Dollar Tree, Inc. v. Dollar Express

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
ANDRE G. BOUCHARD LEONARD L. WILLIAMS JUSTICE CENTER
CHANCELLOR 500 N. KING STREET, SUITE 11400
WILMINGTON, DELAWARE 19801-3734

Date Submitted: October 17, 2017
Date Decided: November 21, 2017

William M. Lafferty, Esquire Stephen E. Jenkins, Esquire
Morris, Nichols, Arsht & Tunnell LLP Ashby & Geddes
1201 North Market Street 500 Delaware Avenue
Wilmington, DE 19801 Wilmington, DE 19899

David E. Ross, Esquire Elena C. Norman, Esquire
Ross Aronstam & Moritz LLP Young Conaway Stargatt & Taylor, LLP
100 S. West Street, Suite 400 Rodney Square
Wilmington, DE 19801 100 North King Street
Wilmington, DE 19801
Jeffrey L. Moyer, Esquire
Richards Layton & Finger P.A.
One Rodney Square
920 N. King Street
Wilmington, DE 19801

RE: Dollar Tree, Inc., et al. v. Dollar Express LLC, et al.
Civil Action No. 2017-0411-AGB

Dear Counsel:

This letter constitutes the Court’s decision on a joint motion that defendants

and intervenor Duff & Phelps, LLC filed to disqualify Morris, Nichols, Arsht &

Tunnell LLP (“MNAT”) from representing plaintiffs in this action. For the reasons

explained below, the motion to disqualify is denied.
Dollar Tree, Inc., et al. v. Dollar Express LLC, et al.
C.A. No. 2017-0411-AGB
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I. Background
Sycamore Partners Management, L.P. (“Sycamore”) is a private equity firm.

At the times relevant to this motion, SP Dollar Holdings, Ltd. (“SP Dollar”) was an

indirect subsidiary of Sycamore, and Dollar Express LLC (“Dollar Express”) was an

indirect subsidiary of SP Dollar. In 2015, Dollar Express acquired approximately

330 discount stores from Family Dollar Stores, Inc. (“Family Dollar”) when Family

Dollar merged with Dollar Tree, Inc. (“Dollar Tree”).

Family Dollar, Dollar Tree, and certain of their affiliates are plaintiffs in this

action; Sycamore, SP Dollar, Dollar Express, and certain of their affiliates are

defendants. Duff & Phelps intervened for the limited purpose of joining defendants

in filing the motion to disqualify MNAT from representing plaintiffs in this action.

A. MNAT Provides Legal Advice in Connection with Dollar Express’
Issuance of a Dividend to Sycamore
In early 2016, as part of a series of transactions, Dollar Express contemplated

issuing a dividend of approximately $30 million to Sycamore (the “Dividend”). As

reflected in an engagement letter dated April 6, 2016, SP Dollar, on behalf of itself

and its subsidiaries, engaged Duff & Phelps to provide a solvency analysis and

opinion concerning the Dividend. The engagement letter states that Duff & Phelps

would use any “non-public or proprietary information . . . solely in the course of this

Engagement and in a manner which Duff & Phelps believes in good faith is

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consistent with the Company Group’s interests or is required by law.” 1 It also

authorizes Duff & Phelps to retain outside counsel for the engagement and provides

that SP Dollar and its subsidiaries would reimburse Duff & Phelps for the reasonable

fees and expenses of such counsel.

In April 2016, Duff & Phelps retained MNAT to provide legal advice on the

solvency work it performed for SP Dollar (the “Duff & Phelps Matter”). MNAT’s

engagement letter, which Duff & Phelps signed on April 14, 2016, states that MNAT

had been selected as “Delaware counsel to represent Duff & Phelps, LLC in

connection with its engagement as independent financial advisor to SP Dollar

Holdings Ltd. and certain of its affiliates.”2

According to a May 3, 2016 invoice MNAT sent to Duff & Phelps, three

MNAT attorneys (two partners and one associate) worked on the Duff & Phelps

Matter over the course of approximately one week, from April 6, 2016 to April 15,

2016. They billed a total of 12.20 hours of time, with the two partners billing less

than four hours each and the associate billing 4.60 hours.3

1
Mot. to Disqualify Ex. B at 8. “Company Group” is defined to mean SP Dollar and certain
of its subsidiaries. Id. at 1.
2
Transmittal Affidavit of S. Mark Hurd (“Hurd Aff.”) Ex. G at 1.
3
Mot. to Disqualify Ex. D at SYC0011317.

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MNAT’s invoice reflects that it assisted in revising Duff & Phelps’

engagement letter with SP Dollar and in reviewing and advising Duff & Phelps on a

board book and a solvency opinion letter.4 The board book contained, among other

things, financial information concerning Dollar Express, an organization chart, a

description of the proposed transaction, and various analyses.5

On April 19, 2016, Duff & Phelps provided its solvency analysis and opinion

to SP Dollar. Duff & Phelps concluded that “[t]he assets of each of the Delaware

Entities, at a Fair Valuation, exceed its respective Debts (including Contingent

Liabilities),” and that “[e]ach of the Delaware Entities should be able to pay its

respective Debts (including Contingent Liabilities) as they become due.”6 The

solvency opinion also concluded that “[n]one of the Delaware Entities will have an

unreasonably small amount of assets (or capital) for the businesses in which it is

4
Id. at SYC0011318. According to MNAT, more than half of the time it billed (6.40 hours)
involved the engagement letter between Duff & Phelps and SP Dollar. Resp’ts Opp’n Br.
at 4.
5
Mot. to Disqualify Ex. C.
6
Mot. to Disqualify Ex. A at 7. “Delaware Entities” is defined to mean SP Dollar Holdco
LLC, SP Dollar Intermediate Holdco LLC, Dollar Express LLC, and Dollar Express Stores
LLC. Id. at 2. Each of these entities is a subsidiary of SP Dollar.

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engaged or in which management has indicated it intends to engage.”7 Sometime

thereafter, the Dividend was issued to Sycamore.

Duff & Phelps paid MNAT for the work it did on the Duff & Phelps Matter.8

The last time MNAT performed any work for Duff & Phelps on any matter was on

August 26, 2016.9

B. MNAT Files the Present Action on Behalf of Plaintiffs
On June 1, 2017, MNAT filed an eighteen-count Verified Complaint on behalf

of plaintiffs in this action alleging that defendants deliberately failed to pay for tens

of millions of dollars of goods and services they purchased from plaintiffs in

connection with operating the 330 discount stores that Dollar Express acquired from

Family Dollar in 2015. Relevant to this motion, some of the counts allege that the

Dividend was a fraudulent transfer and an illegal distribution under 6 Del. C. § 18-

607.10

On September 6, 2017, counsel for defendants discovered MNAT’s May 2016

invoice to Duff & Phelps and thus learned that MNAT had provided legal advice to

7
Id. at 7.
8
Hurd Aff. ¶ 7.
9
Id.
10
Compl. ¶¶ 113-123.

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Duff & Phelps regarding its solvency analysis and opinion for the Dividend.11 On

September 7, 2017, defendants’ counsel contacted MNAT and asked it to withdraw

from this action.12 That same day, S. Mark Hurd, MNAT’s General Counsel,

instructed MNAT personnel to implement an ethical wall between the Duff & Phelps

Matter and this action.13

Hurd investigated the alleged conflict, personally interviewing the two

MNAT partners who worked on the Duff & Phelps Matter.14 The two confirmed

that they have had no involvement in this action and that they have not discussed the

substance of their work for the Duff & Phelps Matter with the MNAT attorneys

involved in this action.15 Hurd also confirmed that the MNAT attorneys involved in

this action have not discussed any confidential information regarding MNAT’s prior

work in the Duff & Phelps Matter with the MNAT attorneys who were involved in

11
Mot. to Disqualify ¶ 12.
12
Hurd Aff. ¶ 2.
13
Id.
14
Hurd Aff. ¶ 8. The third MNAT attorney who worked on the Duff & Phelps Matter left
the firm before this action was filed.
15
Id.

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the Duff & Phelps Matter, nor have they accessed any of the records from the Duff

& Phelps Matter.16

As part of his investigation, Hurd instructed IT personnel at MNAT to

examine the electronic files from the Duff & Phelps Matter. That examination

confirmed, consistent with Hurd’s interviews, that none of the MNAT attorneys who

has appeared in this action ever accessed any confidential information from the

records in the Duff & Phelps Matter.17

On September 20 and 21, 2017, movants sent letters to MNAT explaining why

they believed MNAT was obligated to withdraw from representing plaintiffs in this

action.18 On September 25, 2017, MNAT sent letters to movants’ counsel, formally

refusing to withdraw.19 In these letters, MNAT asserted that the Duff & Phelps

Matter is not “substantially related” to the matters at issue in this action and

explained measures it had implemented to protect Duff & Phelps’ confidences:

The Morris Nichols lawyers involved in the Dollar Tree Litigation were
not involved in the Duff & Phelps matter, have not accessed the file
from the Duff & Phelps matter nor discussed any confidential
information from that representation with the attorneys who were
involved in it, and have been formally screened from access since early

16
Id.
17
Hurd Aff. ¶ 9.
18
Hurd Aff. Exs. A, C, D.
19
Mot. to Disqualify Ex. F; Hurd Aff. Exs. E, F.

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September, when your clients first expressed their views that there was
a potential conflict.20

MNAT further stated that it had advised Duff & Phelps that it would not examine

Duff & Phelps in connection with this litigation, leaving that task to “be conducted

exclusively by other counsel,” and denied the existence of any implied attorney-

client relationship between MNAT and any of the defendants.21

On September 29, 2017, the Court granted Duff & Phelps’ unopposed motion

to intervene in this action. That same day, defendants, joined by Duff & Phelps,

moved to disqualify MNAT.

II. Analysis
Rule 1.9(a) of the Delaware Lawyers’ Rules of Professional Conduct (the

“Rules”) provides as follows: “A lawyer who has formerly represented a client in a

matter shall not thereafter represent another person in the same or a substantially

related matter in which that person’s interests are materially adverse to the interests

of the former client unless the former client gives informed consent, confirmed in

20
Mot. to Disqualify Ex. F at 1-2.
21
Id.

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writing.” Impermissible conflicts arising under the Rules generally are imputed and

apply to a lawyer’s entire firm, and not just to a lawyer individually.22

A. Parties’ Contentions
Movants contend that MNAT violated Rule 1.9 in two respects for which it

must be disqualified. First, they argue that an implied attorney-client relationship

was formed between MNAT and defendants because MNAT received defendants’

confidential information in the Duff & Phelps Matter. They contend that it would

be improper for MNAT to have implicitly advised defendants on the validity of the

Dividend in the Duff & Phelps Matter, but now attack the Dividend as

impermissible. Second, movants argue that MNAT’s participation in this action

violates its duty of loyalty owed to Duff & Phelps and merits disqualification

because MNAT’s representation of plaintiffs in this action would require MNAT to

discredit the same work on which it advised Duff & Phelps.

MNAT denies that it had an attorney-client relationship with defendants

arising from the Duff & Phelps Matter and contends that its representation of

plaintiffs in this action does not violate duties it owes to Duff & Phelps under Rule

1.9. MNAT further contends that, even if its participation in this action were to

22
Del. Lawyers’ Rules of Prof’l Conduct R. 1.10(a); Bleacher v. Bose, 2017 WL 1854794,
at *2 (Del. Super. Ct. May 3, 2017).
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amount to a technical violation of the Rules, its continued involvement does not

undermine the legitimacy of this judicial proceeding such that it should be

disqualified from representing the plaintiffs.

I consider the movants’ two arguments, in turn, below.

B. There Was No Implied Attorney-Client Relationship Between
MNAT and Defendants
“In the absence of an express contract or formal retainer agreement,

determining the existence of an attorney-client relationship is a fact-intensive inquiry

that depends on the circumstances of each case. In determining the existence of an

attorney-client relationship, courts look at the contacts between the potential client

and its potential lawyers to determine whether it would have been reasonable for the

‘client’ to believe that the attorney was acting on its behalf as its counsel.”23

Based on my review of the record, including documents submitted in camera,

I find it would not have been reasonable for defendants to have believed that MNAT

was acting as their counsel in connection with the Duff & Phelps Matter. To start,

defendants were represented by separate legal counsel in connection with the

Dividend before MNAT became involved. Duff & Phelps thereafter reached out to

23
Benchmark Capital Partners IV, L.P. v. Vague, 2002 WL 31057462, at *3 (Del. Ch.
Sept. 3, 2002) (citations omitted).

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have MNAT represent it separately.24 As this Court has recognized on multiple

occasions, the prior retention of separate legal counsel is a factor that counts against

the formation of a subsequent implied attorney-client relationship.25 Additionally,

the engagement agreement between Duff & Phelps and SP Dollar was explicit that

Duff & Phelps, and not SP Dollar, would engage legal counsel to advise on its

solvency analysis and solvency opinion.26 This Court has viewed the fact that a

purported client did not ask a law firm to represent it as a factor counting against the

formation of an attorney-client relationship.27

Movants invoke Jack Eckerd Corp. v. Dart Grp. Corp. for the proposition that

“an attorney-client relationship arises whenever a lay party submits confidential

information to a lawyer with the reasonable belief that the lawyer is acting as his

attorney.”28 This argument fails here on two levels. First, the submission of

confidential information to a lawyer does not automatically form an implied

24
Transmittal Affidavit of Patricia O. Vella (“Vella Aff.”) Ex. 1.
25
See, e.g., Benchmark, 2002 WL 31057462, at *3; Delaware Trust Co. v. Brady, 1988
WL 94741, at *3 (Del. Ch. Sept. 14, 1988) (Allen, C.).
26
Mot. to Disqualify Ex. B at 5 (“[T]he Consolidated Company agrees to promptly
reimburse Duff & Phelps . . . for reasonable documented fees and expenses of outside
counsel retained by Duff & Phelps.”) (emphasis added).
27
Brady, 1988 WL 94741, at *3.
28
621 F. Supp. 725, 731 (D. Del. 1985).

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attorney-client relationship under Delaware law.29 Second, and more importantly, it

would not have been reasonable in my view for defendants to have believed MNAT

was their lawyer for the reasons explained above.

In sum, in my “realistic assessment of all aspects of the relationship,” 30 no

implied attorney-client relationship was formed between defendants and MNAT.

Thus, the purported relationship between defendants and MNAT does not provide a

basis for seeking to disqualify MNAT from representing plaintiffs in this action. I

consider next MNAT’s relationship with its former client Duff & Phelps.

C. Movants Have Failed to Establish that MNAT’s Representation of
Plaintiffs Would Prejudice the Fairness of the Proceedings
In In re Appeal of Infotechnology, Inc., our Supreme Court made clear that a

violation of the Delaware Lawyers’ Rules of Professional Conduct is not sufficient

by itself to warrant disqualification of counsel from an action, and that

disqualification is appropriate only if the challenged conduct prejudices the fairness

of the proceedings:

While we recognize and confirm a trial court’s power to ensure the
orderly and fair administration of justice in matters before it, including
the conduct of counsel, the Rules may not be applied in extra-

29
See Benchmark, 2002 WL 31057462, at *3 (citing Brady, 1988 WL 94741, at *3)
(“While courts have recognized that a client’s submission of confidential information to an
attorney is an important factor in this inquiry, that factor alone is not controlling.”).
30
Brady, 1988 WL 94741, at *3.

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disciplinary proceedings solely to vindicate the legal profession’s
concerns in such affairs. Unless the challenged conduct prejudices the
fairness of the proceedings, such that it adversely affects the fair and
efficient administration of justice, only this Court has the power and
responsibility to govern the Bar, and in pursuance of that authority to
enforce the Rules for disciplinary purposes.31

The Supreme Court reaffirmed this rule more recently, holding that “[a]bsent

conduct that prejudicially disrupts the proceeding, trial judges have no independent

jurisdiction to enforce the Rules of Professional Conduct.”32

The rule adopted in Infotechnology recognizes that ethical rules “are not to be

subverted as procedural weapons.”33 Accordingly, “disqualification of counsel is an

extreme remedy that should be employed only when necessary to ensure the fairness

of the litigation process.”34

31
582 A.2d 215, 216-17 (Del. 1990) (emphasis added).
32
Crumplar v. Superior Court ex rel. New Castle Cty., 56 A.3d 1000, 1009 (Del. 2012).
33
Infotechnology, 582 A.2d at 220. See also Rohm & Hass Co. v. Dow Chem. Co., 2009
WL 445609, at *2 (Del. Ch. Feb. 12, 2009) (internal quotation omitted) (“Because of the
risk that the ethical rules may be invoked by opposing parties as procedural weapons, courts
impose a significant burden on the party seeking disqualification.”); Sanchez-Caza v.
Estate of Whetsone, 2004 WL 2087922, at *4 (Del. Super. Ct. Sept. 16, 2004) (citing
Acierno v. Hayward, 2004 WL 1517134 (Del. Ch. July 1, 2004)) (noting that courts
disfavor disqualification motions “because they are often filed for tactical reasons rather
than bona fide concerns about client loyalty”).
34
Fernandez v. St. Francis Hosp., Inc., 2009 WL 2393713, at *5 (Del. Super. Ct. Aug. 3,
2009).

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“As a threshold matter, therefore, the court must consider whether the alleged

violation of the Rules is sufficiently serious to prejudice the fairness of the

proceeding. If not, then the alleged violation falls within the jurisdiction of the

Delaware Office of Disciplinary Conduct, not this court.”35 When making this

determination, the Court must weigh “the interests of the former client in protecting

confidences revealed during representation with the prejudice that would be suffered

by the current client were the attorney or firm be disqualified.”36

The parties dispute what burden of proof should apply to establishing

prejudice to the fairness of the proceedings. MNAT points to cases holding that the

burden is one of clear and convincing evidence.37 Movants argue that this

heightened standard only applies to non-client litigants seeking disqualification of

opposing counsel,38 and that courts merely weigh the competing interests of the

35
Matter of Rehab. of Indem. Ins. Corp., RRG, 2014 WL 637872, at *1 (Del. Ch. Feb. 14,
2014) (internal quotation marks and alterations omitted).
36
Express Scripts, Inc. v. Crawford, 2007 WL 417193, at *1 (Del. Ch. Jan. 25, 2007).
37
See, e.g., Dunlap v. State Farm Fire & Cas. Co., 950 A.2d 658, 658 (Del. 2008)
(TABLE); Matter of Rehab. of Indem. Ins. Corp., RRG, 2014 WL 637872, at *1; Postorivo
v. AG Paintball Hldgs., Inc., 2008 WL 3876199, at *14 (Del. Ch. Aug. 20, 2008).
38
See Infotechnology, 582 A.2d at 221 (“[W]e conclude that the burden of proof must be
on the non-client litigant to prove by clear and convincing evidence (1) the existence of a
conflict and (2) to demonstrate how the conflict will prejudice the fairness of the
proceedings.”).

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former and current clients where, as here, a former client moves for

disqualification.39 I need not resolve this issue because, even under the less onerous

balance-of-interests test that the movants advocate, I find that the prejudice that

would be caused to plaintiffs if MNAT were disqualified outweighs Duff & Phelps’

concerns.

Simultaneously with filing this action, plaintiffs filed a motion for expedition

and the entry of a status quo order out of concern that defendants were diverting

assets improperly to avoid paying a potentially substantial judgment. Shortly

thereafter, the parties stipulated to entry of an expedited case schedule, with a five-

day trial scheduled to begin in April 2018.40 Since then, document production has

been substantially completed and multiple motions have been fully briefed and

presented to the Court. Disqualification of MNAT thus not only would deprive

plaintiffs of their chosen counsel, but also undoubtedly would result in significant

expense and delay to plaintiffs in a case that has been placed on an expedited track

with the consent of all parties.41

39
See, e.g., Rohm, 2009 WL 445609, at *2; Express Scripts, 2007 WL 417193, at *1.
40
Stipulation & Order Governing Case Schedule ¶ 1(v) (Dkt. #41). At a recent hearing,
counsel for defendants suggested that the trial date may need to be moved back because of
delays in discovery, but that rescheduling has not yet occurred.
41
See Postorivo, 2008 WL 3876199, at *24 (Del. Ch. Aug. 20, 2008) (“[D]epriving
Defendants of their chosen counsel, especially in a case like this one with large numbers

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On the other side of the ledger, MNAT has taken numerous, and in my view,

effective, precautions to protect Duff & Phelps’ confidences. Although MNAT did

not create an ethical screen from the outset of this litigation, it implemented one the

same day that it learned of the issue from defendants’ counsel.42 MNAT has

represented in an affidavit that no attorney who has entered an appearance in this

action has ever accessed information from the Duff & Phelps Matter, and the two

partners who worked on the Duff & Phelps Matter (for less than eight hours

combined) have had no involvement in the present litigation. 43 MNAT also has

represented that it will not examine Duff & Phelps in this action.44 Given these

representations, I am comfortable that the fairness of these proceedings has not been

prejudiced and that appropriate measures are in place to ensure that they will not be

prejudiced in the future.45

of documents, extensive electronic discovery, and numerous fact witnesses, would cause
substantial prejudice.”).
42
Hurd Aff. ¶ 2. See also Express Scripts, 2007 WL 417193, at *2 (denying defendants’
motion to disqualify a law firm even though an ethical screen was implemented only after
conflict of interest concerns were raised).
43
Hurd Aff. ¶¶ 7-9. As noted above, the associate attorney who worked on the matter was
no longer with MNAT when this action was filed.
44
Hurd Aff. Ex. E.
45
See Rohm, 2009 WL 445609, at *3 (“While [defendant] is correct that the ethical rules
impute knowledge of one attorney to other attorneys in the firm, the issue before the Court
is not whether there was a violation of the ethical rules. To justify disqualification, the

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Based on these findings, there is no need for me to determine whether MNAT

has violated Rule 1.9(a), an issue on which MNAT and the movants vigorously

disagree, with each of them submitting expert opinions in support of their respective

positions on the issue. Indeed, given these findings, it would be inadvisable for the

Court to opine on the issue since, under prevailing Supreme Court authority, a trial

court does not have the independent authority to enforce disciplinary rules governing

attorney conduct when the challenged conduct does not prejudice the fairness of the

proceedings.

III. Conclusion
For the reasons explained above, the motion to disqualify is denied.

IT IS SO ORDERED.

Sincerely,

/s/ Andre G. Bouchard

Chancellor
AGB/gm

Court must find that allowing the representation to continue would threaten the fair and
efficient administration of justice, a threat that is greatly reduced by a credible
representation to the Court that the firm will ensure that the attorneys working on this
matter do not have access to [defendants’] client confidences.”).
17