No Fee Award For Litigation Funder

The Delaware Court of Chancery denied a request for a mammoth amount of legal fees by a litigation funder.

Preferred Spectrum Investments, LLC (“PSI”) seeks to recover $20 million as an award of attorneys‘ fees and expenses from Preferred Communication Systems, Inc. (the”Company” or “PCSI”). PSI claims it is entitled to this amount because it provided the funding necessary for plaintiff Michael Judy to pursue three pieces of litigation that were filed separately and then consolidated into this action: (i) a summary proceeding to obtain books and records, (ii) a summary proceeding to compel the holding of an annual meeting, and (iii) a plenary action challenging the authority of the individual then runningthe Company and the validity of certain actions he took.

PSI claims that because Judy prevailed in the litigation, the Company was able to preserve its ownership of two blocks of wireless licenses that constituted the Company‘s primary assets. The Company subsequently sold one block of licenses for $60 million, and PSI values the other block of licenses at $40 million. PSI contends it should receive one third of the after-tax value of the aggregate $100 million benefit. PSI posits a tax rate of 40%, yielding an after-tax benefit of $60 million, and an award of $20 million.

As a fallback, PSI contends it should recover $4,059.99.12, representing expenses that PSI claims to have incurred. PSI contends it actually incurred $8,257,717.52 in expenses, but during a period when individuals affiliated with PSI also held positions with the Company, it made partial payment of the amounts due, leaving the amount PSI now seeks.

 The original $8,257,717.52 appears grossly inflated. Of the total amount, PSI claims to have expended $4,198,618.40 for lawyers and other law-related expenses, but PSI admits that not all of those fees and expenses were for Judy‘s litigation efforts in this action. A substantial portion of the fees went to fund lawyers for individuals who PSI encouraged to intervene and assert personal claims for equity or other securities from the Company. Another substantial portion of the fees were for lawyers who appeared in proceedings before the Federal Communications Commission (the “FCC”), where PSI took positions adverse to the interests of the Company.

Thanks for asking but no thanks

For multiple reasons, PSI‘s motion is denied. First, PSI lacks standing to seek a fee award. PSI was neither the plaintiff nor plaintiff‘s counsel. PSI gratuitously financed litigation nominally being conducted by Judy. As a volunteer financier, PSI cannot seek an equitable fee award.

Second, PSI cannot obtain a fee award because it financed Judy‘s litigation as part of an attempt to take over the Company. This court has held that parties cannot obtain an equitable fee award when they use litigation in support of a takeover.

Third, PSI cannot establish the necessary causal connection between its litigation financing and the value of the licenses. There are too many intervening steps for PSI to be able to claim responsibility for $100 million in value.

Finally, PSI cannot recover a quantum meruit award, and in any event cannot recover all of the expenses it has claimed. Under no circumstances can PSI recover the amounts it spent to hire lawyers for individuals to pursue personal claims against the company or for lawyers to appear before the FCC and take positions adverse to the Company. Nor can PSI recover the myriad of ordinary business expenses that it has included in its petition.

(Mike Frisch)