Toll in legal malpractice action began with law firm's bad advice, not when company discovered $67M cost, Delaware judge rules

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A Texas-based software company should have sued its attorneys within three years after receiving bad advice that cost the company $67 million, not from the date when company knew how costly the bad advice was, a Delaware Superior Court judge ruled last month.

Plaintiff in the case, ISN Software Corp., headquartered in Dallas, argued the statute of limitations began to toll with a state Chancery Court's 2016 ruling when the company found out how much the bad advice from the defendant Wilmington law firm had cost. Superior Court Judge Mary Miller Johnston disagreed, saying that ISN's complaint was time barred and that the toll really began about three years earlier when ISN learned from the defendant law firm, Richards Layton & Finger (RLF), that the advice had been bad.

"Plaintiff's legal malpractice claim accrued as of the date defendants notified plaintiff's counsel of the erroneous nature of the legal advice - Jan. 15, 2013," Johnston said in her 11-page decision, issued Feb. 18, to dismiss the case. "At the latest, the statute of limitations began to run with the appraisal action was filed [in chancery court] in April 2013."

Instead, ISN filed its malpractice complaint against RLF and two of the firm's attorneys, Raymond J. Dicamillo and Mark J. Gentile, this past August, more than two years after the statute limitations under Delaware law expired, Johnston ruled.

"The court finds that plaintiff as failed to demonstrate any basis for tolling the limitations period," Johnston said in her decision.

The case stems from advice ISN executives sought beginning in November 2012 from attorneys at RLF, which had represented ISN in corporate matters for about four years. The advice ISN sought was part of the now much-litigated cash-out merger set into action early the following year, according to background and summary portions of the Johnston's decision and ISN's subsequent lawsuit.

At the time, ISN wanted to convert from a "C corporation," in which shareholders are taxed separately from the company, to an "S corporation," in which the company's income, losses and other financial considerations are passed to shareholders for federal tax purposes. Half of ISN’s eight stockholders were not "S-Corp qualifying" and ISN wanted advise about buy-back options for shares of stock from those stockholders.

RLF advised ISN that it could engage in a cash-out merger of some or all of the not-S-Corp-qualifying stockholders, who then would have the option to accept ISN's cash offer or exercise their appraisal rights under Delaware law. If nonqualifying stockholders opted for the latter, then Delaware Court of Chancery would decide the price per share at the conclusion of an appraisal action, RLF reportedly advised ISN.

Based on that advice, ISN offered to cash out to three of the four nonqualifying stockholders, offering them a little more than $38,000 per share, which ISN and RLF "believed to be a generous and equitable price per share," the lawsuit said.

ISN also established a $34 million buyout reserve to purchase the shares.

On Jan. 15, 2013, less than a week after the merger was consummated, RLF informed ISN that their advice had been erroneous, that all four nonqualifying stockholders had appraisal rights, which three of them later sought. At that point, RLF advised ISN that steps could be taken to "revoke the merger and expunge the record" or that the firm and ISN could "move forward with the merger and vigorously defend against any appraisal actions that might possibly be brought by one or more of the non-qualifying stockholders," the lawsuit said.

"RLF expressly advised ISN that seeking to revoke the merger and expunge the record was not the best option," the lawsuit continued. "RLF advised ISN that it should move forward with the merger and that it should allow RLF to defend ISN against any appraisal actions brought by the non-qualifying stockholders. RLF advised ISN that, given RLF's expertise, it could very well achieve a result whereby ISN would spend less than the Buyout Reserve to purchase all 900 shares."

ISN accepted that advice and reached a conflict consent agreement with RLF in February 2013.

In the appraisal action that followed, the Chancery Court concluded in April 2016 that the fair value of the deal was $357 million, or $98,783 per share, more than $67 million more than ISN’s buyout reserve. The Delaware Supreme Court upheld the Chancery Court’s conclusion in its opinion issued October 2017.

ISN filed its legal malpractice lawsuit this past August against RLF and attorneys Dicamillo and Gentile.

"This was the first date upon which ISN had any reason to believe that RLF's bad advice regarding appraisal rights would lead to actual, non-speculative damages above its buyout reserve," ISN's lawsuit said. "Even then, it was not guaranteed that ISN would be injured because RLF intended to appeal. RLF advised that the Court of Chancery opinion would likely be overturned by the Supreme Court."

Johnston rejected ISN's interpretation of the statute of limitations under Delaware law.

"The statute begins to run at the time of the malpractice," Johnston wrote in her decision. "Ignorance of the facts constituting a cause of action is not an obstacle to the limitations period unless the injury is inherently unknowable and the claimant is blamelessly ignorance of the wrongful act."

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