Chancery Retains Jurisdiction Despite California Forum Clause

Duff v. Innovative Discovery LLC, C.A. No. 7599-VCP (Del. Ch. Dec. 7, 2012).

Issues Addressed: The Court of Chancery addressed the following issues in this opinion:  (1) Whether a forum selection clause providing for “sole” jurisdiction in California courts should be honored when a conflicting forum selection clause in a related agreement provided for jurisdiction in Delaware courts; (2) Whether 6 Del. C. § 18-111 provided a basis for equitable jurisdiction when the agreement that gave the Court of Chancery jurisdiction only provided for money damages; (3) Whether reformation as a remedy will be allowed when the complaint did not specifically request reformation but provided notice of the elements of that form of relief.

Brief Overview

This case arose in connection with the redemption agreements and related agreements through which two members of a Delaware LLC redeemed their interests.

One of the disputes was whether the agreement should be read to cap a total tax liability for the departing members, who each received a Schedule K-1 after the redemption closed, in an amount greater than they thought the agreement allowed.

This decision provides several useful statements of Delaware law that can be effectively highlighted with bullet points.

●          Section 18-111 of Title 6 of the Delaware Code provides for Chancery jurisdiction when agreements among members or managers and their LLC are sought to be enforced.

●          Chancery rejected the arguments that this statutory basis for jurisdiction was conditioned on equitable relief being sought, and also rejected the argument that the Court had the discretion to decline the jurisdiction if a complaint met the requirements of Section 18-111.

●          The Court also explained that the “cleanup doctrine” allows the Court to decide requests for relief that are not equitable as long as there is at least one basis for equitable jurisdiction at the time the complaint was filed.”  See footnotes 30 to 34.

●          The Court reiterated the now well-established Delaware standard for a motion to dismiss under Rule 12(b)(6) as allowing a claim to proceed when there is a mere “possibility of recovery.”  See footnotes 36 to 39.

●          Even though the complaint did not specifically request reformation as a count or a remedy, the Court allowed reformation to be sought as a remedy without amendment to the complaint because the Court explained that each of the elements for reformation were contained in the complaint, even if not so named, and that gave sufficient notice to the defendant.  See footnotes 51 through 65.

●          Equally important is the ruling that a forum selection clause in one agreement that required all suits to be filed in California was not given effect because it conflicted with a forum selection clause allowing for the jurisdiction of Delaware courts in a related agreement that was incorporated by reference.

●          Delaware law was applied which holds that where one contract incorporates another contract by reference, and the forum selection language is not “crystalline,” the Court will not interpret that forum selection clause to be exclusive.  See footnote 67 through 77.