     13-830-cv
     NAF Holdings, LLC v. Li & Fung (Trading) Ltd.

 1                                     UNITED STATES COURT OF APPEALS
 2                                         FOR THE SECOND CIRCUIT
 3
 4
 5                                                       August Term, 2013
 6
 7   (Submitted: February 3, 2014                                           Question Certified: November 19, 2014
 8   Question Answered: June 24, 2015                                                 Decided: September 4, 2015)
 9
10
11                                                     Docket No. 13-830-cv
12
13
14   - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -X
15
16   NAF HOLDINGS, LLC,
17
18                       Plaintiff-Counter-Defendant-Appellant,
19
20   v.
21
22   LI & FUNG (TRADING) LIMITED,
23
24                       Defendant-Counter-Claimant-Appellee.
25
26   -------------------------------X
27
28   Before: LEVAL, CALABRESI and LYNCH, Circuit Judges.
29
30          Plaintiff NAF Holdings, LLC, appeals from the judgment of the United States District
31   Court for the Southern District of New York (Engelmayer, J.) granting summary judgment in
32   favor of Defendant Li & Fung (Trading) Limited. Having certified to the Delaware Supreme
33   Court the question whether, under Delaware law, Plaintiff was required to bring its breach of
34   contract claim as a derivative action, and received the Delaware Court’s answer in the negative,
35   the Court of Appeals concludes that Plaintiff is not barred from pursuing its claim directly. The
36   judgment of the district court is, therefore, VACATED and the case REMANDED for
37   consideration of Defendant’s remaining arguments in support of its motion for summary
38   judgment.
39
40                                                               George A. Reihner, Wright & Reihner, P.C.,
41                                                               Scranton, Pennsylvania, for Plaintiff-Counter-
42                                                               Defendant-Appellant.

                                                                        1
     13-830-cv
     NAF Holdings, LLC v. Li & Fung (Trading) Ltd.

 1                                                   John J. Hay & Ulyana Bardyn, Salans FMC SNR
 2                                                   Denton Europe LLP, New York, New York, for
 3                                                   Defendant-Counter-Claimant-Appellee.
 4   PER CURIAM:

 5          Plaintiff NAF Holdings, LLC (“NAF”), appeals from the judgment of the United States

 6   District Court for the Southern District of New York (Engelmayer, J.) granting summary

 7   judgment in favor of Defendant Li & Fung (Trading) Limited (“Trading”). We assume

 8   familiarity with our prior opinion certifying a question to the Delaware Supreme Court, NAF

 9   Holdings, LLC v. Li & Fung (Trading) Ltd., 772 F.3d 740 (2d Cir. 2014), and the Delaware

10   Court’s answer, NAF Holdings, LLC v. Li & Fung (Trading) Ltd., No. 641, 2015 WL 3896792

11   (Del. June 24, 2015). We briefly review the pertinent facts.

12          In 2008, NAF, a Delaware limited liability holding company wholly owned by Efrem

13   Gerszberg, began to pursue acquisition of Hampshire Group, Limited (“Hampshire”), through a

14   tender offer for its stock. In anticipation, NAF entered into a contract with Trading, by which

15   Trading agreed to serve as Hampshire’s sourcing agent once NAF acquired Hampshire. After

16   making its contract with Trading, NAF decided to effectuate its acquisition of Hampshire

17   through two newly created subsidiaries, NAF Holdings II LLC (“NAF II”), a wholly-owned

18   subsidiary of NAF, and NAF Acquisition Corp. (“NAF Acquisition”), a wholly-owned

19   subsidiary of NAF II (collectively, “the NAF Subsidiaries”). The NAF Subsidiaries entered into

20   a merger agreement with Hampshire (“Merger Agreement”), to be consummated upon the NAF

21   Subsidiaries’ successful acquisition of Hampshire’s stock through a tender offer. Trading then

22   allegedly repudiated and refused to perform its contractual obligation to NAF to serve as

23   Hampshire’s sourcing agent. Trading’s repudiation prevented the NAF Subsidiaries from

24   obtaining the credit they needed to acquire the Hampshire shares and allegedly caused them

25   losses in excess of $30 million, which in turn caused substantial loss to their parent, NAF.

                                                       2
     13-830-cv
     NAF Holdings, LLC v. Li & Fung (Trading) Ltd.

 1   NAF’s complaint alleges that Trading breached its contractual promise to NAF to serve as

 2   Hampshire’s sourcing agent and seeks damages for the harm NAF suffered as the result of

 3   Trading’s breach.

 4          The district court granted summary judgment in favor of Trading on the ground that any

 5   injury to NAF resulted from injury to its subsidiaries, so that “any right NAF has to bring suit

 6   would therefore be in a derivative, not direct, capacity.” NAF Holdings, LLC v. Li & Fung

 7   (Trading) Ltd., No. 10 Civ. 5762(PAE), 2013 WL 489020, at *4 (S.D.N.Y. Feb. 8, 2013). In so

 8   ruling, the district court relied on broad categorical language from Tooley v. Donaldson, Lufkin

 9   & Jenrette, Inc., 845 A.2d 1031, 1039 (Del. 2004), which, if applied to this claim, would bar

10   direct suit. See NAF Holdings, 2013 WL 489020, at *6 (citing Tooley, 845 A.2d at 1039). The

11   district court further reasoned that NAF was barred from bringing its claim as a derivative action

12   on behalf of the NAF Subsidiaries as a result of a settlement agreement the NAF Subsidiaries

13   and Gerszberg made with Hampshire.1

14          On appeal, we noted significant differences between NAF’s claim against Trading for

15   breach of contract and the types of claims in Tooley and its progeny. We concluded that,

16   notwithstanding the broad language of Tooley, the Delaware Supreme Court might find that


     1
      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 entered into a Settlement Agreement and Release (the
     “Settlement Agreement”) with Hampshire. Hampshire paid the NAF Subsidiaries and Gerszberg
     $833,000 in exchange for a full release of all claims relating to the failed merger. The Settlement
     Agreement also 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, 772 F.3d at 742.
                                                       3
     13-830-cv
     NAF Holdings, LLC v. Li & Fung (Trading) Ltd.

 1   NAF’s contract claim did not fall under the Tooley rule. See NAF Holdings, 773 F.3d at 745.

 2   Accordingly, under Second Circuit Local Rule 27.2 and Delaware Supreme Court Rule 41(a)(ii),

 3   we certified the following question to the Delaware Supreme Court:

 4           Where the plaintiff has secured a contractual commitment of its contracting
 5           counterparty, the defendant, to render a benefit to a third party, and the
 6           counterparty breaches that commitment, may the promisee-plaintiff bring a direct
 7           suit against the promisor for damages suffered by the plaintiff resulting from the
 8           promisor’s breach, notwithstanding that (1) the third-party beneficiary of the
 9           contract is a corporation in which the plaintiff-promisee owns stock; and (ii) the
10           plaintiff-promisee’s loss derives indirectly from the loss suffered by the third-
11           party beneficiary corporation; or must the court grant the motion of the promisor-
12           defendant to dismiss the suit on the theory that the plaintiff may enforce the
13           contract only through a derivative action brought in the name of the third-party
14           beneficiary corporation?
15
16   Id. at 750.
17
18           In reply, the Delaware Supreme Court ruled that “a party to a commercial contract may

19   sue to enforce its contractual rights directly, without proceeding by way of a derivative action.”

20   NAF Holdings, 2015 WL 3896792, at *3. The Court reasoned that Tooley does not subject

21   commercial contract actions to a derivative suit requirement, and clarified that the Tooley rule

22   “was intended to deal with a different subject: determining the line between direct actions for

23   breach of fiduciary duty suits by stockholders and derivative actions for breach of fiduciary duty

24   suits subject to the demand excusal rules set forth” in Delaware law. Id. The Delaware Supreme

25   Court thus clarified that Delaware law is not as the district court reasonably believed, and that

26   NAF may bring its suit for breach of contract by a direct action against Trading.

27           The district court’s further ground for dismissal was that a derivative action on behalf of

28   the NAF Subsidiaries is barred by their Settlement Agreement with Hampshire which forbids the

29   Subsidiaries from bringing a suit arising from the failed merger. Under the Settlement

30   Agreement, the NAF Subsidiaries and Gerszberg (but not NAF) agreed with Hampshire that they



                                                      4
     13-830-cv
     NAF Holdings, LLC v. Li & Fung (Trading) Ltd.

 1   would not initiate an action “against any person, whether or not a party to this Settlement

 2   Agreement, to recover damages . . . or any other losses allegedly sustained as a result of the

 3   Transaction Agreements or the Transaction.” NAF Holdings, 772 F.3d at 742. The district

 4   court’s ruling that NAF’s suit was precluded by the terms of the Settlement Agreement was

 5   premised on its conclusion that this is a derivative suit brought on behalf of the NAF

 6   Subsidiaries, which contracted not to sue any other person. That reasoning is no longer

 7   applicable in light of the Delaware Supreme Court’s clarification that NAF properly brought this

 8   suit as its own direct action against Trading.

 9          We remand for consideration of whether the Settlement Agreement bars this direct suit

10   (as well as consideration of Defendant’s other two grounds for summary judgment). We note

11   that even if the terms of the Settlement Agreement are interpreted as applying to a suit directly

12   brought by NAF, it is not clear that Trading has standing to enforce Hampshire’s contract right

13   to bar this action. From the text of the agreement, it appears that Hampshire negotiated the

14   provision barring suits against other entities for its own protection––to avoid being dragged into

15   another litigation as a third-party defendant. Whether Hampshire intended to make Trading a

16   third-party beneficiary of its contract right is ambiguous.2 We make no ruling on these questions.

17   We leave it to the district court to consider what impact, if any, the Settlement Agreement has on

18   NAF’s ability to pursue its contract claim against Trading in a direct action.3

19

20


     2
       The question whether Trading is entitled to enforce Hampshire’s contract rights might be
     mooted if Hampshire intervenes or otherwise effectively authorizes Trading to enforce
     Hampshire’s right.
     3
       The Delaware Supreme Court noted that its ruling that NAF could pursue its claim by direct
     action was not intended to resolve whether the Settlement Agreement affects NAF’s claim. See
     NAF Holdings, 2015 WL at 3896792, at *5.
                                                      5
    13-830-cv
    NAF Holdings, LLC v. Li & Fung (Trading) Ltd.

1                                            CONCLUSION

2          For the reasons stated above and based on the Delaware Supreme Court’s answer to this

3   court’s certified question, the judgment of the district court is hereby VACATED4 and the case

4   REMANDED for the district court to conduct further proceedings,5 including consideration of

5   the defendant’s remaining arguments in support of its motion for summary judgment. We thank

6   the Delaware Supreme Court for its assistance in resolving the challenging question of Delaware

7   law raised in this appeal.




    4
      Because we vacate the district court’s judgment and remand for further proceedings, we need
    not rule on NAF’s remaining grounds for appeal.
    5
      NAF has requested that the case be remanded to a different judge. NAF Post Argument Letter
    Brief at 3 (July 13, 2015). We deny this request because there is nothing in the record that would
    suggest any reason for such an action. See United States v. Cossey, 632 F.3d 82, 89 (2d Cir.
    2011) (stating that reassignment is called for “only in the rare instance in which the judge’s
    fairness or the appearance of the judge’s fairness is seriously in doubt.”) (quoting United States
    v. Bradley, 812 F.2d 774, 782 n.9 (2d Cir. 1987))).
                                                    6
