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

United States Court of Appeals, Second Circuit

September 4, 2015

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

Submitted February 3, 2014.

Question Answered: June 24, 2015. Question Certified: November 19, 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 Defendant Li & Fung (Trading) Limited. Having certified to the Delaware Supreme Court the question whether, under Delaware law, Plaintiff was required to bring its breach of contract claim as a derivative action, and received the Delaware Court's answer in the negative, the Court of Appeals concludes that Plaintiff is not barred from pursuing its claim directly. The judgment of the district court is, therefore, VACATED and the case REMANDED for consideration of Defendant's remaining arguments in support of its motion for summary judgment.

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

John J. Hay & Ulyana Bardyn, Salans FMC SNR Denton Europe LLP, New York, New York, for Defendant-Counter-Claimant-Appellee.

Before: LEVAL, CALABRESI and LYNCH, Circuit Judges.

OPINION

Page 93

PER CURIAM:

Plaintiff NAF Holdings, LLC (" NAF" ), 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 Defendant Li & Fung (Trading) Limited (" Trading" ). We assume familiarity with our prior opinion certifying a question to the Delaware Supreme Court, NAF Holdings, LLC v. Li & Fung (Trading) Ltd., 772 F.3d 740 (2d Cir. 2014), and the Delaware Court's answer, NAF Holdings, LLC v. Li & Fung (Trading) Ltd., No. 641, 118 A.3d 175, 015 WL 3896792 (Del. June 24, 2015). We briefly review the pertinent facts.

In 2008, NAF, a Delaware limited liability holding company wholly owned by Efrem Gerszberg, began to pursue acquisition of Hampshire Group, Limited (" Hampshire" ), through a tender offer for its stock. In anticipation, NAF entered into a contract with Trading, by which Trading agreed to serve as Hampshire's sourcing agent once NAF acquired 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 entered into a merger agreement with Hampshire (" Merger Agreement" ), to be consummated upon the NAF Subsidiaries' successful acquisition of Hampshire's stock through a tender offer. Trading then allegedly repudiated and refused to perform its contractual obligation to NAF to serve as Hampshire's sourcing agent.

Page 94

Trading's repudiation prevented the NAF Subsidiaries from obtaining the credit they needed to acquire the Hampshire shares and allegedly caused them losses in excess of $30 million, which in turn caused substantial loss to their parent, NAF. NAF's complaint alleges that Trading breached its contractual promise to NAF to serve as Hampshire's sourcing agent and seeks damages for the harm NAF suffered as the result of Trading's breach.

The district court granted summary judgment in favor of Trading on the ground 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). In so ruling, the district court relied on broad categorical language from Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1039 (Del. 2004), which, if applied to this claim, would bar direct suit. See NAF Holdings, 2013 WL 489020, at *6 (citing Tooley, 845 A.2d at 1039). The district court further reasoned that NAF was barred from bringing its claim as a derivative action on behalf of the NAF Subsidiaries as a result of a settlement agreement the NAF Subsidiaries and Gerszberg made with Hampshire.[1]

On appeal, we noted significant differences between NAF's claim against Trading for breach of contract and the types of claims in Tooley and its progeny. We concluded that, notwithstanding the broad language of Tooley, the Delaware Supreme Court might find that NAF's contract claim did not fall under the Tooley rule. See NAF Holdings, 772 F.3d at 745. Accordingly, under Second Circuit Local Rule 27.2 and Delaware Supreme Court Rule 41(a)(ii), we certified the following question to the Delaware Supreme Court:

Where the plaintiff has secured a contractual commitment of its contracting counterparty, the defendant, to render a benefit to a third party, and the counterparty breaches that commitment, may the promisee-plaintiff bring a direct suit against the promisor for damages suffered by the plaintiff resulting from the promisor's breach, notwithstanding that (1) the third-party beneficiary of the contract is a corporation in which the plaintiff-promisee owns stock; and (ii) the plaintiff-promisee's loss derives indirectly from the loss suffered by the third-party beneficiary corporation; or must the court grant the motion of the promisor-defendant to ...

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