ISN Software: Result of malpractice suit a mockery of Delaware law, will lead to companies leaving the state

Texas-based ISN Software Corporation is hoping to bring its legal malpractice claim against law firm Richards Layton & Finger PA to the Delaware Supreme Court, believing the dismissal of the case in Delaware Superior Court "makes a mockery" of Delaware law.

In a brief filed June 10, the software corporation argues that Superior Court Judge Mary Miller Johnston should not have dismissed ISN’s legal malpractice claim in February on grounds of statutes of limitations.

As previously reported by the Delaware Business Daily, the Delaware judge ruled in February that the toll in legal malpractice actions began with the law firm’s bad advice, not when the company discovered a loss from a result of the advice. Judge Johnston’s 11-page decision to dismiss the case said ISN Software should have sued RLF within three years after receiving the advice that resulted in a $67 million loss, rather than when the company knew there was some financial damage from said bad advice.

“Recently Delaware lost its top Institute of Legal Reform ranking among corporations and this case is a prime example why," ISN Software Executive Chairman Bill Addy said in an interview. "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. The decision makes a mockery of this principle. The result will be more corporations fleeing the state."

ISN Software’s brief from June 10 argues that actual damages must be incurred in order for a malpractice claim to exist. This, in turn, did not occur more than 3 years after RLF had provided the bad advice.

ISN Software’s malpractice claim against Raymond DiCamillo and Mark Gentile of RLF was filed in August. The case stems from legal advice the attorneys from RLF provided to ISN Software executives regarding a cash-out merger that resulted in a $67 million loss for company. Starting in November 2012, ISN Software sought a conversion from an ‘C’ to an ‘S’ corporation, but four of its eight stockholders did not qualify for an ‘S’ corporation. The company then sought to buy back shares from them and was advised by RFL to carry out a cash-out merger. The shareholders would then have the option to accept ISN’s cash offer or exercise their appraisal rights under Delaware law. The company sought to cash out three of the four non-qualifying stockholders and set aside $34 million in buyout reserves to purchase the shares.

On Jan. 15, 2013, less than one week after the merger was penned, RLF informed ISN that the advice had been erroneous and that all four of the non-qualifying stockholders benefitted from appraisal rights. RLF advised ISN Software that steps could be taken to revoke the merger and expunge the records, or to proceed and defend against any appraisal actions by stockholders. RLF advised ISN to proceed with the merger and the company followed the law firm's advice. 

In the appraisals that concluded in April 2016 – over three years after ISN Software was advised and notified of the erroneous advice – the Delaware Court of Chancery concluded the fair value of the merger was $357 million – a combined $67 million more than ISN’s reserves. The Delaware Supreme Court upheld the Chancery’s conclusion in October 2017.

ISN Software did not bring its legal malpractice claim until August 2018.

The Delaware Supreme Court has not scheduled oral arguments on the appeal.

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