The Delaware Court of Chancery held that claims for breach of statutory and fiduciary duties against a custodian appointed under Section 226 of the Delaware General Corporation Law (“DGCL”) failed as a matter of law because the custodian was entitled to judicial immunity as to certain alleged wrongdoings and because the doctrine of laches barred the plaintiff’s claims on the remaining alleged wrongdoings. In dicta, the Court suggested that custodians appointed pursuant to Section 226 of the DGCL who take actions outside the express terms of a court order could potentially be governed by a “business judgment” standard of conduct similar to that governing directors and officers of a Delaware corporation.
This action arose out of another action begun in 2006 under Section 225 of the DGCL (the “Section 225 Action”) to determine the composition of Rich Realty, Inc. (“RRI”), a Delaware corporation owning only one asset – a parcel of real estate and a commercial building located on the parcel (the “RRI Asset”). At the time, RRI had six shareholders, including B.F. Rich Co., Inc. (“BFR”) and Jepsco, Ltd. (“Jepsco”). Jepsco was not a party to the Section 225 Action, but BFR was. The Supreme Court of Delaware held that the election challenged in the Section 225 Action was invalid and remanded to the Court of Chancery for further proceedings.
Upon remand, on October 12, 2007, the Court granted the parties’ stipulated proposed custodian order, appointing a Delaware lawyer as custodian of RRI pursuant to Section 226 of the DGCL (the “Custodian”). Additional orders regarding the custodianship were later entered. On December 16, 2008, the Custodian informed the Court that the parties in the Section 225 Action had reached a settlement and further asked the Court to enter a final order (the “Final Order”) approving the settlement and settlement agreement, which the Court did. The settlement and the settlement agreement were entered into only by the parties to the Section 225 Action. No notice of the settlement was provided to Jepsco or the other shareholders of RRI, even though the settlement agreement contained release language that purported to bind them. The settlement agreement also provided for the sale of the RRI Asset to BFR. On February 23, 2009, after all outstanding issues relating to the settlement and the settlement agreement had been resolved, the Court entered an order terminating the Custodian’s custodianship.
On March 20, 2012, Jepsco, filed a complaint alleging that the Custodian breached his statutory and fiduciary duties and that BFR aided and abetted the Custodian’s breach of fiduciary duty. Jepsco alleged four distinct wrongs committed by the Custodian. First, Jepsco asserted that the Custodian breached his fiduciary duty by not providing Jepsco notice of the fact of the settlement and its terms. Second, Jepsco asserted that the Custodian breached his statutory duties in executing the settlement agreement by not at least providing notice of the sale of the RRI Asset, which notice would be required under Sections 228 and 271 of the DGCL. Third, Jepsco asserted that the Custodian breached his fiduciary duties by failing to disclose to the Court that no notice of the settlement or the settlement agreement had been or would be provided to Jepsco and certain other persons. Finally, Jepsco asserted that the Custodian violated the express terms of a court order by failing to provide certain financial statements to Jepsco.
The Custodian moved to dismiss the complaint on two grounds, among others. The Custodian first argued he was entitled to judicial immunity for actions taken as custodian of RRI. The Custodian also argued that Jepsco’s claims were barred by laches. BFR joined the Custodian in arguing that Jepsco’s claims were barred by laches.
The Court held that the Custodian was entitled to judicial immunity on Jepsco’s breach of statutory duty claim. Relying primarily on an earlier Court of Chancery opinion in Marciano v. Nakash, Court explained that custodians appointed under Section 226 of the DGCL are officers of the court and entitled to judicial immunity where they act pursuant to an express court order, at least absent any indication of a conflict of interest or bad faith on the part of the custodians. The Court reasoned that the Custodian was entitled to judicial immunity because he acted pursuant to the express terms of the Final Order when he acted pursuant to its provisions and implemented the sale of the RRI Asset and also reasoned that Jepsco had failed to allege facts to show that the Custodian had acted in bad faith or suffered from a conflict of interest in participating in negotiations of the settlement or presenting the settlement to the Court for its consideration. Applying the doctrine of independent legal significance, the Court rejected Jepsco’s assertion that the Custodian was liable because the provisions of Sections 228 and 271 of the DGCL were not fulfilled, reasoning that the Custodian properly acted pursuant to Section 226 of the DGCL in fulfilling his role as custodian of RRI.
The Court next considered whether the Custodian would be entitled to judicial immunity for the remaining alleged wrongdoings, which fell into two categories: (i) business decisions not expressly authorized by a court order and (ii) alleged failures to comply with the express terms of a court order. Quoting Marciano, the Court explained that such actions could potentially be considered under the rubric of a “business judgment” standard of conduct similar to that imposed on directors and officers of Delaware corporations.
Under such an analysis, however, the Court explained that Jepsco had likely pleaded sufficient facts to show that it was reasonably conceivable that the Custodian’s actions were not entitled to judicial immunity. Given that discovery had not yet been conducted, the Court reasoned that the Custodian could have failed to provide Jepsco notice of the settlement, failed to advise the Court that notice of the settlement would not be provided to all of RRI’s minority shareholders, and supported a settlement that provided for a release by Jepsco and another person without providing them notice or obtaining their consent in order to help procure a settlement that improperly advantaged BFR and another person. Moreover, the Court explained that the allegation that the Custodian failed to comply with an express court order also was sufficient to show that it was reasonably conceivable that the Custodian was not entitled to judicial immunity.
The Court did not, however, proceed further to determine the extent to which this potential standard of conduct would actually apply to Jepsco’s remaining allegations. Instead, the Court granted the defendants’ motion to dismiss on these remaining allegations under a traditional laches analysis, concluding that Jepsco had unreasonably delayed in asserting its claims after the expiration of the analogous statute of limitations period and that there was no basis for tolling the laches period.
The full opinion is available here.