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The Ravenswood Inv. Co. L.P. v. Estate of Winmill

Court of Chancery of Delaware

April 27, 2018

The Ravenswood Inv. Co. L.P.
v.
The Estate of Bassett S. Winmill; The Ravenswood Inv. Co. L.P.
v.
Winmill & Co., Incorporated;

          Submitted: April 6, 2018

          R. Bruce McNew, Esquire Wilks, Lukoff & Bracegirdle, LLC

          David A. Jenkins, Esquire Smith, Katzenstein & Jenkins LLP

          Dear Counsel:

         Plaintiff has moved for reargument under Court of Chancery Rule 59(f) or, alternatively, for alteration or amendment of the Court's March 21, 2018, post-trial memorandum opinion, revised on March 22, 2018 (the "Opinion"), [1] under Court of Chancery Rule 59(e).[2] For the reasons that follow, Plaintiff's Motion is without merit and, therefore, must be denied.

         In the Opinion, the Court held that (1) Defendants, Bassett, Thomas and Mark Winmill, as directors of Winmill & Co., breached their fiduciary duty of loyalty to the Company by granting themselves stock options at an unfair price through an unfair process; and (2) Plaintiff failed to prove that Defendants' financial reporting practices constituted a breach of their fiduciary duties. Despite finding that Defendants had breached their duty of loyalty, the Court determined that it lacked any evidentiary basis to remedy the breaches and, consequently, awarded only nominal damages. Plaintiff now moves to reargue, alter or amend the Court's determination with respect to remedies.

         "A motion for reargument under Court of Chancery Rule 59(f) will be denied unless the court has overlooked a controlling decision or principle of law that would have controlling effect, or the court has misapprehended the law or the facts so that the outcome of the decision would be different."[3] Reargument "is only available to re-examine the existing record, "[4] not to consider new evidence, entertain arguments not raised previously or rehash arguments already made.[5] On a motion under Court of Chancery Rule 59(e), the Court may alter or amend its order where the movant demonstrates "the need to correct a clear error of law or to prevent manifest injustice."[6]

          In its Motion, Plaintiff asserts that the Court misapprehended both the law and the facts in such a manner as to warrant reargument or amendment/alteration of the judgment as stated in the Opinion. As to the law, Plaintiff submits that (1) contrary to the Court's findings, "[a]s a matter of law, the Court may never factually defer to illiquid, thinly traded, over-the-counter stock quotation[s] [] as constituting the value of [] stock"[7]; and (2) the Court erred as a matter of law when it found that cancellation was not available despite the fact that Defendants "essentially paid nothing" for their stock.[8] As to the facts, Plaintiff contends that the Court misapprehended the facts when it found the Company lacked sufficient funds to repay Defendants (to effect rescission of the option issuances) and that such payment would significantly reduce the Company's available cash resources.[9] Specifically, Plaintiff argues that, contrary to the Court's findings, the trial record shows that (1) the amount to be repaid would amount to only 10% of the Company's cash resources[10]; (2) the Company has more than sufficient net assets to repay Defendants[11]; (3) such repayment would not be detrimental to the Company[12]; and (4) neither the interest nor principal paid by Defendants would need to be returned to Defendants as part of a rescission remedy because the interest was not paid for the purpose of exercising the options and Bassett's principal payment was a gift.[13]

         Moreover, Plaintiff argues, "[e]ven were it ultimately to prove true that Winmill [& Co.] could not repay amounts which must be returned, . . . the Court's decision to make such a finding on this record also creates a manifest injustice in allowing a faithless fiduciary to escape without providing a remedy."[14] According to Plaintiff, the Court determined that Winmill & Co. would be unable to repay Defendants based on untimely submitted evidence and "[t]his has created a manifest injustice, warranting either an order of rescission, conditioning the cancellation [sic] of repayment of an amount found due by the Court or a fair opportunity to address this claim . . . ."[15]

         In response, Defendants argue that Plaintiff failed to "properly identify, explain, or prove the damages it sought" and that Plaintiff, through its Motion, now seeks to "offer both new and previously-rejected arguments and allege new non-record 'facts, '" all of which is improper on a motion for reargument.[16] Specifically, with regard to the Court's factual findings, Defendants contend that (1) the Court properly determined that rescission would eliminate a material amount of Winmill & Co.'s cash resources and not benefit the Company; (2) Plaintiff failed to argue at any time prior to its Motion that non-cash assets should be the benchmark for rescission and, in any event, non-cash assets would first have to be sold, which also might not be in the Company's best interest; (3) Plaintiff failed to present evidence that Winmill & Co.'s stock value was something other than $1.00; (4) Plaintiff's new theory that Bassett's principal payment was a gift is unsupported by the record; and (5) Defendants paid interest on their notes to the Company and would be entitled to receive back those funds if rescission were granted.

         As to Plaintiff's legal argument regarding cancellation, Defendants submit that Plaintiff's Motion ignores the legal bases for the Court's determination that cancellation was not warranted and instead raises new arguments; namely, that Thomas and Mark paid essentially nothing for their stock, that Bassett's payments were a gift, that Defendants have unclean hands and that manifest injustice would result from the Court's Opinion. Finally, Defendants contend that the Court previously rejected Plaintiff's argument that Defendants failed timely to assert that rescission would not be in the Company's best interest. Thus, according to Defendants, the record supports the Court's factual findings and the Court did not misapprehend the law. For the reasons that follow, I agree with Defendants.

          To be frank, Plaintiff's Motion represents the first time in this ten-year litigation that Plaintiff has attempted to present any argument or "evidence" in support of its requested remedy with regard to the stock option grants. As recited in the Opinion,

Plaintiff requested in the Complaint that the Court award damages "in an amount to be determined at trial, " cancel "the options and all shares acquired using the options" and award "such other further relief" as might be justified. In the Pre-Trial Order and its pre-trial opening brief, Plaintiff requested "[r]escission of all of the challenged Stock issued to the Individual Defendants in 2005." In its post-trial opening brief, Plaintiff again requested cancellation of the "options issued under the [ ] PEP, " but additionally requested that the Court not return to Defendants the money they paid to exercise their options.[17]

         Plaintiff, however, did not support any of its rotating requests for relief with evidence or substantive argument. When asked to address remedies at post-trial oral argument, Plaintiff's counsel impetuously stated, without any attempt to invoke any aspect of the evidentiary record, that "this court has always fashioned remedies based on the evidence presented at trial and the Court's conclusions, "[18] and that

[t]he suggestion that a court of equity could find the defendants breached their fiduciary duties and say "But you know what, my hands are tied because I'm lock-stepped into some particular format of remedy that will actually hurt the company, " finds no support in the jurisprudence of this court. A remedy can be fashioned, and we've suggested some. And if Your Honor wants to say, you know what, I want more on post remedies, the Court can certainly do that. But the suggestion that equity would tolerate a wrong without providing a remedy is unfounded.[19]

         Those statements constitute the full extent of Plaintiff's engagement on the subject of remedies (until now).[20] Consequently, the Court was left to cobble a remedy from a wholly inadequate trial record with no guidance from Plaintiff other than its blanket request(s) for cancellation, rescission, damages or some other remedy the Court might devise in its apparently uninhibited exercise of equitable powers.[21] After thoroughly exploring the possible options, the Court ultimately declined to manufacture a remedy beyond nominal damages because there was no evidentiary basis for the Court to do so in any principled way.

         While the record is clear that Plaintiff did not previously bring to the Court's attention any of the evidence or argument raised in its Motion, for the sake of completeness, I will address seriatim Plaintiff's new arguments on the merits.

         First, Plaintiff argues that the Court erred as a matter of law by accepting the $1.00 trading value of Winmill & Co. stock as its actual value.[22] In the Opinion, the Court explained that the only record evidence of Winmill & Co.'s current stock value was the $1.00 value identified by trial witnesses.[23] Plaintiff presented no contrary evidence at trial.[24] The Court did not misapprehend the law with respect to valuation evidence; rather, it relied on the only valuation evidence that the parties chose to place in the trial record.

         Second, Plaintiff argues that the Court erred as a matter of law when it determined that cancellation was not available even though "Defendants breached their fiduciary duties" and "essentially paid nothing for their stock."[25] Of course, Plaintiff acknowledges that Defendants paid the par value for the stock[26] and that "the Estate paid the [note principal] amount."[27] And the evidence presented at trial established that all three Defendants paid interest on their respective notes.[28] In the Opinion, the Court explained that "[g]enerally, cancellation without restitution is only warranted where there has been a total failure of consideration (including as a result of fraud), " and that "[t]he court has [] denied cancellation without restitution even in cases of fraud and misrepresentation where there has been some exchange of consideration."[29] Even in its belated argument, Plaintiff presents no contrary legal authority.[30] I am satisfied, therefore, that the Court did not misapprehend the applicable law regarding cancellation.

         Plaintiff has invoked Rule 59(e) only with regard to the Court's alleged misapprehensions of law.[31] Accordingly, the Motion under Rule 59(e) and Rule 59(f), to the extent reargument is sought based on the Court having misapprehended the law, must be denied.

         I turn next to Plaintiff's arguments that the Court misapprehended the facts in such a manner as to warrant reargument under Rule 59(f). Here again, I note that none of the fact-based arguments in Plaintiff's Motion were made to the Court prior to the Motion. Accordingly, it is difficult to comprehend how the Court could have misapprehended a "fact" of which it was never apprised. In any event, as the following discussion makes clear, Plaintiff's fact-based arguments fail on their merits as well.

         First, the trial evidence showed Winmill & Co. to be a company with small cash resources-with its main assets being holdings in other companies.[32] The only evidence presented regarding the impact on Winmill & Co. of repayment to Defendants (in order to effect rescission) was the testimony of the Company's CEO that repayment would eliminate a "material" amount of the Company's cash resources.[33] Insofar as it might have been an overstatement to say that repayment could completely deplete the Company's cash resources, that overstatement does not change the outcome. The evidence established that repayment ...


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