IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

THE MARILYN ABRAMS LIVING TRUST, ) ) Plaintiff, ) ) v. ) C.A. No. 12829-VCL ) POPE INVESTMENTS LLC, POPE ) INVESTMENTS II, LLC, and CHINA ALARM ) HOLDINGS ACQUISITION LLC, ) ) Defendants. )

OPINION

Date Submitted: May 16, 2018 Date Decided: May 29, 2018

Thomas E. Hanson, Jr., BARNES & THORNBURG LLP, Wilmington, Delaware; Jeffrey R. Blackwood, BRADLEY ARANT BOULT CUMMINGS LLP, Jackson, Mississippi; Attorneys for Plaintiff.

Jonathan M. Stemerman, ELLIOTT GREENLEAF, P.C.; Attorney for Defendants.

LASTER, V.C.

The Marilyn Abrams Living Trust (the “Trust”) sought books and records from the defendant entities (the “Companies”). The Trust made multiple requests for information, but the Companies denied each request in its entirety. The Trust filed this action and prevailed at trial. In addition to ruling in the Trust’s favor on the merits,1 my post-trial decision found that the Companies had raised bad-faith arguments to contest the Trust’s

clearly established right to information, thus warranting an award of expenses under the bad-faith exception to the American Rule.^[2] After the Companies pursued a motion for reargument, which was denied, the parties conferred regarding the amount of the award. They could not agree, so the Trust moved to quantify it. I granted the Trust a total award of $317,717.20.3

The Companies appealed, challenging both the outcome on the merits and the award of expenses. The Delaware Supreme Court affirmed.^[4]

The Trust has now moved to recover additional expenses. The Trust seeks a total of $94,583.58, comprising (i) $65,574.78 incurred successfully defending the appeal and (ii)

$29,008.80 incurred at the trial level that the Trust had not been able to submit as part of its previous application. The Companies oppose the motion in its entirety.

Whether the Trust can recover these categories of expenses at this time appears to present issues of first impression under Delaware law. This decision concludes that when a trial court has awarded a party expenses under the bad-faith exception to the American

Rule, and that party subsequently defends the trial court’s ruling successfully on appeal, the trial court lacks authority after the appeal to award the expenses that the party incurred defending the appeal. This decision similarly concludes that when a trial court has awarded a party expenses under the bad-faith exception to the American Rule, and the litigation runs its course at the trial level, resulting in a judgment that is final for purposes of appeal, then that party cannot subsequently ask the trial court for a supplemental award if it later realizes that it left certain expenses out of its previous request or determines that it subsequently incurred additional amounts at the trial level. The Trust’s application is therefore denied.

I. EXPENSES INCURRED ON APPEAL

The Trust seeks in its application to recover expenses incurred defending the Companies’ appeal. As the Trust sees it, the appeal was frivolous and a continuation of the Companies’ bad-faith resistance to the Trust’s requests for books and records.

In my view, a trial court lacks authority to award expenses incurred on appeal on the theory that the appeal was frivolous, absent some direction by the Delaware Supreme

Court to undertake that task. Supreme Court Rule 20(f) recognizes that “[t]he Court may in any case involving a frivolous appeal, enter a special order assessing costs . . . as justice may require.”5 The reference to “[t]he Court” is to the Delaware Supreme Court, not other courts.

Trial courts in this state do not generally enforce the Delaware Supreme Court’s rules. The only high court rules that this court typically applies are Supreme Court Rules

41 and 42, which address, respectively, the process by which a trial court certifies a question of law for the Delaware Supreme Court’s consideration and the process by which

a trial court certifies an interlocutory appeal. Both rules speak directly to the trial court and tell the trial court what to do. They do not imply that a trial court has jurisdiction to administer other rules. If anything, the specific direction to the trial court in Rules 41 and 42 implies the opposite about other Supreme Court rules.

For the contrary proposition, the Trust relies on four cases: Gatz Properties, LLC v. Auriga Capital Corp.,6 Scion Breckenridge Managing Member, LLC v. ASB Allegiance

Real Estate Fund,7 Wheeler v. Wheeler,8 and Council of Wilmington Condominium v. Wilmington Avenue Associates, L.P.9 None of these decisions resemble the scenario presented here.

In Gatz, the Delaware Supreme Court directed the trial court to consider an application for expenses based on an allegedly frivolous appeal. The appellees in Gatz moved before the Delaware Supreme Court to recover expenses under Supreme Court Rule

20(f). The Delaware Supreme Court noted that “[t]his Court has authority to award attorney fees in appropriate cases.”10 But the high court chose to have the Court of Chancery address the application in the first instance, explaining:

In this case, however, whether the appellants acted in bad faith in pursuing this appeal is a question possibly requiring findings of fact that are better addressed by the Court of Chancery. We, therefore, deny the appellees’ motion without prejudice to their

6 59 A.3d 1223 (Del. 2012) (per curiam). 7 68 A.3d 665 (Del. 2013). 8 636 A.2d 888 (Del. 1993). 9 1999 WL 1223792 (Del. Super. Nov. ^[3], 1999).

right to pursue in the Court of Chancery their claim for attorney fees on appeal.^[11]

The superior tribunal in Gatz thus determined that the trial court should assess the Rule

20(f) application in the first instance because of likely factual issues. In my view, the Gatz case does not suggest that a trial court always has the ability to consider a post-appeal

application for expenses based on a claim that the appeal was frivolous for purposes of Rule 20(f). It rather illustrates the obvious fact that that the Delaware Supreme Court can

delegate to this court the task of taking the first cut at ruling on a Rule 20(f) application. In this case, the Trust did not make a Rule 20(f) application before the Delaware Supreme

Court, and the Delaware Supreme Court did not instruct this court to take a first cut at ruling on a Rule 20(f) application.

The Scion decision did not involve an allegedly frivolous appeal; it involved a remand to consider an alternative basis for expense-shifting at the trial level. Originally, at the trial level, the plaintiffs sought to recover their expenses under prevailing-party

provisions in the governing agreements, and I granted the application.^[12] On appeal, the Delaware Supreme Court held that the prevailing-party provisions did not apply.^[13] The high court then turned to the appellees’ argument that there were separate and independent bases to affirm the fee award, either as an award pursuant to 10 Del. C. § 5106 or under the bad-faith exception to the American Rule. The Delaware Supreme Court rejected the potential application of Section 5106,14 but left open the possibility of fee shifting under the bad-faith exception. Rather than ruling in the first instance on that theory, the high court remanded the case so that I could address it in the first instance.^[15]

At the same time, the high court denied an “informal application for an award of attorneys’ fees for this appeal,” made in a single sentence of the appellees’ answering

appellate brief.^[16] The high court reasoned that it would not rule on such a request “in the absence of a formal motion made and presented in accordance with the Supreme Court rules.”17 Scion thus does not imply that a trial court has the power to consider an application for expenses based on an allegedly frivolous appeal. It rather indicates that the Delaware courts will not entertain an application for expenses for an allegedly frivolous appeal

without a formal Rule 20(f) motion. In terms of the further proceedings on remand, the Scion decision illustrates a trial court’s obligation to address an issue in accordance with the Delaware Supreme Court’s mandate. In this case, the Trust did not make a Rule 20(f) motion, and the Delaware Supreme Court did not remand the case with instructions for me to consider any alternative bases for shifting expenses.

The Wheeler decision involved a prolonged divorce proceeding in the Family Court that witnessed an improvident interlocutory appeal, a subsequent appeal from the final judgment, and a further appeal after the Family Court ruled on a series of ancillary matters.

At each stage, the Family Court ruled in favor of the husband, and the wife appealed. The Delaware Supreme Court dismissed the improper interlocutory appeal, affirmed the Family

Court’s ruling on the merits, and affirmed the Family Court’s rulings on the ancillary matters. After each appeal, the Family Court granted the husband’s motion for the expenses incurred litigating the appeal. After the final award, the wife appealed again, contending that the Family Court lacked jurisdiction to award expenses for an appeal. The Delaware

Supreme Court affirmed all of the Family Court’s awards, citing a statute that gives the Family Court authority to shift expenses from one party to another.^[18] The high court held

that “[t]he unambiguous language of the statute confers original jurisdiction upon the Family Court to award attorney’s fees following an appeal to this Court” and that “[t]he

Family Court’s jurisdiction to award attorney’s fees following an appeal is not dependent upon a remand from this Court.”19 In this case, there is no similar statute that would give this court jurisdiction to award expenses following an appeal.

Last, in Wilmington Condominium, the Superior Court extended the logic of Wheeler to a situation in which a party recovered expenses at the trial level pursuant to a prevailing-party provision in an agreement. After the party prevailed again on appeal, the party returned to the trial court and sought additional expenses. The trial court concluded that the contractual prevailing-party provision continued to operate and entitled the party to recover expenses for prevailing on appeal.^[20] In this case, the Trust has not cited a prevailing-party provision that could operate to the same effect.

None of the Trust’s cases support the proposition that this court has inherent authority to entertain an application to recover expenses for a frivolous appeal. The cases instead suggest that unless a party moves for expenses pursuant to Rule 20(f), and unless the Delaware Supreme Court instructs the trial court to address the motion in the first

instance, the trial court lacks jurisdiction to consider the application. A trial court may, however, award expenses if the party seeking them has an independent right of recovery, such as pursuant to a statute (Wheeler) or a contractual prevailing-party provision

(Wilmington Condominium). The Trust invokes this court’s inherent authority, which is unavailing.

Federal authority points to the same conclusion.^[21] In Cooter & Gell v. Hartmarx Corp.,22 the United States Supreme Court considered whether a district court that had awarded sanctions against a defendant for asserting a counterclaim that violated Rule 11 of the Federal Rules of Civil Procedure could grant the injured plaintiff the additional

expenses that the plaintiff incurred defending the award on appeal. The Court held that the district court lacked the necessary authority because Rule 11 applied only to trial court

proceedings, not to appeals, and that “[i]f the appeal of a Rule 11 sanction is itself frivolous, Rule 38 gives appellate courts ample authority to award expenses.”23 Rule 38 of the Federal

Rules of Appellate Procedure addresses awards of expenses for frivolous appeals in a

manner analogous to Delaware Supreme Court Rule 20(f). The highest court in the land did not view the district court as having independent authority to administer Rule 38.

The Cooter & Gell decision also considered and rejected a related theory under which one line of decisions from the United States Courts of Appeals had awarded expenses that a party incurred successfully defending a Rule 11 sanction on appeal. Those decisions held that the party incurred the expenses on appeal because of the sanctioned pleading; hence the injured party should be able to recover those expenses and be made whole for the sanctioned conduct.^[24] The United States Supreme Court disagreed, endorsing instead the view of other circuits and holding that “[i]f the district court imposes Rule 11

22 496 U.S. 384 (1990).

sanctions on the plaintiff, and the plaintiff appeals, the expenses incurred in defending the award on appeal are directly caused by the district court’s sanction and the appeal of that

sanction, not by the plaintiff’s initial filing in district court.”25 The highest court in the land observed that this outcome “accords with the policy of not discouraging meritorious appeals” and also would help avoid “the undesirable effect of encouraging additional satellite litigation.”26 The Court recognized that its holding meant that a litigant who

benefited from a Rule 11 award would have to spend its own money to defend the award, but viewed that outcome as “a natural concomitant of the American Rule.”27

The Cooter & Gell decision is not binding as to matters of Delaware law.

Nevertheless, I find its reasoning persuasive, both for sanctions awarded under Rule 11 and for awards of expenses under the bad-faith exception to the American Rule.

In my view, the Trust cannot recover the expenses it incurred litigating the Companies’ appeal to the Delaware Supreme Court. That aspect of its motion is denied.

II. ADDITIONAL TRIAL-LEVEL EXPENSES

The Trust’s application also seeks to recover additional expenses incurred at the trial level before the appeal. The Trust either was billed for the pertinent amounts after it filed its motion or incurred the amounts after I quantified the award.

In my view, a trial court lacks authority to award additional expenses under the bad-

faith exception to the American Rule after entering a judgment that has become final for purposes of appeal. This is particularly true after the appeal has concluded, resulting in the final disposition of the case.

Since 1991, the Delaware Supreme Court has held that a final order remains interlocutory until any outstanding applications for expenses has been adjudicated.^[28] A trial court therefore cannot defer ruling on an application for expenses until after the merits

appeal is completed, unless the trial court first certifies its merits ruling as interlocutory or as a partial final judgment pursuant to Court of Chancery Rule 54(b).29 In the ensuing appeal from a final order, the Delaware Supreme Court can review both the merits and the award of expenses, as it did here, and can pass on both the propriety of the award and the amount.^[30]

To my mind, this legal framework counsels against permitting subsequent applications for additional expenses. For one, the subsequent application is inconsistent with the earlier final order being final. For another, the possibility of a follow-on application at the trial level undermines the Delaware Supreme Court’s ability to review the amount of the award of expenses, because the award could increase later. One answer to that problem might be to permit a second appeal after any additional award, but that solution would result in piecemeal appeals, which is contrary to Delaware Supreme Court policy.^[31] The high court’s requirement that applications for expenses be addressed before an order becomes final for purposes of appeal appears designed to minimize the potential for multiple appeals in the same case, with one appeal from the merits and another from the award of expenses. Permitting a later application for additional expenses would reintroduce this possibility.

As a general rule, the federal courts take a different approach to order finality by treating a trial court decision on the merits as final for purposes of appeal even if a party may file (or has filed) an application for expenses. ^[32] When the application involves a motion for Rule 11 sanctions, however, the United State Court of Appeals for the Third

Circuit has adopted a supervisory rule requiring that the Rule 11 motion be adjudicated before the judgment becomes final.^[33] The court reasoned that “[s]wift disposition of a Rule

11 motion is essential so that any ensuing challenge to it might be included with the appeal on the merits.”34 Although other federal courts have taken a different approach,35 the Third Circuit’s supervisory rule enforces an appellate regime for Rule 11 sanctions that resembles

Delaware’s. That policy choice reinforces my view that the amount awarded under the bad- faith exception to the American Rule should be determined before an order becomes final for purposes of appeal so that the appellate tribunal, here the Delaware Supreme Court, can pass upon both the legitimacy of the award and the amount.

When a party seeks to recover expenses on a basis other than Rule 11, the Federal

Rules of Civil Procedure provide that the party seeking expenses must file a motion to that effect within fourteen days after the judgment is entered, unless a statute or court order establishes a different framework.^[36] The notes of the Advisory Committee suggest several purposes for the short filing period. One is to ensure “that the opposing party is informed of the claim before the time for appeal has elapsed.”37 Another is to afford “an opportunity for the trial court to resolve fee disputes shortly after trial, while the services performed are freshly in mind.”38 The short time period “also enables the court in appropriate circumstances to make its ruling on a fee request in time for any appellate review of a dispute over fees to proceed at the same time as review on the merits of the case.”39

These policy interests apply equally to the Delaware courts, but must be evaluated within a regime in which the Delaware Supreme Court has held that an order is not final until the trial court has ruled on any fee application. In my view, for purposes of Delaware

law, these policy interests counsel in favor of not entertaining further applications for expenses after an order has become final. First, the federal policy interest in facilitating the possibility of a single, comprehensive appeal dovetails with the Delaware Supreme Court’s preference for unitary appeals. Second, the federal policy interest in giving a party notice of the expense application before that party must decide whether to appeal translates readily to the Delaware system. Although it did not matter in this case, a party might well take into account its liability for expenses when deciding whether or not to appeal. A party that chooses to forgo an appeal should not be exposed to a later application that would significantly increase its liability. Third, although the federal concern about promoting prompt review strikes me as a secondary consideration, it is nevertheless relevant. A post-

final-order application, particularly one filed after an appeal is over, may arrive after the trial court’s recollection of the proceedings has dimmed. While the trial court could refresh its recollection about the case, that step comes at a cost of judicial resources that could be expended on other matters.^[40]

Conversely, limiting a party to the amount of the award that it obtains before the appeal has the salutary effect of incentivizing counsel to bill their time, secure invoices from third-party suppliers, and otherwise bring the case to a conclusion. If a party needs more time before filing an application, it can request it.

Inevitably, there will be some frictional costs and slack in the system, and that will translate into a party bearing some portion of trial-level expenses that it otherwise might have recovered. No system will be perfect. In my view, a framework that limits a party to the expenses it sought and was awarded under the bad-faith exception to the American

Rule before the final judgment was rendered results in a more efficient litigation regime.

This decision need not address whether the same outcome would apply to a follow- on application for costs. The Delaware Supreme Court has held that a pending application for costs does not undermine the finality of a judgment, rendering that aspect of the analysis inapplicable.^[41] Nor would the same outcome necessarily hold for a follow-on application for expenses under a statute or contract that provides for recovery. Delaware precedent permits post-remand applications to recover expenses incurred on appeal under statutory or contractual prevailing-party provisions, which suggests a different calculus.^[42] In this

case, the Trust recovered expenses under the bad-faith exception to the American Rule, and this decision is limited to that scenario.

In my view, the Trust cannot recover additional expenses it incurred at the trial level before its appeal to the Delaware Supreme Court. That aspect of its motion is also denied.