JOSEPH L. WASHINGTON, JAMES F. SOLIC, JAMES WASHINGTON, JR., LAURA M. ODELL, and ARLENE BETH CLARKE, Plaintiffs Below, Appellants,
PREFERRED COMMUNICATION SYSTEMS, INC., Defendant Below, Appellee.
Submitted: February 15, 2017
Below: Court of Chancery of the State of Delaware C.A. No.
appeal from the Court of Chancery. REVERSED.
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.
W. Lipkin, Esquire, (Argued), Aimee M. Czachorowski, Esquire,
Eckert Seamans Cherin & Mellott, LLC, Wilmington,
Delaware, for Appellee Preferred Communication Systems, Inc.
STRINE, Chief Justice; HOLLAND, VALIHURA, VAUGHN, and SEITZ,
Justices, constituting the Court en Banc.
STRINE, Chief Justice.
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.
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. 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
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.
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
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,
explaining "[t]he contract at issue consists of the
Notes as modified by the Offer Letter ,
" and Preferred Communication "failed
to issue the Extension Warrants, resulting in
breach." 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." Preferred
Communication did not appeal this ruling.
the Noteholders filed a motion seeking attorneys' fees
and expenses for fees incurred in the Court of Chancery
action. They based their argument for fees
exclusively on the first sentence of Section 6.2 of the
Notes-the fee-shifting provision. 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.
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
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
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,  but they
primarily argued that the Court of Chancery should uphold its
award of ...