Court Opinion

ID: 2801868
Source: CourtListenerOpinion
Date Created: 2015-05-19 19:03:42.834617+00
Date Added: 2024-06-11T12:10:38.579800
License: Public Domain

COURT OF CHANCERY
OF THE
STATE OF DELAWARE

COURT OF CHANCERY COURTHOUSE

34 THE CIRCLE
GEORGETOWN, DELAWARE 19947

SAM GLASSCOCK I II
VICE CHANCELLOR

Date Submitted: February 10, 2015
Date Decided: May 19, 2015

Robert S. Saunders, Esquire
Nicole A. DiSalvo, Esquire
Ronald N. Brown, 111, Esquire

Stephen E. Jenkins, Esquire
Catherine A. Gaul, Esquire
Peter H. Kyle, Esquire

Ashby & Geddes Matthew P. Maj arian, Esquire

500 Delaware Avenue, 8th Floor Skadden, Arps, Slate, Meagher & Flom LLP
PO. Box 1150 One Rodney Square

Wilmington, DE 19899 PO. Box 636

Wilmington, DE 19899
Re: Brevan Howard Credit Catalyst Master Fund Limited et al. v.

Spanish Broadcasting System, Inc. ,
Civil Action No. 9209—VCG

Dear Counseléiﬁ‘;

This is the latest judicial iteration of rights of holders of preferred stock in
Spanish Broadcasting System, Inc. (“SBS”). In their Complaint, the Plaintiffs
allege two different sets of contractual rights for which they seek vindication.
Those alleged in Count 111 involve repurchase rights under the applicable
“Certiﬁcate of Designations Setting Forth the Voting Power, Preferences and
Relative, Participating, Optional and Other Special Rights and Qualiﬁcations,
Limitations and Restrictions of the 10 %% Series B Cumulative Exchangeable,
Redeemable Preferred Stock” of SBS (the “Certiﬁcate”). Those rights were the

subject of a previous opinion in this matter denying a motion to dismiss brought by

 

the Defendant] The remainder of the Complaint deals with certain rights of the
Plaintiffs, as holders of 10 %% Series B Cumulative Exchangeable Redeemable
Preferred Stock (the “Series B Preferred Stock;” I refer to the holders of such stock
as the “Series B Preferred Stockholders”). The rights at issue arise upon the
happening of a Voting Rights Triggering Event (“VRTE”) under the terms of the
Certiﬁcate. According to the Plaintiffs, “[a] VRTE has been in effect since at least
April 15, 2010 when the dividends due July 15, 2009 had been in arrears and
unpaid for four consecutive quarterly dividend periods.”2 Under the terms of the
Certiﬁcate, SBS was contractually bound not to incur “Indebtedness,” a deﬁned
term in the Certiﬁcate, while a VRTE was in effect. The parties dispute whether
the failure to pay dividends as described above was a VRTE under the terms of the
Certiﬁcate. During the alleged VRTE, the Company incurred debt and the
Plaintiffs seek contract damages.

SBS has moved to dismiss on a number of grounds. This Letter Opinion
will address only one: the Defendant’s argument that these Plaintiffs are prevented
from litigating issues decided against those in privity with the plaintiffs in a prior
decision. The Defendant points to a case involving the precise VRTE allegations

made here, which I decided during the pendency of this action: Lehman Brothers

 

g.—  _ _ __

l Brevan Howard Credit Catalyst Master Fund Ltd. v. Spanish Broad. Sys., Inc., 2014 WL
2943570 (Del. Ch. June 27, 2014) (Brevan Howard 1).
2 Am. Compl. 11 45.

2

 

 

Holdings, Inc. v. Spanish Broadcasting System, Inc.3 In that case, I found that the
Series B Preferred Stockholders had acquiesced in the incurrence of debt allegedly
in breach of the Certiﬁcate, and therefore could not recover damages in connection
with such breach.4 SBS argues, correctly in my view, that the Lehman Brothers
decision is binding on the Plaintiffs here. The plaintiffs in Lehman Brothers, like
the Plaintiffs here, were Series B Preferred Stockholders in SBS, and made the
identical argument that the Plaintiffs make here: that non-payment of dividends
led to the occurrence of a VRTE in 2010, after which SBS incurred debt in
violation of the Series B Preferred Stockholders’ contractual rights. Because the
plaintiffs in Lehman Brothers and the Plaintiffs here (or their predecessors) were
situated identically for purposes of my analysis of acquiescence in that prior
opinion, principles of issue preclusion—res judicata or collateral estoppel—
prevent the Plaintiffs from relitigating these issues.5 Thus, Plaintiffs’ Count I

(seeking a declaration of the existence of a VRTE), Count II (alleging breach of

3 2014 WL 718430 (Del. Ch. Feb. 25, 2014) aﬁ'a’, 105 A.3d 989 (Del. 2014). Consideration of
the Defendant’s Motion to Dismiss Counts I, II, and IV was stayed pending the Supreme Court’s

consideration of the appeal in Lehman Brothers.

4 Lehman Bros, 2014 WL 718430, at *9—*13.

5 Whether the theory is framed as res judicata or collateral estoppel, the outcome would be the
same in this case. If res judicata applies, then the Plaintiffs here are barred from relitigating
Counts I, II, and IV because of the final judgment in Lehman Brothers. If collateral estoppel
applies, then the Plaintiffs are barred from relitigating the issue of acquiescence, which results in
a dismissal of Counts I, II, and IV. See MG. Bancorporation, Inc. v. Le Beau, 737 A.2d 513,
520 (Del. 1999) (“Collateral estoppel and res judicata are related principles of law. Res judicata
bars a suit involving the same parties based on the same cause of action. Collateral estoppel
prohibits a party from relitigating a factual issue that was adjudicated previously.” (internal

citations omitted)).

 

3

 

 

i
,
é
%
t1
S
i
g
_i
J
|

 

contract for the incurrence of indebtedness during a period in which a VRTE was
in effect) and Count IV (alleging that the contractual language regarding triggering
of a VRTE should be read in the Plaintiffs’ favor by applying the covenant of good
faith and fair dealing) are dismissed. As set out in Brevan Howard 1, Count 111
involving SBS’s obligation to repurchase stock remains for litigation.6 What
follows is the briefest adumbration of the facts and legal reasoning involved;
interested readers are referred to the opinions in Brevan Howard I and Lehman
Brothers for their statements of facts and discussions of the issues.

The Plaintiffs argue that acquiescence is an afﬁrmative defense and,
therefore, should await a developed record on which I can evaluate whether SBS
has met its burden of proof with respect to the defense. But the Defendant’s
argument is not acquiescence, as such. The argument is that issue preclusion,
based on my ﬁndings in Lehman Brothers, prevents relitigation of the issues here,
and that there is nothing to distinguish these Plaintiffs from the situation of the
plaintiffs in Lehman Brothers with respect to acquiescence. Acquiescence is a
doctrine focused on the Defendant and its understanding that complained-of acts
were acquiesced in; here, that doctrine is considered in light of the uncontested fact

that no Series B Preferred Stockholder (including these Plaintiffs or their

6 Brevan Howard], 2014 WL 2943570, at *6—*8.
4

 

 

 

 

predecessors, as well as the plaintiffs in Lehman Brothers) objected to the
Defendant incurring debt during a purported VRTE.
In Lehman Brothers, I found acquiescence supported by nine factors; those

factors, with their applicability to the present case noted below, are as follows:

(1) The Plaintiffs [there, like the Plaintiffs (or their predecessors)
here], in purchasing the Series B Preferred Stock, were investing in
equity akin to debt instruments, the salient feature of which was the
payment of quarterly dividends; (2) the Certiﬁcate’s language, at least
in the Plaintiffs’ view [there, as well as that of the Plaintiffs here],
required the Company to refrain from incurring four consecutive
quarters of arrearages, or trigger a VRTE, which would provide the
Plaintiffs a right to place directors on the Board as well as prevent
additional incurrence of debt; (3) the Plaintiffs [there, like the
Plaintiﬁfs (or their predecessors) here] should have known both that
dividends were payable quarterly and that they had not received all
quarterly dividend payments, commencing May 9, 2009; (4)
thereafter, the Plaintiffs [there, like the Plaintiﬁfs (or their
predecessors) here] should have known (under their reading of the
Certiﬁcate) that a VRTE was in effect as of April or July of 2010; (5)
the Plaintiffs [there, like the Plaintiffs (or their predecessors) here,]
[had actual or imputed] knowledge of SBS’s intent to enter into the
debt transactions in August 2011 and February 2012; (6) despite
notice of all of these facts, the Plaintiffs [there, like the Plaintiffs (or
their predecessors) here] did nothing, leading SBS to believe that the
Plaintiffs acquiesced in the debt transactions; (7) that belief was
reasonable, and thus foreseeable to the Plaintiffs [there, like the
Plaintiffs (or their predecessors) here], particularly in light of (a) the
mechanism to ﬁll board seats implemented in the Certiﬁcate whereby
SBS would expect preferred stockholders with a large position in SBS
(such as the Plaintiffs [there]) to request the Company hold a Special
Meeting upon the occurrence of a VRTE, (b) the facially ambiguous
language of the VRTE provision, and (c) the fact that those debt
transactions the Plaintiffs [there, like the Plaintiﬁfs here] now
challenge did at the time they were incurred confer on the Plaintiffs
[there, like the Plaintiffs (or their predecessors) here], as equity
holders in the Company, a beneﬁt which at that time they were

5

apparently content to accept; (8) SBS entered into the debt
transactions in reliance on the Plaintiffs’ acquiescence [including that

of the Plaintiffs (or their predecessors) here]; and (9) should the
Plaintiffs [here, like the Plaintiﬁfs there] be permitted to pursue
damages [], such reliance will prove detrimental to SBS since [with

notice, SBS could have avoided damages].7
The question of whether SBS’s Series B Preferred Stockholders acquiesced in the

debt transactions was vigorously and ably litigated in Lehman Brothers.8 Whether

proceeding under the doctrine of res jua’icata9 or collateral estoppel,10 the only
issue in applying the findings above to the Plaintiffs here is whether they are in

privity with the Lehman Brothers plaintiffs.11 The Plaintiffs here do not argue that

-_— —s;.

7 Lehman Bros, 2014 WL 718430, at *12. I note that our Supreme Court’s subsequent decision
in Klaassen v. Allegro Dev. Corp, 106 A.3d 1035 (Del. 2014), appears to have rendered some of
these factors superﬂuous to an acquiescence analysis.

8 The Plaintiffs allege that they cannot be bound by the decision in Lehman Brothers because the
Defendant failed to seek consolidation of this action with that matter when it was pending. I ﬁnd
this argument unavailing. I do not find that the Defendant has made a “clear and unequivocal
waiver” of the right to assert res judicata as a defense. See Glaser v. Norris, 1992 WL 14960, at
*16 (Del. Ch. Jan. 6, 1992) (“Although a party may waive his right to assert a res judicata
defense, . . . the waiver must be clear and unequivocal.”).

9 Dover Historical Soc, Inc. v. City of Dover Planning Comm’n, 902 A.2d 1084, 1092 (Del.
2006) (“Res judicata operates to bar a claim where the following ﬁve-part test is satisfied: (1) the
original court had jurisdiction over the subject matter and the parties; (2) the parties to the
original action were the same as those parties, or in privity, in the case at bar; (3) the original
cause of action or the issues decided was the same as the case at bar; (4) the issues in the prior
action must have been decided adversely to the appellants in the case at bar; and (5) the decree in
the prior action was a ﬁnal decree”).

10 See MG. Bancorporation, 737 A.2d at 520 (“The test for applying the collateral estoppel
doctrine requires that (1) a question of fact essential to the judgment (2) be litigated and (3)
determined (4) by a valid and final judgment”).

H See Kohls v. Kenetech Corp, 791 A.2d 763, 767 (Del. Ch. 2000) aﬂ'd, 794 A.2d 1160 (Del.
2002) (“There are, however, signiﬁcant differences between the two doctrines. Under the
doctrine of res judicata, a judgment in a prior suit involving the same parties, or persons in
privity with them, bars a second suit on the same cause of action. Under the doctrine of collateral
estoppel, on the other hand, a judgment in a prior suit does not operate to bar a subsequent cause
of action but rather precludes the relitigation of a factual issue which was litigated and decided in

6

 

 

.
|
l
g

 

the factors above have not been conclusively decided against other Series B
Preferred Stockholders. Nor do they contest that, under modern principles of issue
preclusion, those litigants sufﬁciently closely situated with the Lehman Brothers
plaintiffs are deemed in privity with, and should be bound by, the earlier decision,
because those with identical interests have already litigated the issues.12 They
argue, however, that they are not in privity with those plaintiff—stockholders and

thus not bound by my decision in Lehman Brothers.

The Plaintiffs ﬁrst cite this Court’s decision in Kohls v. Kenetech for the
proposition that privity does not inure to all those within a class of stockholders,13
and that, therefore, the holding in Lehman Brothers does not apply to them. It is
true that the Court in Kohls applied a narrow, contractual View of privity, as
opposed to the identity-of-interests View adopted in more recent cases,14 and that it
speciﬁcally concluded that a status as fellow stockholders “is plainly not the type
of legal relationship” demonstrating that narrow View of privity, requiring as it
does that “a non-party [have] a speciﬁc type of pre—existing relationship with a

named party, such as bailor and bailee, predecessor and successor or indemnitor

 

 —— —-= — —— _ _;_——__ :_ ___._.=—___._ — __-' -——

the prior suit between the same parties or persons in privity with them.” (emphasis added)

(quoting Foltz v. Pullman, Inc., 319 A.2d 38, 40 (Del. Super. 1974)).
12 See Pls.’ Answering Br. in Opp’n to Def.’s Mot. to Dismiss at 11 (citing Aveta, Inc. v.

Cavalh'erz', 23 A.3d 157, 180 (Del. Ch. 2010) (“Privity is . . . a legal determination for the trial
court with regard to Whether the relationship between the parties is sufﬁciently close to support

preclusion”) (internal quotation marks omitted)).

3 Id. at 11—12 (citing Kohls, 791 A.2d at 769).
14 See, e. g., Aveta, 23 A.3d at 180 (“Parties are in privity for res judicata when their interests are

identical or closely aligned such that they were adequately represented in the ﬁrst suit”).

7

 

 

 

 

 

 

_—.=_n‘"f

and indemnitee.”15 Kohls should give no comfort to the Plaintiffs, however. As I
read Kohls, it places a pleading burden on these Series B Preferred Stockholders to
enunciate why they are situated differently from those Series B Preferred

Stockholders who were parties in Lehman Brothers, or, under principles of stare

6 As discussed below, the

decisis, face dismissal for failure to state a claim.1
Plaintiffs fail to allege meaningful dissimilarity from the Lehman Brothers
plaintiffs, either for purposes of issue preclusion or under a Kohls-type analysis.

In an attempt to differentiate their position from that of the plaintiffs in
Lehman Brothers, the Plaintiffs here ﬁrst point to factor 7(a) in my Lehman
Brothers ﬁndings, set out above. That factor refers to the Defendant’s reasonable
reliance on, inter alia, the fact that large stockholders did not assert the right to a
special meeting, at which all Series B Preferred Stockholders during the existence
of a VRTE could have pursued directorships under the Certiﬁcate. But that point
goes to SBS’s state of mind and reasonable reliance, not the position of the
Plaintiffs. In other words, all Series B Preferred Stockholders knew certain rights
were created in the Certiﬁcate that would likely be exercised if the VRTE
occurred, and that among these rights was a right conferred upon those Series B

Preferred Stockholders with a more-than-ten percent position in SBS—they could

demand a special election. All Series B Preferred Stockholders, in light of that

 

 

“‘5 Kohls, 791 A.2d at 769.
‘6 Id. at 770—72.

 

 

understanding and despite having notice that SBS was to incur debt, failed to
exercise their rights under the Certiﬁcate or even give notice of objection to SBS’s
board. In that circumstance, all Series B Preferred Stockholders, and not just those
with an interest greater than ten percent, acquiesced in the transaction.

Next, the Plaintiffs point out that some of their shares were acquired after
the debt was incurred, and that they should at least be able to take discovery about
the state of mind of their predecessors, assuming those predecessors can be
identiﬁed.17 For that reason, they ask that the Motion to Dismiss be denied. The
problem with that assertion, again, is that acquiescence is focused on the
understanding of the Defendant.18 The record is clear that the Plaintiffs and their
predecessors, owners of Series B Preferred Stock at the time the complained-of
debt was incurred, had actual or constructive notice that SBS intended to acquire

the debt, and stood silent. Their intent in so doing is not pertinent here.19

_ = - =_ .; w.

17 I note that it is unlikely that the predecessors could be identiﬁed, since it is likely that these
shares were acquired from record owners who were not the beneﬁcial owners, and who held
shares in fungible bulk. However, I do not rely on this fact in reaching my decision.
18 Our Supreme Court has recently summarized that acquiescence in a complained-of act is
present where:
[A claimant has] full knowledge of his rights and the material facts and (1)
remains inactive for a considerable time; or (2) freely does what amounts to
recognition of the complained of act; or (3) acts in a manner inconsistent with the
subsequent repudiation, which leads the other party to believe the act has been
approved. For the defense of acquiescence to apply, conscious intent to approve
the act is not required, nor is a change of position or resulting prejudice.
Klaassen v. Allegro Dev. Corp, 106 A.3d 1035, 1047 (Del. 2014) (emphasis added) (internal

citations and quotation marks omitted).
19 The Plaintiffs also argue that they should be entitled to take discovery on the Defendant’s state

of mind as speciﬁcally relating to the Plaintiffs. See Pls.’ Answering Br. in Opp’n to Def.’s Mot.
9

 

 

Because the Plaintiffs may not relitigate this Court’s determination that the |

Series B Preferred Stockholders acquiesced in the incurrence of debt complained

of here, the Counts of the Complaint turning on allegations that such incurrence of 
debt was wrongful—Counts I, II and IV—are dismissed. The parties should 
provide an appropriate form of order. 
é

Sincerely, 

/s/ Sam Glasscock III ;

g

Vice Chancellor 

cc: Register in Chancery f

— __ —_—=_=__-——_____,_——.—_—_ ——_____ ————— — mi
— - _ é — _—_ -'—

HT—Aﬁ

 

 

 

 

to Dismiss at 18—19. I have, however, already made findings with respect to the Defendant’s
state of mind, ﬁnding that SBS relied on the lack of objection by any Series B Preferred
Stockholders. See Lehman Bros. Holdings Inc. v. Spanish Broad. Sys., Inc., 2014 WL 718430, at
*11 (Del. Ch. Feb. 25, 2014), aﬂ'd, 105 A.3d 989 (Del. 2014). I thus ﬁnd that no further

discovery is warranted.

 

10 ;