In the case of In Re Career Education Corporation Derivative Litigation, 2007 WL 2875203 (Del. Ch., Sept. 28, 2007), read opinion here, the Delaware Chancery Court dismissed this derivative suit as a result of the ruling by a federal court in Chicago involving the same basic claims and defendant company, and based on the Chicago court’s conclusion that the Chicago action needed to be dismissed due to failure to satisfy the pre-suit demand requirement.
In addition to fundamental pleading requirements for derivative actions under Aronson and Rales, the Chancery Court decision discusses issue preclusion, collateral estoppel and res judicata. After a careful parsing of the facts and the allegations in the Chancery case compared with the allegations in the Chicago case, as well as what that court already specifically decided, the Chancery Court reasoned that in light of the Chicago court’s decision to dismiss the substantially similar allegations, the plaintiff in the Chancery case was barred from proceeding. The Chancery Court’s analysis is much more detailed and scholary than space and time permit me to amplify for purposes of this blog post, though any reader interested in the foregoing issues should read the full opinion at the above link. (It is not a short opinion). Notably, the Chancery Court distinguished the applicability of another Chancery decision as follows:
This court recently addressed the preclusive effect of a
judgment in a derivative action in federal court on a
plaintiff’s demand futility allegations in West Coast
Management & Capital, LLC v. Carrier Access Corp.
[FN52][ 914 A.2d 636 (Del. Ch.2006).]
In that case,[summarized here] the court followed the full faith
and credit requirements “constitutionally mandated”
in federal court. The court also observed that, “when
the original decision is in federal court, federal issue
preclusion law likely applies.” [FN53] The West
Coast case did not determine, however, the extent to
which issue preclusion applies to a subsequent action,
such as this case, commenced by a different
derivative plaintiff. [FN54]
SUPPLEMENT: In a June 2012 Court of Chancery decision in LAMPERS v. Pyott, a different member of the bench declined to follow certain aspects of this opinion. The Pyott decision was highlighted on these pages here.