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Washington v. Preferred Communication Systems, Inc.

Supreme Court of Delaware

February 27, 2017

JOSEPH L. WASHINGTON, JAMES F. SOLIC, JAMES WASHINGTON, JR., LAURA M. ODELL, and ARLENE BETH CLARKE, Plaintiffs Below, Appellants,
v.
PREFERRED COMMUNICATION SYSTEMS, INC., Defendant Below, Appellee.

          Submitted: February 15, 2017

         Court Below: Court of Chancery of the State of Delaware C.A. No. 10810-VCL

         Upon appeal from the Court of Chancery. REVERSED.

          Evan O. Williford, Esquire, Andrew J. Huber, Esquire, The Williford Firm LLC, Wilmington, Delaware; Dennis M. Holmgren, Esquire, (Argued), Holmgren Johnson: Mitchell Madden, LLP, Dallas, Texas, for Appellants Joseph L. Washington, James F. Solic, James Washington, Jr., Laura M. Odell, and Arlene Beth Clarke.

          Gary W. Lipkin, Esquire, (Argued), Aimee M. Czachorowski, Esquire, Eckert Seamans Cherin & Mellott, LLC, Wilmington, Delaware, for Appellee Preferred Communication Systems, Inc.

          Before STRINE, Chief Justice; HOLLAND, VALIHURA, VAUGHN, and SEITZ, Justices, constituting the Court en Banc.

          STRINE, Chief Justice.

         I.

         In this case, noteholders succeeded in securing warrants that the issuer of the notes had promised as a result of the resolution of a previous event of default. When addressing the merits, the Court of Chancery held that the promise of warrants had become a right of the noteholders under the notes, as amended after the default. For that reason, the Court of Chancery awarded the noteholders the warrants they sought. The noteholders then sought to recover their attorneys' fees based on a fee-shifting provision in the notes which entitled the noteholders to attorneys' fees if: (1) "any indebtedness" evidenced by the notes was collected in a court proceeding; or (2) the notes were placed in the hands of attorneys for collection after default. But, the Court of Chancery denied this request and the noteholders brought this appeal. Because the warrants are a form of indebtedness that the noteholders had to collect through an action in the Court of Chancery, the noteholders are entitled to attorneys' fees. The noteholders are also entitled to attorneys' fees because they had to seek the assistance of counsel to collect the warrants after default.

         II.

         In 2006, the appellants (or "Noteholders" for simplicity's sake) invested in promissory notes (the "Notes") issued by the appellee, Preferred Communication Systems, Inc. In exchange for their investment, they were promised repayment of principal and interest, plus warrants upon execution of the Notes. When the Notes came due in 2007, Preferred Communication was unable to pay and defaulted. Therefore, Preferred Communication sought to satisfy the noteholders by promising them additional consideration if they would forgo remedies for default under the Notes. Preferred Communication sent a written offer (the "Offer Letter") to the noteholders presenting them with two alternatives, one of which promised additional warrants (the "Extension Warrants") in exchange for the noteholders extending the repayment date of the Notes indefinitely.[1] The appellant Noteholders accepted Preferred Communication's offer by returning an acceptance letter that stated:

Please repay my principal and interest under the Note as soon as the Company determines it has sufficient cash to pay the Note. The maturity date of my note is hereby extended to the date such repayment is made, with the understanding that in return for the extension I will receive warrants for 225 shares of Class B Common Stock ($5.00 exercise price and five year exercise term) for every month between the original maturity date of my Note and the time the Note is repaid as described in the First Action. The warrants will be cumulated and issued to me on the date the Note is repaid in full.[2]

         A plain reading of this amendment to the Notes indicates that when Preferred Communication repaid the Notes, in addition to paying principal and interest, it was also required to issue the Extension Warrants.

         In 2013, Preferred Communication sold most of its assets to Sprint Corporation for approximately $60 million, which triggered its obligation to pay off the Notes, as amended by the Offer Letter. Certain noteholders, including the appellant Noteholders, sued Preferred Communication in Texas, bringing claims to collect their principal, interest, and Extension Warrants. Preferred Communication and the Texas plaintiffs settled the claims for outstanding principal and interest in exchange for an immediate cash payment, and they agreed to litigate the claim for the Extension Warrants in the Court of Chancery. The settlement agreement stated that the Noteholders "shall retain any claim to fees and costs related to their claim for warrants incurred after the [the effective date of the settlement agreement] to be paid, if at all, in accordance with the terms of the [Notes]."[3]

         The Noteholders then moved for summary judgment in the Court of Chancery, arguing that Preferred Communication breached its obligations under the Notes by failing to issue the Extension Warrants. The Court of Chancery granted the motion in part, [4] explaining "[t]he contract at issue consists of the Notes as modified by the Offer Letter , "[5] and Preferred Communication "failed to issue the Extension Warrants, resulting in breach."[6] The Court of Chancery concluded that "[Preferred Communication] promised warrant coverage as a component of the plaintiffs' return and is now obligated to provide it."[7] Preferred Communication did not appeal this ruling.

         Thereafter, the Noteholders filed a motion seeking attorneys' fees and expenses for fees incurred in the Court of Chancery action.[8] They based their argument for fees exclusively on the first sentence of Section 6.2 of the Notes-the fee-shifting provision.[9] Section 6.2 provides:

Should any indebtedness evidenced by this Note be collected by action at law, or in bankruptcy, receivership, or other court proceedings, or should this Note be placed in the hands of attorneys for collection after default, Maker agrees to pay, upon demand by Holder, in addition to principal and interest and other sums, if any, due and payable hereon, court costs and reasonable attorneys' fees and other reasonable collection charges. Should Maker be required to bring any action to enforce its rights under this Note, it shall be entitled to an award of its court costs and reasonable attorneys' fees in such action.[10]

         The Court of Chancery originally granted the Noteholders' request for fees of $166, 313.26, but, in doing so, relied on the second sentence of Section 6.2. The Court of Chancery explained:

Section 6.2, entitled "Collection, " contains two sentences. The first deals with the indebtedness evidenced by the Note and the collection of that indebtedness. The second is broader. It states, "Should Maker be required to bring any action to enforce its rights under this Note, it shall be entitled to an award of its court costs and reasonable attorneys' fees in such action." The right to the Extension Warrants was a right that the Maker received under the Note. This action was brought to enforce that right. [Preferred Communication] has a fair point that this enforcement action did not fall within the first sentence. Instead, it fell within the second sentence.
The court has reviewed the fees and expenses sought. They are reasonable given the nature and scope of the action. In the context presented, they are adequately supported.[11]

         Preferred Communication then filed a motion for reargument, arguing that the second sentence of Section 6.2 only permitted fees in favor of Preferred Communication. The Noteholders responded respectfully by attempting to defend the Court of Chancery's ruling as to the second sentence of Section 6.2 by the only reasoning that they could, [12] but they primarily argued that the Court of Chancery should uphold its award of ...


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