noting that the Court "may deviate in its sound discretion" from the applicable rate of interestSummary of this case from Tiverton Power Associates Lid. v. Shaw Group
C.A. No. 18524-NC
Date Submitted: January 31, 2003
Date Decided: July 8, 2003
David C. McBride, John W. Shaw, and Dawn M. Jones, Esquires of YOUNG CONAWAY STARGATT TAYLOR, LLP, Wilmington, Delaware; and Max W. Berger, Steven B. Singer, and Gerald H. Silk, Esquires of BERNSTEIN LITOWITZ BERGER GROSSMANN LLP, New York, New York; Attorneys for Plaintiffs.
Henry A. Heiman and Susan B. Kaufman, Esquires of HEIMAN, GOUGE KAUFMAN, Wilmington, Delaware; Anthony M. Feeherry, and Gus P. Coldebella, Esquires of GOODWIN PROCTER LLP, Boston, Massachusetts; Neal J. Levitsky, Esquire of FOX ROTHSCHILD LLP, Wilmington, Delaware; and Donald H. Chase, Esquire of MORRISON COHEN SINGER WEINSTEIN, LLP, New York, New York; Attorneys for Defendants.
Presently pending are two motions presented by the plaintiffs. The first seeks the entry of default judgment against defendant Jozef Lernout. The second seeks a determination of damages, following the entry of default judgment, against all defendants. For the reasons discussed below, both motions will both be granted.
The plaintiffs are Stonington Partners, Inc., the Stonington Capital Appreciation 1994 Fund, L.P., and Stonington holdings, L.L.C. (collectively "Stonington"). Stonington owned approximately 96% of the issued and outstanding capital stock of Dictaphone Corporation, a Delaware corporation ("Dictaphone"). In May 2000, Stonington sold their interest in Dictaphone to the defendants This lawsuit arises out of that sale.
Storungton Partners, Inc., a Delaware corporation, is the management company that controls the Stonington Capital Appreciation 1994 Fund Stonington Capital Appreciation 1994 Fund, L.P. is a Delaware limited liability company. All three plaintiff entities have their principal place of business in New York.
Dictaphone, which is headquartered in Connecticut, develops, manufactures, markets, services, awl supports integrated voice and data management systems and software.
Four defendants were joined in this action. The corporate defendant, Lernout Hauspie Speech Products, N.V. ("LH"), is a Belgian corporation whose principal places of business are located in leper, Belgium and Burlington, Massachusetts. The three individual defendants are Jozef Lernout ("Lernout"), Pol Hauspie ("Hauspie"), and Nico Willaert ("Willaert"). Default judgments were entered against defendants Hauspie and Willaert at an earlier stage of this case.
Lernout and Hauspie are the co-founders of LH. Until November 9, 2000, both were managing directors and co-chairmen of LH's board of directors. Willaert was LH's vice-chairman, and was also a managing director until November 9, 2000. Both Willaert and Hauspie were directors of LH until November 22, 2000.
Stonington Partners Inc. v. Lernout Hauspie Speech Products, N.V., 2002 Del. Ch. LEXIS 123 (Del.Ch., Oct. 23, 2002) (Jacobs, V.C).
In May 2000, LH purchased Stonington's 96% interest in Dictaphone in exchange for LH stock then worth $489,183,707. As a result, Dictaphone became a wholly owned subsidiary of LH. Six months later, in early November 2000, LH announced that because of "accounting irregularities," it had restated its publicly-filed financial statements for 1998, 1999, and the first half of 2000. As a result, $373 million of revenues that LH had publicly reported for the period January 1998 through June 2000, evaporated.
Days later, on November 29, 2000, LH filed for bankruptcy in both the United States and Belgium. The effect of those proceedings was to render essentially worthless the LH stock that Stonington had received in connection with LH's May 2000 purchase of Stonington's Dictaphone stock.
Stonington commenced this action on November 27, 2000, claiming that the defendants had defrauded them, Stonington sought rescission of the Dictaphone stock transaction; or alternatively, money damages for the value of the LH stock as of the merger date; plus prejudgment interest.
The defendants were served with process on December 6, 2000. On October 30, 2001, eleven months after this action was filed, Lernout moved for an enlargement of time to answer or otherwise respond to the complaint. Hauspie and Willaert never entered an appearance in this action until January 11, 2002, at which time they resisted Stonington's motion for the entry of default judgment against them. By Opinion dated October 23, 2002, this Court granted the plaintiffs' motion for default judgment against Hauspie and Willaert, and denied Lernout's motion for enlargement of time. Thereafter, the plaintiffs brought on the pending motions.
Stonington Partners, 2002 Del. Ch. LEXIS 123, at *32.
II. THE GOVERNING LAW AND THE PARTIES' CONTENTIONS
The plaintiffs seek the entry of a default judgment against Lernout and an award of damages against all the defendants. Under Rule 55(b), this Court may enter a default judgment where a party has failed to appear, plead, or defend a case. The party seeking entry of the default must apply for that relief, and thereafter, the Court may conduct whatever hearings, or request whatever information, it requires to enable it to determine what damages are appropriate.
See Ch. Ct. R. 55(b).
Lernout contends that no default judgment can be entered against him, because he was improperly served with process under the Hague Convention of the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters (the "Convention"). Lernout argues that because he is a citizen and resident of Belgium, service of process on him by registered mail was a nullity.
The plaintiffs disagree. They contend that default judgment is fully warranted, because Lernout waived any service of process defense by failing to respond in a timely manner after receiving actual notice of the complaint. They further contend that under the Convention, service by mail is permissible.
Assuming that the motion for default judgment against Lernout is granted, the plaintiffs also seek a determination of damages against all defendants. Stonington contends that because rescission is impracticable, they are instead entitled to damages of $489,183,707, plus prejudgment interest of $51,364,289 per year. Defendants Hauspie and Willaert contend, for various reasons, that the amount of damages being requested was improperly calculated. Lernout contends that the damages should be measured by the plaintiffs' out-of-pocket loss, i.e, the difference between the value of the property that the plaintiffs gave up and the value of the property that they received. Lernout also argues that the plaintiffs are not entitled to prejudgment interest as a matter of right.
The plaintiffs next contend that under Rule 55(b), this Court, in its discretion, may determine damages without a live evidentiary hearing. Stonington argues that the Rule permits the Court to determine damages based on affidavits and other evidentiary materials filed after the entry of default judgment, thereby obviating the need for a hearing and discovery. The defendants disagree. They contend that they are entitled to discovery and to a live hearing as a matter of right.
The above-recited contentions boil down to two issues. The first is whether the motion for entry of default judgment against Lernout should be granted. The second is whether a hearing and discovery are necessary to determine damages, and if not, what the appropriate amount of damages should be.
I turn to those issues.
A. The Motion For Default Judgment Against Lernout
This Court has previously found that the plaintiffs have satisfied the test for the entry of a default judgment against Lernout. Its reasons were set forth at length in the Court's earlier Opinion, and will not be repeated here. In this Opinion, what the Court considers are Lernout's newly proffered reasons why, despite his default, judgment should not be entered against him. Lernout argues that service was improper. The plaintiffs respond that service was proper for three independent reasons. First, service was proper under the Convention because the plaintiffs complied with the Delaware long arm statute. Second, Lernout was properly served through the mail as permitted by the Convention. Third, Lernout has waived any objection to ineffective service. The Court determines that all of plaintiffs' arguments are meritorious.
Stongington Partners, 2002 Del. Ch. LEXIS 123, at *15 — *17.
1. Lernout Was Properly Served
Lernout contends that he was improperly served with process under the Convention. He argues that the Convention requires that he be personally served, which was not done here. Lernout is wrong. Article 10(a) of the Convention permits judicial documents to be sent directly to foreign parties through postal channels. The Article relevantly provides that "[p]rovided the State of destination does not object, the present Convention shall not interfere with . . . the freedom to send judicial documents, by postal channels, directly to persons abroad . . ." Neither the United States nor Delaware "objected."
Convention of the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters, Nov. 15, 1965, art 10(a), 20 U.S.T. 361.
Delaware case law holds that where the requirements for service of process under the Delaware long arm statute are satisfied, then so, too, are the service requirements under the Convention. Section 3104(b) of Delaware's long arm statute provides that a defendant is effectively served with process when service is made upon Delaware's Secretary of State. Section 3104(b) does not require that the process documents be physically served upon the nonresident defendant. All that the statute requires is that a copy be sent to the nonresident defendant by registered mail.
Quinn v. Keinicke, 700 A.2d 147, 155-56 (Del.Super. 1996) (holding service of process sufficient because Delaware's long-arm statute required actual service upon Delaware Secretary of State but only notice to defendant). The courts have split over the meaning of Article 10(a) of the Convention. A majority of courts follow the position asserted in Quinn, namely that the word "send" in Article 10(a) means "service." But see Bankston v. Toyota Motor Corp., 889 F.2d 172 (8th Cir. 1989) (maintaining that Article 10(a) does not endorse service by mail). The Bankston court employed a literal interpretation of Article 10(a), and found that when they drafted the Convention, the drafters intended to distinguish between the terms "service" and "send." See id. at 173-74.
Here, the plaintiffs initially served the complaint and summons upon the Delaware Secretary of State, and sent copies of the complaint to each Belgian defendant by registered mail. Because those documents were "sent" within the meaning of Delaware's long arm statute and Article 10(a) of the Convention, the plaintiffs complied with the service requirements of both. Service of process was, therefore, valid.
2. Service By Mail Is Permitted Under The Convention
In addition, and in the alternative, the plaintiffs argue that service was promptly effected under the Convention, which permits service of process by mail. Delaware Courts have interpreted Article 10(a) of the Convention broadly to effect its intended purpose, which is to simplify service of process upon nonresident defendants abroad. Lernout's arguments — which advocate different requirements for service than those permitted by the Convention — are without merit.
See Quinn, 700 A.2d at 159 (citing Hague Service Convention, reprinted in 28 U.S.C.A. Rule 4 at 219-21 nn. 3, 3c, 11a, 11d (West 1992)). The Court is also persuaded by the fact that objection to any Article is permitted and certain states found it necessary to object to service of mail. Belgium did not object to service by mail, as did other signatories. Among the states objecting to service by mail, as they understood Article 10(a) to provide for, were Mexico, Bulgaria, and China. Other states, such as Canada and Pakistan, explicitly agreed to service of process by mail under Article 10(a). See also United States Department of State Opinion Regarding the Bankston Case and Service by Mail to Japan under the Hague Service Convention, 30 I.L.M. 260, 261 (1991). It is apparent that the United States Department of State takes the position that service by mail is permitted under the Convention.
Thus, for the two reasons addressed above, Lernout was properly served under the Delaware long arm statute and the Convention. But, there is a third reason. Where, as here, a defendant fails without excuse to answer the complaint in a timely manner, the defense of defective process is deemed to have been waived. Here, because Lernout failed without excuse to answer in a timely manner, he is precluded from raising the defective process defense on the ground of waiver.
Stonington Partners, Inc., 2002 Del. Ch. LEXIS 123, at *31 n. 29.
Ch. Ct. R. 12(h)(1); see Tuckman v. Aerosonic Corp, 394 A.2d 226, 232-33 (Del.Ch. 1978). (holding that failure to assert defenses promptly resulted in a waiver). Rule 12(a) requires that an answer be served within 20 days of service of the complaint on defendant unless the time for answering is extended, and therefore, under normal circumstances a defendant would be held to have waived the defenses of lack of jurisdiction over the person and insufficient service of process if the defenses had not been raised in the answer or by motion before service of the answer. In either event whether raised by motion or pleading, the maximum time allowed would have been 20 days from service of the complaint on a defendant. See id. at 233. See also 5a Wright Miller, Federal Practice and Procedure, § 1391 (2d ed. 1990) "But when the party has received actual notice of the suit there is no due process problem in requiring him to object to the ineffective service within the period prescribed by Rule 12(h)(1) and the defense is one that he certainly can waive if he wishes to do so." See id. at 756.
B. The Motion For A Determination of Damages
Once a default is established, the defaulting party loses standing to contest the factual allegations of the claim. Because default judgments have been granted against Lernout, Willaert, and Hauspie, the only remaining issue is what relief is appropriate. The appropriate relief in these circumstances is damages.
Gebelein v. Four State Builder, 1982 Del. Ch. LEXIS 479, at *4 (Del.Ch. Oct. 8, 1982) (citing Thomson v. Woosten, 113 U.S. 104 (1885)) (hereinafter "Gebelein I").
1. Discovery And Hearing Unnecessary
Weinberger v. UOP, Inc, 457 A.2d 701 (Del. 1983).
The defendants argue that before damages can be determined, they are entitled to take discovery and have an evidentiary hearings Rule 55(b) provides that the Court may hold a post-default hearing to determine "the amount of damages or to establish the truth of any averment by evidence . . ." if it finds such a hearing to be necessary. Where a default has occurred, it is common for courts to determine the damages that the plaintiffs are entitled to recover, and then enter judgment accordingly. The damages are calculated from the established facts and other record evidence. Hearings are commonly held where the amount of damages is unknown, but in all events, the issue of whether or not to hold a hearing remains entirely within the Court's discretion. There is no "entitlement" to a hearing as a matter of right.
Ch. Ct. R. 55(b).
See Pope v. U.S., 323 U.S. 1, 12 (1944)
Gebelein v. Four State Builders, 1983 Del. Ch. LEXIS 492, at *1-*2 (Del.Ch. Feb. 24, 1983) (hereinafter "Gebelein II"). 10 Wright Miller, Federal Practice § 2688 (1973).
In this case, damages can be determined without a live evidentiary hearing. The defendants contend that a hearing is needed, because plaintiffs' request for damages is not for a "sum certain." The Court disagrees. LH was willing to exchange 9,064,329 shares of its own common stock in exchange for Stonington's 96% ownership interest in Dictaphone. On the day of the transfer, that LH stock was worth $489,183,707 on a market value basis.
Calculated as follows: 9,064,329 shares of LH stock having a market value of $53.969 per share on May 5, 2000, the date of the transaction.
The defendants also seek discovery relating to the damages issue, specifically, information that would enable them to analyze Dictaphone's financial condition at the time of the transaction. This argument fails for two reasons. First, the defendants have not shown how such discovery would have any discernible relevance to the issue of damages, even under the flexible standard of Rule 26. Second, the defendants had ample opportunity to analyze Dictaphone's financial statements during and as part of their due diligence, when they acquired the Dictaphone stock on May 5, 2000. The defendants should have performed their due diligence at that time. They cannot be permitted to do so now under the guise of conducting discovery, particularly where, as here, the only practical effect would be to delay this proceeding for no legitimate purpose.
The Court next turns to the issue of how damages should be computed.
2. Determination of Damages
Where, as here, a party to a contract is entitled to a money judgment for having been defrauded into surrendering property, one measure of recovery is restitutionary, i.e., the extent of the wrongdoer's unjust enrichment measured by the value of the surrendered property at the time of its improper acquisition. Alternatively, the Court may award the plaintiffs their "out-of-pocket" loss, which is the difference between the value of what they gave up and the value of what they received in return. The plaintiffs here seek damages in the amount of $489,183,707. The defendants argue that damages should not exceed the plaintiffs' "out-of-pocket" loss, which would require subtracting from the $489,183,707, the present worth of Stonington's LH stock.
See Morris v. Thayer, 1991 Del. Ch. LEXIS 190, at *7 (Del.Ch. Nov. 15, 1991); see also Restatement (First) of Restitution § 151 (1937).
Morris, 1991 Del. Ch. LEXIS 190, at *7.
That contention, even if accepted, is of no help to the defendants. Here, damages of $489,183,707 would be justified whether measured by restitutionary (i.e., unjust enrichment) or out-of-pocket standard, because the LH stock is currently worth nothing ($O).
In many cases, these amounts would differ, but due to the underlying facts of this case, they are the same.
Therefore the plaintiffs' out-of-pocket loss is $489,183,707 ($489,183,707 less $0); and because no proof was offered that the value of LH stock at any time after the transaction was worth more than $0, the defendants were unjustly enriched by $489,183,707.
Here, damages will be computed on the "out-of-pocket" basis. The issues, therefore, become: (i) what was the value of the Dictaphone stock and (ii) what was the value of the LH stock exchanged therefor, at the time of the transaction?
In this case, the parties contracted for the sale of plaintiffs' Dictaphone stock in exchange for LH stock that had a particular value at that time. The plaintiffs contend that their damages should equal the market price of the LH stock they received on the day of the Dictaphone transfer. On May 5, 2000, the day of the transfer, the market price of LH stock was $53.969 per share. Because Stonington received 9,064,329 shares of LH stock, LH must have regarded the value of Stonington's 96% ownership interest in Dictaphone as worth $489,183,707 ($53.969 x 9,064,324).
The defendants do not contest that value. They claim, however, it must be reduced by the value of the LH stock that they received and presently own. As a theoretical matter that is true, but in fact it makes no difference because, as a result of the fraud perpetrated by defendants, LH's stock value is worthless. Measuring damages under the "out-of-pocket" approach, this Court finds that plaintiffs gave up Dictaphone stock having a value equivalent to $489,183,707 (based on the then-market price of LH stock), in exchange for 9,064,329 shares of LH that are now worthless. Therefore the plaintiffs will be awarded their "out-of-pocket" loss of $489,183,707 ($489,183,707 less $0).
Hauspie Willaert Ans. Br, at 4.
The LH stock is no longer publicly traded, LH stock declined dramatically, falling from a high of $72.50 in March 2000 to $.76 on December 29, 2000. On December 6, 2000, the common stock of LH was de-listed by Nasdaq. Thereafter, LH voluntarily de-listed from Nasdaq Europe in March 2001. See The Commission Files Fraud Action against Lernout Hauspie Speech Products, at http://www.sec.gov/litigation/litreleases/lrl7782.htm (Oct. 10, 2002). The SEC has also revoked its registration. LH stock is no longer listed on the Pink Sheets Registry. There no longer exists any public market for LH stock.
See Tam v. Spitzer, 1995 Del. Ch. LEXIS 116, at *28-*30 (Del.Ch. Aug. 17, 1995). The damages in a fraud case are calculated by determining the amount a party should have received at the time of a transaction less the value of what that party actually received. In Tam, the plaintiffs purchased a business for $103,500. Plaintiffs later learned that the defendants had defrauded them and the company was actually worth $58,210 less. This Court awarded damages in the form of a $58,210 reduction of the purchase price. Here, however, because the LH stock is worthless, there is no value to subtract from the purchase price.
The parties also dispute the plaintiffs' claim for prejudgment interest. An award of prejudgment interest is within this Court's discretion, Given the defendants' egregious fraud, prejudgment interest is appropriate in this case. The legal rate of interest, which is the Federal Discount Rate plus 5%, is a benchmark from which the Court may deviate in its sound discretion. The Court finds no reason to deviate from the legal rate in this case.
Gaffin v. Teledyne, 611 A.2d 467, 467 (Del. 1992).
RGC Int'l Investors, LDC v. Greka Energy Corp., 2001 Del. Ch. LEXIS 107, at *68 (Del.Ch. Aug. 22, 2001).
See 6 Del. C. § 2301.
To calculate the appropriate rate of prejudgment interest, the Court must first determine when prejudgment interest began to accrue. Here interest began accruing on the date the fraud was perpetrated on the plaintiffs — May 5, 2000. Accordingly, prejudgment interest will be awarded for the period May 5, 2000 up to and including the date of judgment.
To afford counsel guidance in determining the prejudgment interest rate, they should average (i) the monthly Federal Discount Rate (Federal Funds) for the months of May 2000 to December 2000 (6.61875%), (ii) the composite Federal Discount Rate for 2001 (3.40%), and for 2002 (1.17%), and (iii) the monthly rates from January 2003 until the date that the judgment becomes final. To the resulting percentage, 5% should be added to arrive at the legal rate. See RGC Int's Investors, 2001 Del. Ch. LEXIS 107, at *69. The monthly and weekly figures are available online at http://www.federalreserve.gov/releases/H15. The yearly figures are available at http://www.federalreserve.gov/releases/H15/data/a/dwb.txt.