ISN SOFTWARE CORPORATION v. RICHARDS, LAYTON & FINGER, P.A., RAYMOND J. DICAMILLO and MARK J. GENTILE
No. 110, 2019
IN THE SUPREME COURT OF THE STATE OF DELAWARE
February 17, 2020
Submittеd: December 11, 2019; Court Below: Superior Court of the State of Delaware, C.A. No. N18C-08-016
Before SEITZ, Chief Justice; VALIHURA, VAUGHN, TRAYNOR, Justices; and NEWELL, Chief Judge,* constituting the Court en Banc.
Upon appeal from the Superior Court. AFFIRMED.
Christopher H. Lee, Esquire, Blake A. Bennett, Esquire, COOCH AND TAYLOR, P.A., Wilmington, Delaware; Timothy S. Perkins, Esquire, UNDERWOOD PERKINS, P.C., Dallas, Texas; Jeremy C. Martin, Esquire (argued), MARTIN APPEALS, PLLC, Dallas, Texas; Attorneys for Plaintiff-Appellant ISN Software Corporation.
P. Clarkson Collins, Jr., Esquire, Carl N. Kunz, III, Esquire, Kathleen A. Murphy, Esquire, MORRIS JAMES LLP, Wilmington, Delaware; George M. Kryder, Esquire (argued), Melissa L. James, Esquire, VINSON & ELKINS LLP, Dallas, Texas; Attorneys for Defendants-Appellees Richards, Layton & Finger, P.A., Raymond J. DiCamillo, and Mark J. Gentile.
For tax reasons ISN Software Corporation wanted to convert from a C corporation to an S corporation. But four of its eight stockholders, representing about 25 percent of the outstanding stock, could not qualify as S Corporation stockholders. ISN sought advice from Richards, Layton & Finger, P.A. about its options. RLF advised ISN that before a conversion ISN could use a merger to cash out some or all of the four stockholders. The cashed-out stockholders could then accept ISN’s cash-out offer or exercise appraisal rights under Delaware law.
ISN did not proceed with the conversion, but decided to use a merger to cash out three of the four non-qualifying stockholders. After ISN completed the merger, RLF notified ISN that its advice might not have been correct. All four stockholders, including the remaining stockholder whom ISN wanted to exclude, were entitled to appraisal rights.
ISN decided not to try and unwind the merger. Instead, ISN proceeded with the merger and notified all four stockholders they were entitled to appraisal. ISN and RLF agreed that RLF would continue to represent ISN in any appraisal action. Three of the four stockholders, including the stockholder ISN wanted to exclude, eventually demanded appraisal. Years later, when things did not turn out as ISN had hoped—meaning the appraised value of ISN stock ended up substantially higher than ISN had reserved for—ISN filed a legal malpractice claim against RLF.
The Superior Court dismissed ISN’s August 1, 2018 complaint on statute of limitations grounds. The court found that the statute of limitations expired three years after RLF informed ISN of the erroneous advice, or, at the latest, three years after the stockholder ISN sought to exclude demanded appraisal. On appeal, ISN argues that its legal malpractice claim did not accrue until after the appraisal action valued ISN’s stock because only then could ISN claim damages.
Although we apply a different analysis, we agree with the Superior Court that the statute of limitations began to run in January 2013. By the time ISN filed its malpractice claim on August 1, 2018, the statute of limitations had expired. Thus, the Superior Court’s judgment is affirmed.
I.
According to the allegations of the complaint, in 2012, ISN requested advice from RLF about converting from a C corporation
On January 15, 2013, RLF “recognized [its] mistake” and notified ISN that all four of the non-qualifying stockholders could demand appraisal.1 RLF and ISN disсussed ISN’s options—proceed and provide appraisal rights to all four stockholders,2 or cancel the merger, which would create new liabilities. ISN decided to proceed with the merger. RLF agreed to litigate any appraisal action, and advised that the appraisal could also result in a lower valuation than the cash offer made to the stockholders. The next day, ISN informed the four stockholders of their appraisal rights. Stockholder A accepted the cash offer. The three other stockholders signaled that they might seek appraisal.
RLF and ISN signed a conflict consent agreement letter in February 2013. It stated, in part:
[t]he proposed representation creates a potential conflict under [Dеlaware Lawyers’ Rules of Professional Conduct] Rule 1.7 because it may involve prior work of our firm, namely the advice (the “Advice”) given concerning the availability of appraisal rights in connection with the merger . . . . Litigating issues arising from a law firm’s prior legal work may generate a conflict of interest under the rule when there is a plausible claim that the firm’s prior work was deficient . . . . It appears there may be an issue concerning the Advice.3
RLF believed that the “potential conflict” would not hinder its representation of ISN in the appraisal litigation because “the availability of appraisal rights is not likely to be at issue in an appraisal proceeding.”4 RLF also advised ISN that “[t]his is an important decision, and we suggest that [ISN] consider consulting indeрendent counsel to assist it in deciding whether to consent.”5 The agreement concluded that “[n]either [ISN’s] consent nor any other provision of this letter constitutes a waiver or release of potential
ISN had independent counsel to advise it at the time.7 ISN did not raise the possibility of a tolling agreement to preserve ISN’s legal malpractice claim.
Three of the four stockholders filed for appraisal in April 2013. RLF represented ISN in the appraisal litigation. Over three years later, in August 2016, the Court of Chancery valued each ISN share at $98,783—resulting in a total appraisal value well in excess of the amount reserved for the buyout.8 This Court affirmed.9
Several months later, ISN requested its entire file from RLF. RLF provided a portion of ISN’s file, but declined to provide the entire file, including billing information around the time of the аlleged negligent advice. After RLF’s counsel declined to produce further documents, on August 1, 2018, ISN filed suit against RLF for legal malpractice relating to its advice concerning the merger and appraisal rights.
RLF moved to stay discovery and to dismiss ISN’s complaint on statute of limitations grounds. The Superior Court granted RLF’s motion to stay and later its motion to dismiss.10 According to the court, to decide when the action accrued for statute of limitations purposes, the “test is when the malpractice was discernable by a reasonably diligent plaintiff.”11 The court found that ISN had actual notice of the
disputed advice and its erroneous nature on January 15, 2013. By that date, ISN knew, or should have known, “of the potential for financial loss if the appraisal action resulted in a share valuation that would exceed” its cash reserves.12 As a result, the cause of action accrued on the date that RLF informed ISN of the alleged negligent advice or, alternatively, when the appraisal action was filed in April 2013. Thus, the claim expired under the statute of limitations no later than April 2016. Because ISN did not file a malpractice suit until August 2018, the Superior Court dismissed the suit.
II.
On appeal we review de novo whether a claim is barred by a statute of limitations.13 We accept all well-pleaded allegations in the complaint as true and draw all reasonable inferences in favor of ISN.14
A.
Statutes of limitations “establish jurisdictional prerequisites for initiating or maintaining a suit.”15 Although they are,
balance a plaintiff’s right to seek a remedy with a defendant’s right to avoid defending stale claims.17
Under
A cause of action “accrues” for statute of limitations purposes based on distinct triggering events. Some states accrue a cause of action when damages have been suffered or are ascertainable.18 Other states accrue a cause of action at the time of loss.19 Delaware, by contrast, declined to adopt these or other alternatives.20 Instead, Delaware is an “occurrence rule” jurisdiction, meaning a cause of action accrues “at the time of the wrongful act, even if the plaintiff is ignorant of the cause
of action.”21 In Delaware, for contract claims, the wrongful act occurs at the time a contract is breached. For tort claims, like the legal malpractice claim here, the wrongful act occurs at the time of injury.22
Because of the harshness of the occurrence rule when a plaintiff is ignorant of the malpractice, this Court has applied a limited “time of discovery” exception to toll the time of accrual. “Under the ‘discovery rule’ the statute is tolled when the
injury is ‘inherently unknowable and the claimant is blamelessly ignorant of the wrongful act and the injury complained of.’”24 Otherwise, “[i]gnorance of thе cause of action will not toll the statute[] absent concealment or fraud.”25 Outside these exceptions, the statute of limitations continues to run even if the claimant is unaware of the facts supporting a cause of action.26
B.
Turning to the facts alleged in ISN’s complaint, the circumstances surrounding the alleged faulty advice appear undisputed. RLF advised ISN that it could complete a cash-out merger of less than all of the non-qualifying stockholders, and the stockholder(s) left behind would not have appraisal rights. ISN completed the merger on January 9, 2013 to cash-out only three of the four non-qualifying stockholders. On January 15, 2013, RLF notified ISN that its advice could have been faulty. All of the non-qualifying stockholders were entitled to demand appraisаl. Three of the four stockholders, including the stockholder ISN wanted to
exclude, demanded appraisal. Thus, the question is when ISN suffered injury, no matter how slight, when RLF gave the alleged faulty advice.
We find that the injury occurred to ISN when the fourth stockholder—the largest of the group—obtained the right to demand appraisal. The transaction as intended contemplated cashing out three stockholders who owned a total of 356 shares, and excluding a fourth who owned 544 shares and would not have appraisal rights. Because of RLF’s alleged faulty advice, ISN ended up allowing the fourth stockholder to demand appraisal, meaning ISN could be liable to pay fair value for 544 more shares of stock than contemplated
Our injury determination is consistent with earlier decisions of this Court. For instance, in Shea v. Delcollo and Werb, P.A.,28 the plaintiff hired a law firm to assist in refinancing her mortgage to remove her ex-husband from the property deed. With
the firm’s help, the plaintiff refinanced and recorded a new mortgage, but, unknown to her, the ex-husband’s name remained on the deed.29 Several years later, the plaintiff discovered the error.30 She sought to partition the property and, after paying to remove a lien against her ex-husband, removed his name from the deed.31 Then she filed a legal mаlpractice claim against the law firm.32 This Court found that she was injured at the time of the refinancing because she relied on the attorney’s expertise to remove her ex-husband’s name, and the refinancing transaction failed to accomplish that goal.33 The statute of limitations was tolled, however, because she was “blamelessly ignorant of her inherently unknowable claim until she discovered the injury.”34
In Shea, the injury occurred when the plaintiff found herself in an unintended situation as a result of the alleged negligence, even if the recoverable damages were uncertain.35 Here, as a result of acting on the alleged negligent advice, ISN found itself in an unintended position when
ISN argues that the cause of action cannot accrue until it could state a claim, whether for injunctive relief37 or for damages,38 and damages were not certain until the Court of Chancery’s appraisal decision exceeded its reserve amount.39
According to ISN, it suffered no damages at the time of the merger because the costs to litigate an appraisal proceeding were the same regardless of the number of shares seeking appraisal, and if the total appraised value of the stock did not exceed the amount it had set aside to cover its expenses, it would not incur damages.40
ISN has failed to distinguish between an injury sufficient for a cause of action to accrue and damages that ISN could have sought in the malpractice action. Under the Delaware occurrence rule, injury is distinct from damages. The statute of limitations can start to run before any “actual or substantial damages” occur.41 Here, the unintended consequences of the merger injured ISN when the transaction closed because it could not proceed without new liabilities—providing additional appraisal rights than intended or unwind the merger. ISN’s legal malpractice suit was not subject to dismissal for being
legal malрractice claim and the court could have stayed the litigation until the extent of damages was certain.42
ISN also argues that public policy supports finding that the statute of limitations did not begin to run until the appraisal decision. According to ISN, finding that the cause of action accrued before the appraisal award would subject it to a host of difficulties and inefficiencies. It would have had to find new counsel for the appraisal litigation. It would have created an actual conflict with RLF. And it would have required ISN to file a potentially unripe claim, or forgo the mitigation of damages from appraisal. All those points might have some validity, but are arguments in support of possible amendments to the Delaware statute as other stаtes have done.43 Under the current state of Delaware law, however, regardless of complications, inefficiencies, and possible unfairness, a cause of action accrues at the time of the wrongful act, which in this case means when injury occurred and not when damages were certain.44
C.
ISN also argues that its case should not have been dismissed before the court ordered RLF to turn over its entire file to ISN. As ISN argues, access to the entire file would allow ISN “to analyze the veracity and intentions of RLF’s advice” after it “admitted its mistake.”45 The entire file, the argument goes, might have supported a fraudulent concealment claim or equitable tolling.
ISN is correct that concealment or fraud can toll the statute of limitations.46 But to rеsist RLF’s motion to dismiss on these grounds, ISN had to plead sufficient facts in support of the claims.47 The Superior Court correctly found that access to RLF’s file would not have changed what was actually pleaded in the complaint—that RLF informed ISN of its problematic advice. Because ISN had notice of the alleged negligent advice, nothing in RLF’s file would aid ISN in attempting to toll the statute of limitations.
ISN also argues that RLF fraudulently concealed the existence of a cause of action because it allegedly agreed in the
existed at the time.48 Even if ISN had pleaded fraud with particularity,49 which it has not, the RLF/ISN agreement cannot be reasonably interpreted as misleading. RLF wrote that “[l]itigating issues arising from a law firm’s prior legal work may generate a conflict of interest . . . when there is a plausible claim that the firm’s prior work was deficient,” and that “there may be an issue concerning the” transaction advice.50 RLF concluded by stating that the agreement did not waive any “potential causes of action [that ISN] may have against [RLF].”51 When combined with the recommendation to seek independent counsel on this “important decision,”52 which ISN did, the only reasonable inference is that the agreement provided notice to ISN that there may be a then-present claim for legal malpractice. Because ISN was on notice of the facts and possibility of a legal malpractice claim, the allegations of the complaint do not lead to an inference that RLF engaged in fraudulent or misleading conduct about problems with its advice.
III.
On Januаry 15, 2013, RLF put ISN on notice of a potential legal malpractice claim. RLF’s problematic advice led ISN to complete a cash-out merger that
allowed a stockholder it intended to exclude to demand appraisal. Instead of entering into a tolling agreement to preserve its malpractice claim, ISN, with the advice of independent counsel, decided to proceed with the merger and give appraisal rights to all four stockholders. When the appraised value of ISN stock exceeded what ISN expected to pay, ISN sued RLF for legal malpractice. Unfortunately, under Delaware law, ISN’s legal malpractice claim accrued in January 2013, when ISN was injured by RLF’s allegedly faulty advice. The statute of limitаtions expired in January 2016. The Superior Court properly dismissed ISN’s August 1, 2018 complaint as time-barred. The judgment of the Superior Court is affirmed.
ISN SOFTWARE CORPORATION v. RICHARDS, LAYTON & FINGER, P.A., RAYMOND J. DICAMILLO and MARK J. GENTILE
No. 110, 2019
IN THE SUPREME COURT OF THE STATE OF DELAWARE
VAUGHN, Justice, dissenting:
The rule that a cause of action generally accrues upon the occurrence of a wrongful act is subject to the accompanying rule that a cause of action in tort accrues at the time of injury. Where legal negligence is involved, the client may or may not suffer injury because of such negligence. Fortunately, some legal negligence is resolved, or resolves itself, without the client experiencing any injury. In this case, the Majority finds that ISN suffered injury when the fourth stockholder obtained the right to demand appraisal upon consummation of the merger.
The Superior Court did not rule that ISN suffered injury when the fourth stоckholder obtained appraisal rights. In its opinion, the Superior Court ruled that:
A cause of action for professional malpractice accrues as soon as the wrongful act occurs. It does not matter that at the time of the negligent act, the client has not yet suffered a loss. Exposure to the risk of loss is sufficient injury to create
an actionable claim for application of the statute of limitations.1
Later in its opinion, the Superior Court added that:
Plaintiff’s cause of action against the Defendants accrued on the date Plaintiff explicitly was informed of Defendants’ erroneous advice – January 15, 2013. At the very latest, the statute of limitations began to run as of the filing of the appraisal action in the Court of Chancery. At that time, Plaintiff was aware of the potential for damages (appraisal in excess of the Buyout Reserve), even though there was not yet a determination of the precise measure
of damages, or even whether damages ultimately would be suffered.2
In other words, the Superior Court ruled that the statute began to run when the alleged malpractice occurred creating an exposure to a risk of loss or potential for damages. In Kaufman v. C.L. McCabe & Sons, Inc., however, this Court ruled that “[a] cause of action in tort accrues at the moment when ‘an injury, although slight, is sustained in consequence of the wrongful act of another.’”3 I believe that the Superior Court erred when it ruled that mere exposure to the risk of loss or the potential for damages is sufficient to start the running of the statute of limitations. The plaintiff must sustain sоme actual injury before the cause of action accrues. As explained in Kaufman, it is not required that all, or even most, of the damages occur at that time, but there must be some actual injury to start the clock for statute of limitations purposes.4 An exposure to risk of loss or potential for damages is not sufficient. Because of the manner in which the parties framed the issues in the Superior Court, the court did not discuss whether the fourth stockholder’s acquisition of appraisal rights, in and of itself, injured ISN.
In Kaufman, the plaintiffs owned a residence in Fenwick Island. They took out a policy of insurance on the residence from the defendant which was supposed to include loss of use coverage. The premium the plaintiffs paid included a premium
for loss of use coverage. The insurance agent, however, failed to include loss of use coverage in the policy. Several years later, a fire occurred, and the insurance company denied the plaintiffs’ claim for loss of use. The Kaufmans brought suit alleging negligence on the part of the insurance agency in selling them a policy of insurance that did not comply with their request, that is, one that did not include loss of use coverage. As the Court summarized, the Kaufmans “contend[ed] that a cause of action against an agent-broker for the negligent procurement of insurance coverage does not accrue until the insured suffers some loss for which it is not covered. They argue[d] that it was only then that the insured has really suffered injury.”5 The Court noted thаt several jurisdictions appeared to have adopted such a rule, citing three insurance cases from other jurisdictions.6 This Court rejected that rule and held that the plaintiffs were injured, and the cause of action accrued, at the time the policy was issued.7
been sustained at that time, and the running of the statute is not postponed by the fact that the actual or substantial damages do not occur until a later date.”9 The Court also found the Kaufmans had a remedy when the policy was issued: “[i]f [the insured] had discovered the omission which was apparent on the face of their policy, they could have pursued [the insurance agency] for the difference in value between a policy which included the requested coverage and the value of the policy as issued.”10 And “[t]he Kaufmans could have asserted the claim they now assert from the date on which [the insurance agency] procured their insurance policy and delivered it to them.”11 When the Kaufmans’ cause of action accrued, they could plead all elements of their claim—damages included.12
I would find that the statute of limitations begins to run when the plaintiff sustains an injury for which the law affords a remedy. More specifically, I would find as follows:
A tort claim accrues for limitations purposes when it becomes enforceable, that is, when all elements of the tort can be truthfully alleged in a complaint, and accordingly, when damage is an essential element of a tort, the claim does not accrue at the time of the defendant’s wrongful act or the plaintiff’s discovery of the injury, but when the harm is sustained.13
The above-quoted text is subject to the qualification endorsed in Kaufman that “it
This case has not followed a straight path. As mentioned, the question upon which the appeal is being decided—when did ISN sustain injury—was not addressed by the Superior Court. The questions presented as framed by the parties in their briefs bear little resemblance to the question the Majority now answers. It appears that RLF may not have believed in 2013 that a cause of action against it accrued when the fourth stockholder obtained the right to demand appraisal. In its February 14, 2013 letter, RLF represented to its client that ISN had only “potential causes of action” against the law firm.15 To ensure the parties have been fully and fairly heard on the question which has emerged during this appeal—when was ISN injured—I would reverse the judgment of the Superior Court for the error which I discuss above and remand the case for further proceedings in that court, including proceedings to determine when ISN sustained an injury for which the law afforded a rеmedy.