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Dollar Tree, Inc. v. Dollar Express LLC

Court of Chancery of Delaware

November 21, 2017

Dollar Tree, Inc., et al.
Dollar Express LLC, et al.

          Submitted: October 17, 2017

          William M. Lafferty, Esquire Morris, Nichols, Arsht & Tunnell LLP

          David E. Ross, Esquire Ross Aronstam & Moritz LLP

          Jeffrey L. Moyer, Esquire Richards Layton & Finger P.A.

          Stephen E. Jenkins, Esquire Ashby & Geddes

          Elena C. Norman, Esquire Young Conaway Stargatt & Taylor, LLP

         Dear Counsel:

         This letter constitutes the Court's decision on a joint motion that defendants and intervenor Duff & Phelps, LLC filed to disqualify Morris, Nichols, Arsht & Tunnell LLP ("MNAT") from representing plaintiffs in this action. For the reasons explained below, the motion to disqualify is denied.

         I. Background

         Sycamore Partners Management, L.P. ("Sycamore") is a private equity firm. At the times relevant to this motion, SP Dollar Holdings, Ltd. ("SP Dollar") was an indirect subsidiary of Sycamore, and Dollar Express LLC ("Dollar Express") was an indirect subsidiary of SP Dollar. In 2015, Dollar Express acquired approximately 330 discount stores from Family Dollar Stores, Inc. ("Family Dollar") when Family Dollar merged with Dollar Tree, Inc. ("Dollar Tree").

         Family Dollar, Dollar Tree, and certain of their affiliates are plaintiffs in this action; Sycamore, SP Dollar, Dollar Express, and certain of their affiliates are defendants. Duff & Phelps intervened for the limited purpose of joining defendants in filing the motion to disqualify MNAT from representing plaintiffs in this action.

         A. MNAT Provides Legal Advice in Connection with Dollar Express' Issuance of a Dividend to Sycamore

         In early 2016, as part of a series of transactions, Dollar Express contemplated issuing a dividend of approximately $30 million to Sycamore (the "Dividend"). As reflected in an engagement letter dated April 6, 2016, SP Dollar, on behalf of itself and its subsidiaries, engaged Duff & Phelps to provide a solvency analysis and opinion concerning the Dividend. The engagement letter states that Duff & Phelps would use any "non-public or proprietary information . . . solely in the course of this Engagement and in a manner which Duff & Phelps believes in good faith is consistent with the Company Group's interests or is required by law."[1] It also authorizes Duff & Phelps to retain outside counsel for the engagement and provides that SP Dollar and its subsidiaries would reimburse Duff & Phelps for the reasonable fees and expenses of such counsel.

         In April 2016, Duff & Phelps retained MNAT to provide legal advice on the solvency work it performed for SP Dollar (the "Duff & Phelps Matter"). MNAT's engagement letter, which Duff & Phelps signed on April 14, 2016, states that MNAT had been selected as "Delaware counsel to represent Duff & Phelps, LLC in connection with its engagement as independent financial advisor to SP Dollar Holdings Ltd. and certain of its affiliates."[2]

         According to a May 3, 2016 invoice MNAT sent to Duff & Phelps, three MNAT attorneys (two partners and one associate) worked on the Duff & Phelps Matter over the course of approximately one week, from April 6, 2016 to April 15, 2016. They billed a total of 12.20 hours of time, with the two partners billing less than four hours each and the associate billing 4.60 hours.[3]

         MNAT's invoice reflects that it assisted in revising Duff & Phelps' engagement letter with SP Dollar and in reviewing and advising Duff & Phelps on a board book and a solvency opinion letter.[4] The board book contained, among other things, financial information concerning Dollar Express, an organization chart, a description of the proposed transaction, and various analyses.[5]

         On April 19, 2016, Duff & Phelps provided its solvency analysis and opinion to SP Dollar. Duff & Phelps concluded that "[t]he assets of each of the Delaware Entities, at a Fair Valuation, exceed its respective Debts (including Contingent Liabilities), " and that "[e]ach of the Delaware Entities should be able to pay its respective Debts (including Contingent Liabilities) as they become due."[6] The solvency opinion also concluded that "[n]one of the Delaware Entities will have an unreasonably small amount of assets (or capital) for the businesses in which it is engaged or in which management has indicated it intends to engage."[7] Sometime thereafter, the Dividend was issued to Sycamore.

         Duff & Phelps paid MNAT for the work it did on the Duff & Phelps Matter.[8]The last time MNAT performed any work for Duff & Phelps on any matter was on August 26, 2016.[9]

         B. MNAT Files the Present Action on Behalf of Plaintiffs

         On June 1, 2017, MNAT filed an eighteen-count Verified Complaint on behalf of plaintiffs in this action alleging that defendants deliberately failed to pay for tens of millions of dollars of goods and services they purchased from plaintiffs in connection with operating the 330 discount stores that Dollar Express acquired from Family Dollar in 2015. Relevant to this motion, some of the counts allege that the Dividend was a fraudulent transfer and an illegal distribution under 6 Del. C. § 18-607.[10]

         On September 6, 2017, counsel for defendants discovered MNAT's May 2016 invoice to Duff & Phelps and thus learned that MNAT had provided legal advice to Duff & Phelps regarding its solvency analysis and opinion for the Dividend.[11] On September 7, 2017, defendants' counsel contacted MNAT and asked it to withdraw from this action.[12] That same day, S. Mark Hurd, MNAT's General Counsel, instructed MNAT personnel to implement an ethical wall between the Duff & Phelps Matter and this action.[13]

         Hurd investigated the alleged conflict, personally interviewing the two MNAT partners who worked on the Duff & Phelps Matter.[14] The two confirmed that they have had no involvement in this action and that they have not discussed the substance of their work for the Duff & Phelps Matter with the MNAT attorneys involved in this action.[15] Hurd also confirmed that the MNAT attorneys involved in this action have not discussed any confidential information regarding MNAT's prior work in the Duff & Phelps Matter with the MNAT attorneys who were involved in the Duff & Phelps Matter, nor have they accessed any of the records from the Duff & Phelps Matter.[16]

         As part of his investigation, Hurd instructed IT personnel at MNAT to examine the electronic files from the Duff & Phelps Matter. That examination confirmed, consistent with Hurd's interviews, that none of the MNAT attorneys who has appeared in this action ever accessed any confidential information from the records in the Duff & Phelps Matter.[17]

         On September 20 and 21, 2017, movants sent letters to MNAT explaining why they believed MNAT was obligated to withdraw from representing plaintiffs in this action.[18] On September 25, 2017, MNAT sent letters to movants' counsel, formally refusing to withdraw.[19] In these letters, MNAT asserted that the Duff & Phelps Matter is not "substantially related" to the matters at issue in this action and explained measures it had implemented to protect Duff & Phelps' confidences:

The Morris Nichols lawyers involved in the Dollar Tree Litigation were not involved in the Duff & Phelps matter, have not accessed the file from the Duff & Phelps matter nor discussed any confidential information from that representation with the attorneys who were involved in it, and have been formally screened from access since early September, when your clients first expressed their views that there was a potential conflict.[20]

         MNAT further stated that it had advised Duff & Phelps that it would not examine Duff & Phelps in connection with this litigation, leaving that task to "be conducted exclusively by other counsel, " and denied the existence of any implied attorney- client relationship between MNAT and any of the defendants.[21]

         On September 29, 2017, the Court granted Duff & Phelps' unopposed motion to intervene in this action. That same day, defendants, joined by Duff & Phelps, moved to disqualify MNAT.

         II. Analysis

         Rule 1.9(a) of the Delaware Lawyers' Rules of Professional Conduct (the "Rules") provides as follows: "A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client unless the former client gives informed consent, confirmed in writing." Impermissible conflicts arising under the Rules generally are imputed and apply to a lawyer's entire firm, and not just to a lawyer individually.[22]

         A.Parties' ...

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