NAF Holdings, LLC v. Li & Fung (Trading) Ltd.
772 F.3d 740
2d Cir.2014Background
- NAF Holdings, LLC sues Li & Fung (Trading) Ltd. for breach of contract seeking damages to its own business interests.
- The contract obligated Trading to serve as Hampshire’s sourcing agent following NAF’s planned Hampshire acquisition.
- NAF formed two subsidiaries (NAF II and NAF Acquisition) to effect the Hampshire merger; the merger was to be financed by third-party loans tied to Trading’s commitment.
- Trading allegedly repudiated its contractual obligation, jeopardizing financing and causing over $30 million in losses to the NAF subsidiaries and to NAF itself as parent.
- After termination of the Merger Agreement, Hampshire settled with Gerszberg and the NAF subsidiaries via a Settlement Agreement that released claims and barred the subsidiaries from pursuing certain actions.
- The district court granted summary judgment for Trading, treating NAF’s injuries as derivative, arising from harm to the subsidiaries, and barred direct suit.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether NAF may sue directly for breach of contract under Delaware law | NAF alleges a direct contractual duty owed to it. | Tooley requires a direct claim only if injury to the stockholder is independent of harm to the corporation. | Certified to Delaware Supreme Court; not resolved here |
| Whether the Tooley framework governs this contractual-direct claim scenario | Tooley’s focus on fiduciary duties may not apply to a direct contract with a third party. | Tooley forecloses direct claims where injury is tied to the corporation’s losses. | Question certified; Delaware Supreme Court guidance requested |
| Whether the Settlement Agreement forecloses NAF’s direct claim by binding the subsidiaries | Settlement bound only the subsidiaries and Gerszberg; NAF remains eligible to sue. | Settlement potentially affects ability to pursue claims on behalf of subsidiaries. | Not resolved; procedural certification ongoing |
Key Cases Cited
- Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (direct vs derivative inquiry; focus on injury to stockholder and duties owed)
- Agostino v. Hicks, 2004 WL 443987 (Del. Ch. 2004) (footnote cited on focus of injury and duty owed)
- Parnes v. Bally Entm’t Corp., 722 A.2d 1243 (Del. 1999) (fiduciary-duty based direct/derivative analysis)
- Grimes v. Donald, 673 A.2d 1207 (Del. 1996) (derivative vs direct considerations in fiduciary contexts)