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Sanctions: A Very Expensive Difference Between Aggressive and Bad Faith

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By Joshua Gelman, Esq.

Business divorces can be very difficult for those involved because, amongst other extensive reasons, the emotions of the parties can run very high. Parties, where a resolution is not reached, may understandably wish to be aggressive in righting perceived wrongs. When dealing with the breaking up of a closely held or family business, people have been known to stray from the reasonability that is often associated with other business disputes. While being aggressive in protecting one’s rights can be appropriate and commendable, aggression to the point of bad faith can be perilous to one’s case and costs.

In Ensing v. Ensing, Del. Ch., C.A. No. 12591, Slights, V.C. (Mar. 6, 2017), following an actual marital divorce, the parties wound up in a business divorce of related limited liability companies relating to an Italian winery and hotel. After trial, the Vice Chancellor utilized sanctions for bad faith litigation to teach a very important and very expensive lesson: “it is more time-consuming to clean up the pizza than to throw it.” Ensing at p. 37, n. 136 (quoting Auriga Capital Corp. v. Gatz Props., LLC, 40 A.3d 839, 882 (Del. Ch. 2012)). The Court awarded the plaintiff two-thirds of her attorney’s fees and costs as well as the entirety of her expert’s fees and costs.

The defendant, who was not identified as a member or officer on the operating agreements of either limited liability company at issue, was found to have sought to unlawfully seize the LLCs through the creation of what the court found to be a “sham document” and the use of a purportedly fictional accountant. In addition to multiple discovery disputes and contempt of an order, the plaintiff was forced to obtain an expert report on the illegitimacy of the sham document and the origin of the emails from the mysterious accountant. On the eve of trial, the defendant sought a continuance based upon a misrepresentation. When the attempted continuance failed, despite extensive discovery and litigation over the “sham document” that was the majority of defendant’s case, it was not relied upon.

The Vice Chancellor reasoned that sanctions were appropriate because the defendant “submitted false evidence, delayed proceedings by taking frivolous and inconsistent litigation positions and then awkwardly tried to ‘wash his hands’ of the bad faith by attempting to withdraw the offensive evidence at the zero hour when it was far too late.” Ensing at p. 36. In addition, amongst other things, the Court found the defendant improperly sent notice of a special meeting and then held that meeting without the plaintiff’s knowledge and requested at trial, without notice or explanation, the application of foreign law.

While the avoidance of bad faith behavior is an important take-away from this case, it is not the only lesson. While the original reasons are unstated in Ensing, the defendant was never named in the operating agreements for the limited liability companies at issue. Instead, the defendant sought to undo the operating agreement by asking the court to “to take notice of the fact that he was ‘the financial impetus behind the acquisition and operation of the vineyard’ and that he has always acted as the ‘de facto manager’” of the company. Ensing at p. 25. The court unsurprisingly found that argument unpersuasive because it conflicted with the unambiguous language of the agreement. This case offers a cautionary tale about the importance of carefully drafting organizational documents that reflect the interests and intent of those involved to make sure that the rights of the interested parties are protected not just on day one but day 1,001 and thereafter.

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