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A Delaware Court of Chancery judge issued a rare ruling last week ordering defendants in a nearly seven-year legal saga to pay their opponents’ attorney fees and costs based on the defendants’ prelitigation conduct. In an April 12 letter ruling in Saliba v. William Penn Partnership, Chancellor William B. Chandler III ordered the defendants who orchestrated the contested sale of a motel to pay all of the plaintiffs’ attorney fees and court costs and part of their expert witness fees. “Because defendants conducted the sale in a clearly conflicted manner that resulted in a breach of fiduciary duty, I find and conclude that it would be unfair and inequitable to require plaintiffs to shoulder the costs incurred in demonstrating the unfairness of this sales process,” Chandler wrote. In the underlying case dating back to December 2003, Anis Saliba and Rosa Ksebe, two trustees of an entity that partly owned Del Bay LLC, a real estate investment and holding company, sued seven parties in Delaware’s Chancery Court. The individual and company defendants include Del Bay; partial owners William Penn Partnership and Robert Hoyt; Del Bay managers Bryce Lingo and T. William Lingo; and Lingo-owned companies J.G. Townsend Jr. & Co. and Beacon Revex LLC. The plaintiffs’ second amended lawsuit of June 24, 2005, claims that the Lingos arranged with other owners to buy a Del Bay-owned motel and undeveloped land in Lewes, Del., for $6 million in June 2003 to illegally advance their own financial interests. The plaintiffs asked the court to award damages or rescind the transaction in question. According to other court documents, Del Bay ultimately sold the motel and land to the Lingo-owned Townsend for $6.6 million. The case was tried in November 2006. A May 2009 bench ruling held that defendants “utterly failed to present evidence sufficient to meet their burden of showing entire fairness.” In September 2009, the court appointed two experts to determine the property’s fair market value as of June 2003. A Jan. 22 filing by the plaintiffs disputed the experts’ estimated $5.48 million fair market value for the property. The plaintiffs noted that the estimate was based on a routine appraisal and not a bidding process. They also noted that if the Lingos hadn’t forced the sale, it would probably have occurred “at an extremely opportune time for sellers in Lewes.” The filing also requested attorney fees and costs because the Lingos “acted in a knowing, indefensible, and egregious manner when they manipulated the sales process for their benefit.” The plaintiffs claimed the Lingos wanted the below-market deal in order to do a so-called 1031 exchange. Section 1031 of the Internal Revenue Code allows taxpayers to defer capital gains on certain types of property sales if the seller uses the proceeds to buy other property within a set time frame. The lawsuit claims include breach of fiduciary duty, aiding and abetting breaches of fiduciary duty, conspiracy and unjust enrichment. The plaintiffs’ lawyer, Peter Walsh, a partner a Potter Anderson & Corroon in Wilmington, Del., did not return calls for comment. The defendants’ lawyer, Jeffrey Weiner of Wilmington, said he does not comment on matters in active litigation. Although it’s not unprecedented for the Delaware chancery court to award legal fees for egregious prelawsuit conduct, “it is rare,” said Francis G.X. Pileggi, a Wilmington, Del., litigation partner at Philadelphia’s Fox Rothschild, who isn’t involved in the case. Parties involved in U.S. litigation generally pay their own attorney fees unless a statute or agreement dictates otherwise or the case is a class action or a derivative case with a common fund to pay legal costs, Pileggi said. “Egregious, unjustified prelitigation conduct may be an exception to [this] rule, especially when there has been a breach of fiduciary duty and only nominal damages are otherwise available based on the facts of the case,” Pileggi said.

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