The Delaware Supreme Court’s decision to publicly rebuke Delaware Court of Chancery Chancellor Leo E. Strine Jr. has reminded some court watchers of previous tension between the two institutions. Although the two courts have battled before, some say the Supreme Court’s criticism of Strine was more barbed than it has been in previous conflicts.
In a per curiam opinion issued earlier this month in Gatz Properties v. Auriga Capital, the Supreme Court sharply criticized Strine for using 11 pages of his 75-page post-trial opinion in the case to espouse his view that Delaware’s Limited Liability Company Act does impose default fiduciary duties upon an LLC’s managers and controllers when the LLC agreement is silent on such matters. Strine had concluded that under the statute, LLC managers have the same fiduciary duties as heads of traditional equity groups unless both parties specifically write in the LLC agreement that such duties do not apply. The Supreme Court affirmed Strine’s opinion in Gatz, but called his interpretation of the LLC Act an “issue that the trial court should not have reached or decided” and declared his opinion on the matter “as dictum without any precedential value.”
“We remind Delaware judges that the obligation to write judicial opinions on the issues presented is not a license to use those opinions as a platform from which to propagate their individual worldviews on issues not presented,” the court said. “A judge’s duty is to resolve the issues that the parties present in a clear and concise manner. To the extent Delaware judges wish to stray beyond those issues and, without making any definitive pronouncements, ruminate on what the proper direction of Delaware law should be, there are appropriate platforms such as law review articles, the classroom, continuing legal education presentations and keynote speeches.”
The court further highlighted its point by referring to Strine as a “trial judge” instead of as chancellor and included a footnote restating Section 3.1(a) of the Delaware Judges’ Code of Judicial Conduct. One Delaware attorney called both moves “highly personal.”
However, court watchers say such conflict between the two courts is not new and both institutions will survive with their reputations intact.
“This kind of friction is nothing new between the Supreme Court and the Court of Chancery,” said Lawrence A. Hamermesh, the Ruby R. Vale Professor of Corporate and Business Law at Widener University School of Law. “There were similar conflicts in the late 1980s between Justice [Andrew G.T.] Moore and Chancellor [William T.] Allen and Delaware seems to have survived just fine in the long run. I would suggest both institutions are much greater than whatever this dustup is about.”
Hamermesh added that the relationship between the two courts has improved in the past decade.
“The tension has been much worse,” he continued. “There was a time in the 1990s when I think there was an outright disrespect for the chancellor from some of the positions taken by the Delaware Supreme Court. It was a source of tension, but you don’t see that anymore.”
Jill E. Fisch, the Perry Golkin Professor of Law and co-director of the Institute for Law and Economics at the University of Pennsylvania Law School, agreed with Hamermesh that the relationship between the two courts has improved.
“I do think the Delaware justices and vice chancellors have been more outspoken referring back and forth to the other court in recent years,” she said. “There have been a number of cases where a vice chancellor has stated their view, but said it was constrained by the Supreme Court. However, I think there is more explicit dialogue between the two courts than there used to be.”
Delaware legal insiders say the differences between the two courts climaxed in 1993, when the Supreme Court, in an opinion written by former Justice Henry R. Horsey, criticized Allen for his decision in Cede & Co. v. Technicolor. One Delaware practitioner called the opinion “very stinging.”
At one point in the opinion, Horsey blasted Allen’s restatement of the rule to require a plaintiff to prove a proximate cause relationship between the defendant’s board’s presumed breach of its duty of care.
“We think the court’s restatement of the rule would lead to most unfortunate results, detrimental to goals of heightened and enlightened standards for corporate governance of Delaware corporations,” Horsey wrote.
In Cede & Co., the Supreme Court kept its criticism of Allen strictly to the case at hand and did not rise to the level of rhetoric used by the court in Gatz.
“It got more personal in Gatz,” said one Delaware attorney. “The Supreme Court elevated the threat when they cited the Code of Judicial Conduct. They went overboard with their response.”
Another key difference between the two opinions is that Horsey continued to refer to Allen as “chancellor” throughout the opinion, not as a “trial judge,” a move that the attorney said “was designed to take [Strine] down a peg.”
Previous Supreme Court decisions that levy criticism of the Chancery Court have usually been signed by a single judge. For example, Horsey is also credited for another notable opinion critical of Allen, Paramount Communications v. Time. However, Gatz is unique because it is a per curiam opinion.
Outside of attorney discipline matters and advisory opinions requested by the governor, the Delaware Supreme Court issued only one per curiam opinion this year, in Crumplar v. Superior Court, according to its website. The Supreme Court did not issue any per curiam opinions in 2011 or 2010.
As a per curiam opinion, all of the Delaware justices had to sign off on the decision, meaning they needed to be comfortable with the language used by the court. One Delaware practitioner called the decision to issue Gatz as a per curiam opinion “unusual” and clear that it is “reflective of all the justices’ views.”
Fisch said the differences between the two courts are good for Delaware because it shows that both institutions have different, but informed, views on corporate governance.
“I don’t think either court looks foolish,” she said. “It looks like both courts are informed, have views on important issues and are interested in articulating the reasons for their views. I don’t see it as a black mark on either court.”
She added that the attention paid to the Supreme Court’s rebuke of Strine has undermined an important policy question the two courts are currently mulling.
“The media is taking attention away from the important policy question about what Delaware’s LLC Act should look like,” she said. “It is an important question for the courts to air and I don’t think debating its opinions undermines the reputation or importance of either court.”
Hamermesh agreed, noting that sometimes it is necessary for the Supreme Court to weigh in on corporate governance issues and remind the legal community of its importance in establishing law.
“If legal opinions are Delaware’s main export, the Supreme Court understandably and appropriately insisted that it is a significant part of that export,” he said. “The export is not just the Court of Chancery, it is the whole system. Sometimes the Chancery Court gets it wrong and it is important to have a sophisticated appellate court to reverse those decisions than a trial court that is unaccountable.”
This article first appeared in Delaware Business Court Insider, a Legal sibling publication.