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NAF Holdings, LLC v. Li & Fung (Trading), Ltd.

United States Court of Appeals, Second Circuit

November 19, 2014

NAF HOLDINGS, LLC, Plaintiff-Counter-Defendant-Appellant,
LI & FUNG (TRADING) LIMITED, Defendant-Counter-Claimant-Appellee

Submitted: February 3, 2014.

Plaintiff NAF Holdings, LLC appeals from the judgment of the United States District Court for the Southern District of New York (Engelmayer, J.) granting summary judgment in favor of the defendant Li & Fung (Trading) Limited. The district court dismissed the claim for breach of contract on the grounds that (i) under Delaware law the claim is a derivative claim of the plaintiff's subsidiaries and therefore may not be brought by plaintiff as a direct claim, and (ii) the claims could not be brought derivatively as claims of the subsidiaries because the subsidiaries had committed themselves in a settlement agreement not to bring such claims. The Court of Appeals (Leval, J.) certifies to the Delaware Supreme Court the question whether a corporation is barred under Delaware law from suing to enforce a contract on the ground that the damages it suffered from the contractual breach resulted from harm to the corporation's subsidiary.

George A. Reihner, Wright & Reihner, P.C., Scranton, Pennsylvania, for Plaintiff-Counter-Defendant-Appellant.

John J. Hay & Ulyana Bardyn, Dentons U.S. LLP, New York, New York, for Defendant-Counter-Claimant-Appellee.

Before: LEVAL, CALABRESI and LYNCH, Circuit Judges. Judge LYNCH concurs in a separate opinion.


LEVAL, Circuit Judge :

Plaintiff NAF Holdings, LLC (" NAF" ) appeals from the judgment of the United States District Court for the Southern District of New York (Engelmayer, J.) in favor of defendant Li & Fung (Trading) Limited (" Trading" ). NAF's complaint alleges that Trading breached a contract between them and seeks damages for the harm it suffered as the result of Trading's breach. Under the contract, Trading had

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made a commitment to NAF that it would serve as sourcing agent for Hampshire Group, Limited (" Hampshire" ) once NAF completed its contemplated acquisition of Hampshire. The complaint alleges that Trading wrongfully repudiated the contract and that, as a consequence of Trading's breach, NAF lost financing commitments provided by third parties (which depended on the contract remaining in effect) and was therefore unable to complete the acquisition of Hampshire.

After making its contract with Trading, NAF decided to effectuate its acquisition of Hampshire through two newly created subsidiaries, NAF Holdings II LLC (" NAF II" ), a wholly-owned subsidiary of NAF, and NAF Acquisition Corp. (" NAF Acquisition" ), a wholly-owned subsidiary of NAF II (collectively, " the NAF Subsidiaries" ). The NAF Subsidiaries then entered into a merger agreement with Hampshire (" Merger Agreement" ), to be consummated upon the successful acquisition by the NAF Subsidiaries of Hampshire's stock through a tender offer. Trading allegedly repudiated and refused to perform its contractual obligation to NAF to serve as Hampshire's sourcing agent. Trading's repudiation prevented the NAF Subsidiaries from obtaining the credit they needed to acquire the Hampshire shares and caused them losses in excess of $30 million, which in turn caused substantial loss to their parent, NAF.

The district court granted summary judgment in favor of Trading on the grounds that any injury to NAF resulted from injury to its subsidiaries, so that " any right NAF has to bring suit would therefore be in a derivative, not direct, capacity." NAF Holdings, LLC v. Li & Fung (Trading) Ltd., No. 10 Civ. 5762(PAE), 2013 WL 489020, at *4 (S.D.N.Y. Feb. 8, 2013). The court further reasoned that the suit could not be brought as a derivative action on behalf of the NAF Subsidiaries because, in a settlement agreement arising out of a dispute with Hampshire, " NAF's subsidiaries have both expressly relinquished their rights to pursue claims against Trading." Id.

In discussing the appropriate tests for distinguishing shareholder suits that could be brought as direct actions from those that could be brought only as derivative actions, the Delaware Supreme Court has indeed used broad categorical language which, if applied to this claim, would bar direct suit. See Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1039 (Del. 2004). But the claims asserted in Tooley and the cases that have applied its rule are significantly different from the claims made here, and the differences appear to us to justify a different conclusion. We believe it is prudent to ask the Delaware Supreme Court how it would rule on this type of claim, rather than guess at the application of Tooley to a very different scenario. We therefore certify our question to the Delaware Supreme Court.


I. Factual Background

a. The Attempted Acquisition of Hampshire

In 2008, NAF, a Delaware limited liability holding company wholly owned by Efrem Gerszberg, began to pursue acquisition of Hampshire through a tender offer for its stock. Contemplating the operation of Hampshire following the expected acquisition, NAF sought a commitment by Trading that it would serve as Hampshire's sourcing agent. In December 2008, NAF and Trading entered into a contract, by which Trading agreed to serve as Hampshire's sourcing agent once NAF acquired Hampshire.

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NAF then created the NAF Subsidiaries to effectuate the acquisition of Hampshire. On February 23, 2009, the NAF Subsidiaries entered into the Merger Agreement with Hampshire to take effect upon their successful acquisition of the Hampshire stock through a tender offer at $5.55 per share (resulting in an aggregate purchase price of $30,353,865). In order to finance the acquisition, NAF Acquisition secured a $40 million bridge loan commitment from Keba, LLC (" Keba" ). Keba's commitment was conditioned on Hampshire having a post-merger working capital line of credit. To satisfy that condition, Gerszberg obtained a loan commitment from Wells Fargo Trade Capital, LLC (" Wells Fargo" ) in February 2009 to fund $30 million of a $40 million credit facility. Wells Fargo's commitment was conditioned on Trading's agreement remaining in force to act as sourcing agent.

In March 2009, after discovering that Hampshire's projected sales for 2009 were significantly less than its sales for 2008, Trading allegedly repudiated its commitment to serve as Hampshire's sourcing agent. Appendix of Appellant (" App'x" ) at 867, NAF Holdings, LLC v. Li & Fung (Trading) Ltd., No. 13-830-cv (2d Cir. Jun. 26, 2013) . Notwithstanding Trading's repudiation, NAF persisted in its attempt to acquire Hampshire. On April 24, 2009, NAF secured Wells Fargo's agreement to finance Hampshire's post-merger working line of credit, provided Wells Fargo received side collateral and a high rate on the credit facility. However, Wells Fargo informed NAF that it would not provide a commitment letter until April 27, 2009. Later on April 24, 2009, Gerszberg advised Keba that NAF did not yet have a binding commitment for Hampshire's post-merger line of credit. Keba then withdrew its undertaking to furnish the bridge loan. On April 26, 2009, Hampshire and the NAF Subsidiaries terminated their Merger Agreement. NAF contends that the NAF Subsidiaries suffered losses of in excess of $30 million caused by Trading's repudiation of its contractual commitment.

b. The Hampshire Settlement Agreement

After the termination of the Merger Agreement, NAF, the NAF Subsidiaries, and Gerszberg drafted a complaint against Hampshire, alleging a variety of claims. On September 28, 2009, Gerszberg and the NAF Subsidiaries, but not NAF, entered into a Settlement Agreement and Release (the " Settlement Agreement" ) with Hampshire. Hampshire paid them $833,000 in exchange for a full release of all claims relating to the failed merger. The Settlement Agreement prohibited the NAF Subsidiaries and Gerszberg, but not NAF, from

institut[ing] . . . or voluntarily aid[ing] in . . . any action, claim, suit, proceeding, arbitration or cause of action of any kind whatsoever . . . against any person, whether or not a party to this Settlement Agreement, to recover damages . . . or any other losses allegedly sustained as a result of the Transaction Agreements or the Transaction.

NAF Holdings, LLC, 2013 WL 489020, at *4 (emphasis in district court opinion).

c. This Litigation

NAF then brought this action against Trading, seeking damages of over $30 million caused by Trading's wrongful repudiation of its contract to serve as Hampshire's sourcing agent. NAF's complaint seeks an award of damages, based on Trading's injury to the value ...

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