintiff from the requirement of a pre-suit demand.  In its injunction opinion, the Court in Massey similarly refused to create another exception to the general rule that a merger extinguishes the ability of a former stockholder plaintiff to pursue claims derivatively on behalf of the corporation.  In addition, the Court noted that if a potential buyer cannot rely on the fact that a merger will eliminate derivative claims, bids for troubled assets will be reduced, if not deterred completely, because the buyer must discount the value of the assets to reflect the uncertainty. 
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supreme-court-building-1209701_1280 On February 28, 2017, the Missouri Supreme Court joined a growing list of tribunals to apply a strict reading of the United States Supreme Court’s seminal ruling in Daimler AG v. Bauman, 134 S. Ct. 746 (2014). In State ex rel. Norfolk So. Ry. Co. v. Hon. Colleen Dolan, No. SC95514, the Missouri Supreme Court held that Missouri courts lack the requisite personal jurisdiction, either specific or general, over a non-resident defendant, Norfolk Southern Railway Company, in a claim brought by a non-resident plaintiff who asserted a Federal Employer’s Liability Act (FELA) violation arising from his employment by Norfolk Southern in the State of Indiana. The ruling marks a significant victory for corporate defendants seeking to combat forum shopping by plaintiffs, the practice of bringing cases in jurisdictions which are more likely to provide a favorable judgment or a more lucrative verdict.

The plaintiff, Indiana resident Russell Parker, argued that Missouri courts had both general and specific jurisdiction over Norfolk based on the company’s contacts with the state. Specifically, the plaintiff cited Norfolk’s ownership of approximately 400 miles of railroad track in the state, 590 employees in the state, and approximately $232,000,000 in annual revenue from the company’s operations in Missouri. As grounds for its decision, the court found that the plaintiff’s allegations did not arise from or relate to Norfolk’s activities in Missouri so as to give rise to specific jurisdiction, nor were Norfolk’s operations in the State sufficient to give rise to a Missouri court’s exercise of general jurisdiction over a defendant such as Norfolk; a company incorporated in and with principal place of business in Virginia.

Citing the Second Circuit’s decision in Brown v. Lockheed Martin Corp., 814 F.3d 619, 627-30 (2d Cir. 2016), wherein .05 percent of the defendant’s employees and no more than .107 percent of total revenue were derived from the defendant’s activities in the state of Connecticut, the Missouri Supreme Court concluded that Norfolk’s activity in Missouri represents “a tiny portion” of the company’s business activities nationwide. Specifically, the court noted that the revenue derived from Missouri is approximately 2 percent of Norfolk’s total revenues; the tracks owned and operated in Missouri constitute approximately 2 percent of the tracks Norfolk owns and operates nationally; and the company’s Missouri-based employees account for only about 2 percent of its total employees.

The Missouri Supreme Court’s decision is particularly newsworthy for its refusal to find general personal jurisdiction based on a non-resident company’s appointment of a registered agent in the state. In its ruling, the court rejected the plaintiff’s argument that Norfolk’s compliance with Missouri’s mandatory business registration requirements for foreign corporations amounted to consent to the exercise of general personal jurisdiction by Missouri courts. To the contrary, the court held that as the relevant section of law provided only that registration is consent to service of process against non-resident corporations, “the registration statute does not provide an independent basis for broadening Missouri’s personal jurisdiction to include suits unrelated
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architecture-22039_960_720“Veil piercing” is an equitable remedy that allows a plaintiff with a claim against an entity to obtain relief from the entity’s owners, in spite of laws providing for limited liability.  When the owners provide personal guarantees or otherwise contract around liability protections, or when the owners are sued in their own right based on their own conduct, it is not necessary to pierce a veil of limited liability.  True veil piercing – where the owners are asked to stand in for acts of the entity – is an extraordinary remedy to be reserved for the most extreme cases.

Courts generally have reviewed several factors, with varying degrees of emphasis, when determining whether to pierce the veil of a corporation.  These have included the existence of fraud, adherence to “corporate formalities” such as holding and documenting meetings, the level of capitalization, whether a dominant stockholder siphoned funds from the corporation, and whether investors are so active in the management of the corporation that the corporation is their “alter ego” or “instrumentality.”  Fraud may, depending on the circumstances, provide an independent basis for the liability of stockholders and others on the grounds that individuals are being found liable based on their own conduct.  Other factors supporting veil piercing also often stand in as proxies for fraud, or reasons to suspect fraudulent behavior.

As has become increasingly clear, Delaware “alternative entities” such as limited partnerships and limited liability companies are not the same thing as corporations.  While many of the same fiduciary principles applicable to corporate fiduciaries may apply under certain circumstances to the fiduciaries of an alternative entity, courts must remain sensitive to distinctions in entity law.  In the context of veil piercing, these distinctions suggest that a Delaware LLC should not be subject to true veil piercing at all, as opposed to the imposition of liability under standard concepts of fraud, fraudulent conveyance, etc.; and that assuming the LLC’s veil may be pierced, any piercing should be subject to different standards than those applicable to piercing the corporate veil.

Section 102(b)(6) of the Delaware General Corporation Law (“DGCL”) states that a certificate of incorporation “may” contain “[a] provision imposing personal liability for the debts of the corporation on its stockholders to a specified extent and upon specified conditions; otherwise, the stockholders of a corporation shall not be personally liable for the payment of the corporation’s debts except as they may be liable by reason of their own conduct or acts.”  8 Del. C. § 102(b)(6).  Thus, under the DGCL, the default rule is that stockholders are not personally liable for corporate debts based on their ownership of stock, but may be liable as a result of their own conduct, and may also agree in the charter to be liable to a specified extent and upon specified conditions.

Section 18-303(a) of the Delaware Limited Liability Company Act (“DLCCA” or “Delaware LLC Act”) states that

Except as otherwise provided by this chapter, the debts, obligations and liabilities of a limited liability company,


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Delaware Supreme Court
Delaware Supreme Court

The Delaware Supreme Court recently held that the plain language of an employment agreement and an LLC agreement prevented an LLC from interjecting a fraudulent inducement defense into a summary proceeding for the advancement of litigation expenses under Section 18-108 of the Delaware LLC Act.

Trascent Mgmt. Consulting, LLC v. Bouri, No. 126, 2016 (Del. Nov. 28, 2016). In Trascent, an LLC brought claims against a terminated executive for breach of his employment agreement. The executive then counterclaimed for advancement of his litigation expenses under his employment agreement and the operating agreement of the LLC, both of which contained nearly identical language stating that, “[u]nless a determination has been made by final, nonappealable order of a court of competent jurisdiction that indemnification is not required, [the LLC] shall, upon the request of [the indemnitee], advance or promptly reimburse [the indemnitee’s] reasonable cost of investigation, litigation or appeal, including reasonable attorneys’ fees [subject to the condition that the indemnitee provide a written undertaking to repay advancements if a court of competent jurisdiction ultimately decided he was not entitled to indemnification].” Having agreed to this language, the LLC “knew it agreed to provide a right, subject to expedited specific enforcement, and it could not reasonably believe that it could deny that right simply by alleging that the contract was invalid.”

Under those circumstances, the Court explained, allowing the LLC to interpose a defense of fraudulent inducement would be inconsistent with the contractual language, would defeat the purpose of a statutory advancement proceeding by inserting a “plenary claim” into what the Court noted should be a summary proceeding, and would impair the public policy interests served by contractual advancement provisions. In dicta, the Court also noted that equity supported its ruling because the LLC had employed the executive for 16 months and then sued him under the same contract that it claimed was invalid.

Link to ruling:

http://courts.delaware.gov/Opinions/Download.aspx?id=249390
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