Bessenyei v. Vermillion, Inc., C.A. No. 7572-VCN (Del. Ch. Nov. 16, 2012) (Noble, V.C.)
In this memorandum opinion, the Court of Chancery dismissed with prejudice a breach of fiduciary duty action after Plaintiffs submitted invalid verifications accompanying pleadings and interrogatory responses. The Court explained that failure to comply with Rule 3(aa)’s notarized verification requirement went beyond mere technicality, undercutting the basis of the judicial process and warranting dismissal, but declined to award attorneys’ fees on the ground that dismissal appropriately addressed Plaintiffs’ conduct.
Plaintiffs, György Bessenyei, a Hungarian national living in Switzerland, and Robert Googin, III, a Pennsylvania attorney, sued Vermillion, Inc. and its present and former directors in connection with certain seats on Vermillion’s board. They alleged the directors breached their fiduciary duties by reducing the size of the board after Plaintiffs initiated a proxy contest for those seats and sought declaratory and injunctive relief. During discovery, Defendants learned Bessenyei’s verifications, which accompanied the complaint, amended complaint, and interrogatory responses, were inappropriately notarized. Defendants moved for dismissal pursuant to Court of Chancery Rule 41(b), arguing Plaintiffs failed to comply with Court of Chancery Rules by submitting verifications that did not satisfy Rule 3(aa).
Rule 3(aa) requires that a notarized verification accompany pleadings and other papers filed with the Court. Verifications from foreign jurisdictions satisfy this requirement so long as they are valid under the law of the jurisdiction in which they are signed. The Court, citing Pennsylvania precedent, explained that Pennsylvania law requires, among other things, a signatory to appear before the notary who is notarizing the document. Bessenyei’s verifications were notarized by Jennifer Bennett who worked for Googin in Philadelphia. Yet, Bessenyei did not appear before Bennett at the time he signed the verification. The Court concluded that, because Bessenyei did not appear before Bennett when signing the verifications, Bessenyei’s verifications were invalid under Pennsylvania law and that they failed to satisfy Rule 3(aa) as a result.
Citing to Parfi Holdings AB v. Mirror Image Internet, Inc., 954 A.2d 911 (Del. Ch. 2008), the Court explained that failure to comply with the Court of Chancery rules does not, without more, warrant dismissal with prejudice. Under Parfi, dismissal for failure to comply with Court of Chancery Rules is appropriate where a party deliberately violates the Rules of the Court. The Court concluded it did not have enough information with respect to Bessenyei or Plaintiffs’ Delaware Counsel to conclude they deliberately provided invalid verifications. The Court was, however, critical of Delaware Counsel observing there were steps Plaintiffs’ Delaware Counsel “perhaps, should have or could have taken.” With respect to Bennett and Googin, the Court explained that whether they knew their conduct was improper was irrelevant; Bennett and Googin either knew of this requirement or were willfully ignorant of it. Such conduct, the Court concluded, warranted dismissal.
The Court next addressed a more complex question: what to dismiss. Bessenyei, it reasoned, should be dismissed because it was his signatures that were improperly notarized. But, Googin, the other plaintiff, had properly notarized verifications. The Court nevertheless dismissed Googin as well because Googin’s direction to Bennett to improperly notarize Bessenyei’s signature went to the very concerns that resulted in the adoption of Rule 3(aa) and its notarization requirement. Bessenyei’s verifications reported that he had signed before a notary. Googin knew this to be untrue and did nothing to preserve the integrity of the process that he had brought before the Court. The Court concluded no sanction short of dismissal was appropriate in those circumstances.
Defendants sought attorneys’ fees and expenses incurred in bringing their motion to dismiss. Although recognizing dishonesty is often a mark of bad faith, the Court observed that Bessenyei had, in fact, signed the documents. The falsehood, in this circumstance, was a procedural one, which, the Court concluded, the sanction of dismissal with prejudice adequately addressed.