Effective Steps Prevent Disqualification

The Delaware Court of Chancery denied a motion to disqualify counsel

This letter constitutes the Court’s decision on a joint motion that defendants and intervenor Duff & Phelps, LLC filed to disqualify Morris, Nichols, Arsht & Tunnell LLP (“MNAT”) from representing plaintiffs in this action. For the reasons explained below, the motion to disqualify is denied.

Sycamore Partners Management, L.P. (“Sycamore”) is a private equity firm. At the times relevant to this motion, SP Dollar Holdings, Ltd. (“SP Dollar”) was an indirect subsidiary of Sycamore, and Dollar Express LLC (“Dollar Express”) was an indirect subsidiary of SP Dollar. In 2015, Dollar Express acquired approximately 330 discount stores from Family Dollar Stores, Inc. (“Family Dollar”) when Family  Dollar merged with Dollar Tree, Inc. (“Dollar Tree”).

Family Dollar, Dollar Tree, and certain of their affiliates are plaintiffs in this action; Sycamore, SP Dollar, Dollar Express, and certain of their affiliates are defendants. Duff & Phelps intervened for the limited purpose of joining defendants in filing the motion to disqualify MNAT from representing plaintiffs in this action.

MNAT had represented Duff & Phelps

MNAT’s invoice reflects that it assisted in revising Duff & Phelps’ engagement letter with SP Dollar and in reviewing and advising Duff & Phelps on a board book and a solvency opinion letter.

The present matter

On June 1, 2017, MNAT filed an eighteen-count Verified Complaint on behalf of plaintiffs in this action alleging that defendants deliberately failed to pay for tens of millions of dollars of goods and services they purchased from plaintiffs in connection with operating the 330 discount stores that Dollar Express acquired from Family Dollar in 2015. Relevant to this motion, some of the counts allege that the Dividend was a fraudulent transfer and an illegal distribution under 6 Del. C. § 18- 607.10

On September 6, 2017, counsel for defendants discovered MNAT’s May 2016 invoice to Duff & Phelps and thus learned that MNAT had provided legal advice to Duff & Phelps regarding its solvency analysis and opinion for the Dividend. On September 7, 2017, defendants’ counsel contacted MNAT and asked it to withdraw from this action. That same day, S. Mark Hurd, MNAT’s General Counsel, instructed MNAT personnel to implement an ethical wall between the Duff & Phelps Matter and this action.

Hurd investigated the alleged conflict, personally interviewing the two MNAT partners who worked on the Duff & Phelps Matter.  The two confirmed that they have had no involvement in this action and that they have not discussed the substance of their work for the Duff & Phelps Matter with the MNAT attorneys involved in this action. Hurd also confirmed that the MNAT attorneys involved in this action have not discussed any confidential information regarding MNAT’s prior work in the Duff & Phelps Matter with the MNAT attorneys who were involved in the Duff & Phelps Matter, nor have they accessed any of the records from the Duff & Phelps Matter.

As part of his investigation, Hurd instructed IT personnel at MNAT to examine the electronic files from the Duff & Phelps Matter. That examination confirmed, consistent with Hurd’s interviews, that none of the MNAT attorneys who has appeared in this action ever accessed any confidential information from the records in the Duff & Phelps Matter.

Movants failed to establish an attorney-client relationship with MNAT 

Based on my review of the record, including documents submitted in camera, I find it would not have been reasonable for defendants to have believed that MNAT was acting as their counsel in connection with the Duff & Phelps Matter. To start, defendants were represented by separate legal counsel in connection with the Dividend before MNAT became involved. Duff & Phelps thereafter reached out to have MNAT represent it separately.

And failed to establish that the proceedings would be tainted

MNAT has taken numerous, and in my view, effective, precautions to protect Duff & Phelps’ confidences. Although MNAT did not create an ethical screen from the outset of this litigation, it implemented one the same day that it learned of the issue from defendants’ counsel. MNAT has represented in an affidavit that no attorney who has entered an appearance in this action has ever accessed information from the Duff & Phelps Matter, and the two partners who worked on the Duff & Phelps Matter (for less than eight hours combined) have had no involvement in the present litigation. MNAT also has represented that it will not examine Duff & Phelps in this action. Given these representations, I am comfortable that the fairness of these proceedings has not been prejudiced and that appropriate measures are in place to ensure that they will not be prejudiced in the future.

Based on these findings, there is no need for me to determine whether MNAT has violated Rule 1.9(a), an issue on which MNAT and the movants vigorously disagree, with each of them submitting expert opinions in support of their respective positions on the issue. Indeed, given these findings, it would be inadvisable for the Court to opine on the issue since, under prevailing Supreme Court authority, a trial court does not have the independent authority to enforce disciplinary rules governing attorney conduct when the challenged conduct does not prejudice the fairness of the proceedings.

(Mike Frisch)