The general rule in the United States justice system, the so-called “American Rule,” is that each party to litigation must pay its own attorney’s fees. The underlying rationale for the rule is that a plaintiff should not be deterred from bringing a meritorious case to court for fear of prohibitive costs. The American Rule is a default rule that many state and federal statutes or private contracts modify. Courts also generally possess inherent authority to assess attorneys’ fees and litigation costs against a party who acts in bad faith, vexatiously, wantonly or for oppressive reasons. Delaware courts generally follow the American Rule. Pettry v. Gilead Scis., Inc., 2020 WL 6870461, at *30 (Del. Ch. Nov. 24, 2020) (quoting Shawe v. Elting, 157 A.3d 142, 149 (Del. 2017). However, they recognize an exception in equity when a party litigates in bad faith. Rice v. Herrigan-Ferro, 2004 WL 1587563, at *1 (Del. Ch. July 12, 2004). Such “extraordinary circumstances,” exist when a party employs “overly aggressive litigation strategies” to resist a books and records demand. Pettry, 2020 WL 6870461, at *29-30. To warrant fee shifting, a litigant’s conduct muse be “glaring[ly] egregious.” Seidman v. Blue Foundry Bancorp, 2023 WL 4503948, at *6 (Del. Ch. July 7, 2023).
A recent decision by the Delaware Court of Chancery demonstrates a circumstance when the application of a “bad faith” exception to the American Rule is justified. In PVH Polymath Venture Holdings Ltd. v. TAG Fintech Inc., C.A. No. 2023-0502-BWD (Del. Ch. Jan. 26, 2024) (“Polymath”), the Court of Chancery found that defendant-corporation’s efforts to resist stockholder’s books and records demand under 8 Del. C. § 220 (“Section 220”) was glaringly egregious to warrant fee-shifting, requiring the corporation to pay the stockholder’s attorneys’ fees and costs. There, the plaintiff alleged that a privately held Delaware corporation, TAG Innovation (Private) Limited (“TAG”), which provides technology to deliver banking services (e.g., Visa-networking, bill payment, person-to-person payments), submitted a forged letter to the State Bank of Pakistan representing that it obtained funding from an investment advisory firm from China. Id. at 2-3. After the forgery was discovered, Polymath, TAG’s first non-founder shareholder, sent TAG a books and records demand pursuant to Section 220, premised on those allegations. Id. at 3.
TAG denied Polymath’s multiple demands based on supposed questions about Polymath’s status as record stockholder of the corporation and the signatory’s authority to represent Polymath. Id. at 3-4. After Polymath filed a books and records action, TAG answered it, asserting that demand was “invalid,” again questioning the signatory’s authority to make a demand and securing multiple injunctions from the Pakistani government precluding the disclosure of its documents. Id. at 5. TAG even introduced issues of foreign corporate law to defeat the Section 220 demand after the close of discovery and even attempted a last-minute recission of the stockholder’s shares to moot its claims one week before the scheduled trial. Id. at 9. To needlessly increase the cost of litigation and prolong the delay, TAG sought to introduce live testimony at trial, requiring additional briefing by the parties and another status conference before the Chancery. Id. at 11. At trial, TAG refused to stipulate to the authenticity of the majority of the documents even though many were copies of TAG’s own materials and spent most of its trial time arguing merits of the allegations in the Section 220 Demand, despite conceding stockholder’s proper purpose for the Demand. Id. at 12. TAG’s obstructionist tactics did not end there. Even after the Court entered a Final Order and Judgment (“Final Order”), TAG failed to produce any of the materials ordered in the Final Order, forcing Polymath to move for sanctions, in response to which, TAG only agreed to produce documents for in-person inspection in its Abu Dhabi offices. Id. at 16.
Polymath then filed a motion for fee-shifting, seeking an award of attorneys’ fees and expenses, arguing that TAG exhibited overly aggressive litigation strategy aimed at burning both time and Polymath’s resources. The Court of Chancery agreed, holding that TAG’s tactics satisfied Delaware’s standard of “glaringly egregious conduct,” justifying fee-shifting and awarding Polymath attorneys’ fees and costs that the Court found were within the range of what a party reasonably incurs when faced with an adversary who engages in a “’mix of open defiance, evasion and obstruction.’” Id. at 22-23.
Chancery’s decision in Polymath provides a cautionary tale for all litigants and their counsel that they should expect close scrutiny by the Court of Chancery, not only during litigation, but in the context of pre-trial and post-trial proceedings to ensure that all parties comply in good faith with their discovery and substantive obligations.
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