Chancery Rebukes Party for “Distracting” and “Detrimental” Rule 11 Arguments

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POSCO Energy Co., Ltd. v. FuelCell Energy, Inc., C.A. No. 2020-0713-MTZ (Del. Ch. Oct. 22, 2020)

Under Court of Chancery Rule 15, a Delaware plaintiff may request leave from the Court to amend or supplement a complaint. Leave to grant such motions is “liberally granted, unless, in a narrowly construed exception, there is inexcusable delay and prejudice to the defendant.” This opinion involves an unsuccessful opposition to a motion to amend based, in part, on the argument that the original pleading violated Rule 11.  

In POSCO Energy, a stockholder of a Delaware corporation (the “Plaintiff”) filed a books and records action in the Court of Chancery, pursuant to 8 Del. C. § 220, alleging that Plaintiff was a record stockholder of the defendant corporation, FuelCell Energy, Inc. (the “Defendant”). In response to Plaintiff’s books and records action, Defendant’s counsel wrote to Plaintiff to assert that Plaintiff was not a record stockholder and, further, that Plaintiff knew as much when it submitted the first books and records demand and the complaint. According to Defendant, Plaintiff then attempted to use “false evidence” to demonstrate Plaintiff’s status as a record stockholder of Defendant. After several weeks of discourse on this issue, Plaintiff eventually signaled that it had recently discovered that—rather than a record stockholder—it was a beneficial owner of Defendant’s stock. Plaintiff therefore indicated that it would serve a new books and records demand to correct the pleading defect, and told Defendant it “need not respond to the original complaint.” While Defendant did not oppose the merits of the amended and supplemental complaint, Defendant moved the Court to condition the amended complaint’s approval on granting Defendant “fees and costs incurred in investigating whether [Plaintiff] was a record stockholder, investigating whether [Plaintiff] is a beneficial stockholder, and moving to dismiss [Plaintiff’s] first complaint alleging [Plaintiff] was a record stockholder.” 

The Court noted its discretion in granting both leave to amend or to supplement a complaint, as well as a conditional allowance for such leave. The Court then explained that, when deciding whether to condition leave to amend a pleading on a fee award under Rule 15, the Court must “balance the interest in deciding a case on its merits with the costs incurred when parties do not timely comply with pleading requirements.” Under that balancing, the Court of Chancery has declined to condition amendment on fees when a plaintiff’s amendments “represent good faith attempts to cure alleged pleading defects the defendants identified." In contrast, commonly-cited cases in which the Court has granted conditional allowance based on fees generally involve situations in which “the party with the pleading burden chose not to seek leave to amend … and instead stood on its defective pleading, making a series of meritless arguments, only to beg for leave to amend at oral argument.” The rationale for granting conditional allowance in such cases is that the opposing party “incurred substantial expense … that was wasted by the decision granting belated leave to amend.”

In light of those standards, the Court granted Plaintiff’s motion for leave to amend but declined to condition that leave on fees, explaining that Plaintiff did exactly “what the conditional allowance cases instruct: [Plaintiff] sought leave to amend, rather than defending a wrongful position by opposing a motion to dismiss through briefing and argument.” Further, Plaintiff disputed Defendant’s assertions that Plaintiff “knowingly made false allegations in its original complaint and waved ‘false evidence’ before [Defendant].” The Court noted that Defendant’s theory was premised on case law decided under the “bad faith litigation exception,” not under the conditional allowance standards. After noting as much, the Court rebuked Defendant, saying that Defendant had “invoked Court of Chancery Rule 11 casually and repeatedly” throughout the litigation. The Court may order sanctions for conduct violating Rule 11 only after being presented with an independent motion for Rule 11 sanctions; the Court may not consider such arguments through an opposition brief opposing unconditional leave to amend. After describing these standards, the Court again admonished Defendant for its Rule 11 “rhetoric,” calling it “distracting” and “detrimental to the famed collegiality of the Delaware bar.”

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