How Broad Was That Bylaw?

by Allen Matkins
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In yesterday’s posting, I noted a recent Form 8-K filing that discloses the adoption of a fee-shifting bylaw.  In  ATP Tour, Inc. v. Deutscher Tennis Bund, 2014 Del. LEXIS 209 (Del. May 8, 2014), the Delaware Supreme Court held that a fee-shifting provisions in a non-stock corporation’s bylaws can be valid and enforceable under Delaware law.  In reaching this conclusion, the Court said:  ”A bylaw that allocates risk among parties in intra-corporate litigation would also appear to satisfy the DGCL’s requirement that bylaws must ‘relat[e] to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.’”  Note that the Court held that a fee-shifting bylaw “can be valid and enforceable”.  Thus, the Court only addressed the question of facial validity – it expressly disclaimed any conclusions on either the adoption or use of the bylaw in question.

In my review of the bylaw at issue in the case, it seems to me that it is so broadly worded that it arguably covers situations unrelated to the business of the corporation et cetera.  Here is the bylaw as quoted in the Court’s opinion:

In the event that (i) any [current or prior member or Owner or anyone on their behalf ("Claiming Party")] initiates or asserts any [claim or counterclaim ("Claim")] or joins, offers substantial assistance to or has a direct financial interest in any Claim against the League or any member or Owner (including any Claim purportedly filed on behalf of the League or any member), and (ii) the Claiming Party (or the third party that received substantial assistance from the Claiming Party or in whose Claim the Claiming Party had a direct financial interest) does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then each Claiming Party shall be obligated jointly and severally to reimburse the League and any such member or Owners for all fees, costs and expenses of every kind and description (including, but not limited to, all reasonable attorneys’ fees and other litigation expenses) (collectively, “Litigation Costs”) that the parties may incur in connection with such Claim.

Now, let’s suppose that one member of the corporation is driving to pick up her child at school and collides with an automobile driven by another member who is on her way to a social occasion.  If the first member sues the second member and fails to obtain a judgment on the merits, will that member be liable under the bylaw for attorneys’ fees and other costs?  The bylaw seems to require only that a member assert a claim against another member and fail to obtain a judgment.  The bylaw does not on its face require that the claim be brought by or against a member qua member.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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