Global Link Logistics, Inc. v. Olympus Growth Fund III, L.P., et al., C.A. No. 4444-VCP (Del. Ch. Jan. 29, 2010)
In this Memorandum Opinion, the Court of Chancery dismissed cross-claims for contribution following an arbitration panel’s finding that cross-claim plaintiffs and cross-claim defendants committed fraud and breached certain representations made in a stock purchase agreement.
In 2006, a group of private equity funds (collectively, “Olympus”), CJR World Enterprises, Inc. (“CJR”) and Chad Rosenberg (“Rosenberg”) entered into a stock purchase agreement in connection with the sale of Global Link Logistics, Inc. to a third party (“Buyer”). Shortly after the consummation of the sale, Buyer learned that the company had engaged in certain illegal practices and commenced arbitration proceedings against Olympus, CJR and Rosenberg. Buyer asserted that the defendants breached certain representations in the agreement and committed fraud by concealing the company’s illegal activities. After a 7-day hearing and numerous witnesses, the arbitration panel found in favor of Buyer and awarded $6.4M in indemnification damages, payable by the defendants pro-rata based upon their respective ownership interests at the time of the sale. The arbitrator also determined that Olympus and CJR were jointly and severally liable for $5.6M in damages (plus interest and costs) relating to the fraud claim. Buyer subsequently filed a complaint with the Court of Chancery to confirm the arbitration award. Olympus filed an answer and also made cross-claims against CJR and Rosenberg seeking contribution from CJR, either for the entire amount of the award based on CJR’s alleged disproportionate liability for the fraud or for CJR’s pro rata share of the same.
Olympus first sought contribution from CJR pursuant to 10 Del. C. § 6302(d), which provides that where there is disproportionate fault as among joint tort-feasors to render inequitable an equal distribution of liability, the relative degrees of fault will be considered in determining their pro rata share of liability. CJR sought to dismiss the proportionate fault claim based on the operation of 10 Del. C. § 6306(d), which provides that as among joint tortfeasors against whom a judgment has been entered in a single action, Section 6302(d) applies only if the issue of proportionate fault is litigated between the cross-claim parties in that action. Thus, because Olympus failed to raise the issue of proportionate fault via cross-claim during the arbitration, CJR argued that Olympus was barred from litigating that issue in a later case. In response, Olympus asserted that an arbitration award does not constitute a final judgment, and Section 6306 was therefore inapplicable. Citing the limited grounds on which a court may modify or vacate an arbitration award and concerns that a contrary decision would undermine judicial efficiency and open the door to duplicative litigation, the Court concluded that under the facts of this case, an arbitration award should be deemed to be a judgment. Accordingly, because the arbitration award constituted a judgment and Olympus failed to litigate the issue of proportionate fault prior to the entry of such judgment, Section 6306(d) barred Olympus’ crossclaims relating to disproportionate liability.
Olympus also sought CJR’s pro rata contribution of the fraud damages pursuant to 10 Del. C. § 6306(b)(1), which permits cross-claims based on a claim that a co-party is liable for all or part of a “claim asserted in the action against the cross-claimant.” However, the Court observed that the action in which CJR could have been found liable to Olympus was the arbitration. Because the arbitration was complete, Olympus was barred from bringing a cross-claim under Section 6306(b)(1). Moreover, Olympus could not seek contribution under Section 6306(b)(2), because such rights to contribution arise only when one of the joint tort-feasors “has discharged the judgment by payment or has paid more than his or her pro rata share.” Thus, the Court dismissed the pro rata contribution claim without prejudice as premature. For similar reasons, the Court also dismissed Olympus’ claims seeking to pierce CJR’s corporate veil. The Vice Chancellor noted that the veil piercing claim was relevant only to the extent that Olympus had a cognizable claim for contribution against CJR. Thus, since the contribution claim was not ripe, the veil piercing claim was not ripe either.