Delaware’s Court of Chancery is not a court of general jurisdiction, and in a recent case involving an LLC’s redemption agreements, the defendant LLC sought dismissal on grounds that Chancery did not have subject matter jurisdiction. Duff v. Innovative Discovery LLC, No. 7599-VCP, 2012 WL 6097660 (Del. Ch. Dec. 7, 2012) (slip op.). Relying on provisions in Delaware’s LLC Act, the court retained jurisdiction.
Background. Edward Carp and Bruce Duff were members of Innovative Discovery, LLC, a Delaware limited liability company. In February 2012 Carp and Duff entered into two separate but identical Redemption Agreements with Innovative, and the LLC redeemed their member interests. Carp and Duff also caused Delaware Document Imaging, LLC (DDI) to enter into a License Agreement with Innovative. The License Agreement was an exhibit to each of the Redemption Agreements, and was incorporated by reference into the Redemption Agreements. Carp and Duff also entered into separate Consulting Agreements with Innovative.
Later a dispute over the Redemption Agreements arose, and Carp, Duff and DDI filed suit in June 2012 against Innovative in the Delaware Court of Chancery. They asserted claims for breach of the Redemption Agreements, the License Agreement, and the Consulting Agreements. Innovative then filed a motion to dismiss the complaint on grounds that the Court of Chancery lacked subject matter jurisdiction and that venue was improper, and for failure to state a claim.
Court’s Analysis. The court began by recognizing that the Court of Chancery is one of limited jurisdiction and that there are only three ways by which it can acquire subject matter jurisdiction over a case: (1) the invocation of an equitable right, (2) a request for an equitable remedy when there is no adequate remedy at law, or (3) a statute has conferred subject matter jurisdiction. Id. at *4. If part of a controversy involves legal as well as equitable claims, the court has discretion to decide the legal portions of the dispute as well as the equitable aspects. Id.
Innovative argued that the plaintiffs’ complaint was essentially seeking damages for breaches of the agreements and therefore there was no basis for the court’s equity jurisdiction, but the plaintiffs argued that Section 18-111 of the Delaware LLC Act conferred jurisdiction:
Any action to interpret, apply or enforce the provisions of a limited liability company agreement, or the duties, obligations or liabilities of a limited liability company to the members or managers of the limited liability company, or the duties, obligations or liabilities among members or managers and of members or managers to the limited liability company, or the rights or powers of, or restrictions on, the limited liability company, members or managers, or any provision of this chapter, or any other instrument, document, agreement or certificate contemplated by any provision of this chapter, may be brought in the Court of Chancery.
(Emphasis added.) The plaintiffs contended that Section 18-111 provided two bases for Chancery’s jurisdiction over their claim. The first was that their claim for breach of the Redemption Agreements was an action to enforce “the duties, obligations or liabilities of a limited liability company to the members.”
The plaintiffs’ second invocation of Section 18-111 was that their claim for breach of the Redemption Agreements sought to enforce an “instrument, document, agreement or certificate contemplated by any provision of this chapter.” They looked to Section 18-702(e) of the LLC Act, which states that unless otherwise provided in the LLC agreement, “a limited liability company may acquire, by purchase, redemption or otherwise, any limited liability company interest or other interest of a member.”
Innovative argued for a limited interpretation of § 18-111, contending that the phrase “may be brought” in § 18-111 means that actions of the type described in § 18-111 may only be brought if the claim involved is equitable in nature, and that even if the equity requirement is met, the Court of Chancery has discretion to decline jurisdiction. The court rejected both parts of this argument, holding that there is no requirement for an independent, equitable basis for jurisdiction if § 18-111 is satisfied, and that the court does not have discretion to decline the jurisdiction if § 18-111 is satisfied. The statute’s use of the word “may,” said the court, means that plaintiffs have a choice of filing in the Court of Chancery or in another forum, not that Chancery has discretion to decline jurisdiction when Section 18-111’s requirements are met. Id. at *6.
The court concluded that redemption agreements are explicitly contemplated by § 18-702, and that therefore § 18-111 conferred jurisdiction on the court to hear Carp’s and Duff’s claims for breach of their Redemption Agreements. Id. The court also asserted jurisdiction over the plaintiffs’ remaining claims, under the “cleanup doctrine”: “[i]f a controversy contains any equitable feature by means of which a court could acquire cognizance of it, the court may go on to a complete adjudication.” Id. at *7. The court found the claims for breach of the Redemption Agreements to be closely intertwined with the plaintiffs’ other claims, and that severing those claims would undermine judicial efficiency.
Venue. Innovative argued that the plaintiffs’ claims for breach of the License Agreement should be dismissed because that agreement had a venue clause mandating that the sole venue for any litigation was in California. The plaintiffs pointed out that the Redemption Agreements had language incorporating by reference the terms of the License Agreements, and that the Redemption Agreements had a permissive jurisdiction clause that allowed suit to be brought in Delaware.
The court read the contracts together and found the result ambiguous because of the two conflicting venue provisions. Delaware will not interpret a contractual venue provision to be exclusive unless the contractual language is “crystalline,” and the court therefore refused to dismiss the claims on the License Agreement for being brought in the wrong venue. Id. at *11-12. The court also rejected the motion to dismiss for failure to state a claim. Id. at *11.
Comment. Jurisdiction and venue are fundamental legal concepts, and it’s a treat to see the court’s dissection of them in this case.
Delaware’s Court of Chancery is highly respected for its expertise in corporate and LLC law, and is often attractive to business litigators for its expedited procedures and the absence of juries. But it is a specialized court and not a court of general jurisdiction, and this case is a good reminder that there are limits on its jurisdiction.
The good news for LLC lawyers is that most disputes involving the internal governance of LLCs, such as disputes between members, managers, and the LLC, will fall within the LLC Act’s grant of jurisdiction to the Court of Chancery at Section 18-111. Chancery’s jurisdiction is not exclusive, so a claimant can always choose an alternative forum. Delaware’s General Corporation Law provides a similar grant of jurisdiction for corporate disputes at Section 111.
The venue dispute in this case is an example of a scenario I have seen more than once: inconsistent boilerplate provisions in separate written agreements that cover different aspects of a single transaction. Often the differences in the boilerplate provisions (matters such as governing law, venue, attorneys’ fees, arbitration, etc.) are not the result of considered analysis but simply reflect the fact that the different agreements were prepared by different attorneys working on the deal but not coordinating closely enough. This case shows the result: ambiguity and unenforceability of the exclusive venue provision in the License Agreement.