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American Bar Association - Defending Liberty, Pursuing Justice

Fall 2008

Vol. 5, No. 1

Business Law

 

Non-Delaware Lawyers Can Be Sued for Giving Advice on Delaware Law

In Sample v. Morgan, 2007 WL 4207790 (Del. Ch. Nov. 27, 2007), the Delaware Chancery Court provides a scholarly and practical analysis of Delaware’s long-arm statute. The court determined that a non-Delaware lawyer and a non-Delaware law firm who provided advice on Delaware law to a Delaware corporation, and who caused a charter amendment to be filed with the Delaware Secretary of State, are both subject to personal jurisdiction in Delaware courts. This decision should be of great interest to the many lawyers all over the country who give advice on a daily basis about Delaware corporate law. (Some wags suggest that there are more lawyers in New York City who give advice on Delaware corporate law than all the lawyers in the state of Delaware who do so.)

This opinion also addresses the issue about when a corporate officer can conspire with the corporation he or she serves, and under what circumstances a corporate act can also create liability for those who caused the corporation to act. Corporate lawyers risk liability by entangling themselves in schemes that may be viewed as having entrenchment of incumbent management as their goal as opposed to actions taken in the best interests of the corporation.

The court itemized the factual foundation on which the issue presented was based. The non-Delaware lawyer and his non-Delaware firm:

  1. prepared and caused corporate documents to be filed in Delaware;
  2. advertised themselves as nationwide experts in matters of corporate governance;
  3. provided extended legal advice regarding Delaware law to a Delaware company;
  4. undertook to direct the defense of the Delaware lawsuit related to the advice on Delaware law; and
  5. faced allegations of aiding and abetting top managers in breaching fiduciary duties based on Delaware law.

In connection with finding that a non-Delaware lawyer may be sued on claims arising out of providing advice and services to a Delaware corporation, the court reasoned that Delaware has an interest in ensuring that Delaware corporations and their stockholders have access to its judicial system. Extensive factual details about this case are provided in an earlier opinion in the case that outlines a scheme in which the court described some of the directors as “unwitting and uninformed accomplices.” See Sample v. Morgan, 914 A.2d 647 (Del. Ch. Jan. 23, 2007).

The court described as a “graceless position” the non-Delaware lawyer’s argument that it would be “constitutionally aggrieved” if the suit proceeded in Delaware. The position was belied by his overt actions in providing a Delaware corporation advice relating to Delaware law. Delaware’s long-arm statute applied in this case because the non-Delaware lawyer transacted business in the state by causing the filing of the certificate with the Delaware Secretary of State and by providing a broad range of services to the board and officers of a Delaware corporation. Additionally, a due process argument was not viable because when a Delaware corporation is financially injured by the faithless conduct of its agents, the corporation is injured in its legal home for purposes of the long-arm statute.

The court acknowledged that the facts of the case were unusual, but warned that “lawyers and law firms, like other defendants, can be sued in [Delaware] if there is a statutory and constitutional foundation for doing so.” The court also noted that the non-Delaware lawyer’s assertion that he had “no cause to enter Delaware nor did he file any documents with any court or agency in Delaware in connection with this representation” was implausible because of his direct facilitation of filing the certificate amendment.

Moreover, the jurisdictional issue was impacted by the non-Delaware firm's active role in drafting the briefs in the summary judgment motion in defense of the claims against it. Even its Delaware local counsel had to concede that at least one of the arguments in the non-Delaware firm's brief lacked any “plausible basis in law or logic.”

The court found it unnecessary to rely on the conspiracy theory of personal jurisdiction in light of the actions being committed by the non-Delaware lawyer himself. The court rejected the argument that it was really the corporation that committed the alleged actions in Delaware, because the lawyer allegedly was acting only as the corporation's agent. The court analyzed the situation as follows:

When well-pled facts support the inference that a person caused a corporation to take jurisdictionally-significant conduct in Delaware and that conduct is an element in a scheme by corporate fiduciaries to unfairly advantage themselves at the expense of a Delaware corporation and its stockholders, our case law has consistently held that the long-arm statute may be used to serve that person.

In essence, if a lawyer or law firm facilitates or arranges, directly or indirectly, through its use of Delaware situated agents the filing of corporate documents with the Delaware Secretary of State and those facilitated transactions are ultimately challenged, Delaware courts have repeatedly recognized that these acts alone are sufficient to constitute the transaction of business under the Delaware long-arm statue. The Delaware Supreme Court has opined that trial courts must provide a broad reading to the terms of the long-arm statute in order to effectuate the statute's intent.

In addition, the non-Delaware lawyer attempted to assert the “intra-corporate conspiracy doctrine”and/or the “agent's immunity rule”where corporate officials are deemed incapable of conspiring with the corporation they serve and/or that they should not be held personally liable when acting in their official capacity. However, the court observed that the alleged conspiracy did not include the corporation. Rather, the corporation was a victim of the scheme between the lawyer and the directors whose plan was to “enrich”and “entrench”themselves at the expense of the corporation. Further, the court explained:

The doctrine on which the moving defendants rely does not even apply on its own terms. Well-pled facts support the inference that the moving defendants were not acting within the appropriate scope of their agency. The moving defendants were in fact acting to unfairly advantage the Top Managers at the expense of their real client, the company.

The court also included a brief analysis of decisions discussing the viability of an intra-corporate conspiracy argument involving a corporation and its agents. “It is well-settled that ‘a conspiracy between a corporation and its agents, acting within the scope of their employment, is a legal impossibility.’ . . . The policy behind the intra-corporate conspiracy doctrine “is to preserve independent decision-making by business entities and their agents free of the pressure that can be generated by allegations of conspiracy.” See Chain Store Maint., Inc. v. Nat’l Glass & Gate Serv. Inc., 2004 WL 877599 at *11 (R.I. Super. 2004). “Because an attorney is an alter ego of his or her client, a conspiracy between the attorney and the client is not possible.” See Roth v. La Societe Anonyme Turbomeca France, 120 S.W.3d 764, 778 (Mo. App. 2003).

In sum, the court reasoned that Delaware’s public interest would not be served by adopting a rule that insulates advisors of managers of a Delaware corporation from accountability if the advice assisted managers of the corporation in breaching their fiduciary duties.

Francis Pileggi is the founding partner of the Wilmington, Delaware, office of Fox Rothschild LLP. His e-mail is . Francis G.X. Pileggi’s blog at www.delawarelitigation.com summarizes all the key decisions on corporate and commercial law from the Delaware Court of Chancery and Delaware Supreme Court. Danielle Blount is an associate in the firm’s Wilmington office. Her e-mail is .

Note

“Keeping Current: Jurisdiction: Non-Delaware Lawyers Can Be Sued for Giving on Delaware Law” by Francis G.X. Pileggi and Danielle S. Blout, published in  Business Law Today, Volume 17, No. 4, March/April 2008.  Copyright © 2008 by the American Bar Association. Reprinted with permission.

© Copyright 2008, American Bar Association.