Del. Justices Award Attorney Fees Under Promissory Note Fee-Shifting Provisions

Persuaded by the arguments of the appellant noteholders, the Delaware Supreme Court ruled that two fee-shifting provisions in the promissory notes entitled them to recover attorney fees the noteholders incurred filing suit to secure warrants issuable under the notes. Relying on an exception to the American rule permitting fee-shifting where a contract so provides, the Supreme Court in Washington v. Preferred Communications Systems, No. 436, 2016 (Del. Supr. Feb. 27), ruled that the amended notes unambiguously provided fee-shifting in this case. It rejected the company’s argument that under the relevant contractual provisions the warrants did not constitute “any indebtedness” and that the noteholders action to recover them did not amount to a collection action after default. Having found a clear basis in the contract to support its fee award, the Supreme Court declined the opportunity to broaden its ruling and have Delaware address an emerging trend in other states to treat a one-sided fee provision as a mutual fee-shifting provision.

BACKGROUND

Preferred Communications Systems Inc. issued promissory notes in 2006. The company promised investors repayment of principal, interest and warrants. When the notes became due in 2007, the company defaulted. In an offer letter, the company offered the noteholders additional warrants (the extension warrants) if they would forego remedies for default. When in 2013 the company engaged in a transaction triggering its obligation to pay off the notes, the company paid the principal and interest but disputed the noteholders entitlement to the extension warrants. After the noteholders brought suit in the Court of Chancery and moved for summary judgment, the Chancery Court concluded that the company had promised the extension warrants as a component of the noteholders’ return and was obligated to provide them. The noteholders then moved for their attorney fees and expenses incurred in the Chancery action. Their motion was based on Section 6.2 of the notes: Should any indebtedness evidenced by this note be collected by action at law, or in bankruptcy, receivership, or other court proceedings, or should this note be placed in the hands of attorneys for collection after default, Maker agrees to pay, upon demand by holder, in addition to principal and interest and other sums, if any, due and payable hereon, court costs and reasonable attorney fees and other reasonable collection charges. Should maker be required to bring any action to enforce its rights under this note, it shall be entitled to an award of its court costs and reasonable attorney fees in such action.