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Wednesday, November 20, 2019

ISN Software seeks Delaware supreme court review of malpractice claim against its former lawyers

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By John Breslin | Jun 21, 2019

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ISN Software Corp. is asking the Delaware state supreme court to overturn a ruling that it failed to file in time an allegation of malpractice against its lawyers.

ISN Software Corp. is suing Richards Layton & Finger (RLF) in Delaware, claiming the legal firm delivered advice relating to the rights of share holders that cost the company approximately $67 million.

"Ignoring all of this Court’s precedents requiring an actual 'resulting loss' to file a malpractice claim, the Superior Court created a new standard that requires a client to file a malpractice claim when she is subjected only to a mere 'risk of loss,'” attorneys for ISN argue in its brief before the Delaware Supreme Court.

The company was told in February 2013 that it was given incorrect advice relating to a merger and that there was a risk of future harm. Courts considered the issue and the Delaware Court of Chancery concluded, in April 2016, that the value of the merger was $357 million, $67 million more than ISN's reserves. This decision was upheld by the Delaware Supreme Court.

ISN sued RLF in August 2018, but Delaware Superior Court Judge Mary M. Johnston found that the company should have sued within three years of RLF’s mistake in 2013. ISN Software sought legal advice in 2012 from RLF regarding the company’s options to buy back its own shares to convert from a C-Corp to an S-Corp. The law firm developed a merger plan that involved cashing out four stockholders, at about $38,000 per share.

In January, ISN moved forward with the merger, based on the advice that a shareholder did not hold appraisal rights, that is the right to have a Delaware Court of Chancery decide the price per share. The merger was finalized in January 2013. Following the merger, RLF told the company that its advice was incorrect and that the shareholder would have appraisal rights.

In February 2013, ISN Software and the law firm approved a “consent letter" acknowledging that RLF’s continued representation of the company would create a “potential conflict” because “litigating issues arising from a law firm’s prior legal work may generate a conflict of interest," according to a Delaware Business Daily article.

The consent letter also stated there “may be an issue” concerning the law firm’s advice on “the availability of appraisal rights in connection with the merger.”

In April 2013, the stockholder filed an appraisal action. In August 2016, the Court of Chancery issued an opinion valuing the shares at $98,783 per share. The buyout ended up costing ISN Software about $65 million more than the company expected it to cost. Superior Court Judge Johnston ruled that the claim failed due to the state's three year statute of limitations.

“Recently Delaware lost its top Institute of Legal Reform ranking among corporations and this case is a prime example why," said Bill Addy, executive chairman of the ISN Software Corporation, in a statement. "The Superior Court judge in our case has created a new interpretation of Delaware law regarding the right to sue lawyers for legal malpractice.

"We created our corporation in Delaware because it had a reputation for consistent and fair application of Delaware law," Addy said. "The decision makes a mockery of this principle. It is placing protecting Delaware attorneys above the principle of fairly applying Delaware law. The result will be more corporations fleeing the state.”

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