Reid v. Spazio et al., Del. Supr., No. 199, 2008 (April 9, 2009), read opinion here.
Kevin Brady, a highly respected Delaware litigator, provides us with the benefit of his review of this decision.
Yesterday, the Delaware Supreme Court reversed and remanded the Court of Chancery’s dismissal of plaintiff’s complaint in this matter on grounds that it was barred by the applicable statute of limitations and by laches. The claim was also saved by a procedural "safety net" known as the "Delaware Savings Statute".
International Joint Venture Dispute Goes to U. S. Supreme Court and Back
A joint venture was formed between U.S. Russian Telecommunications LLC (“USRT”), a Delaware limited liability company, and a group of Italian companies to assist Russia in replacing its obsolete commercial satellites. There were allegations that in late 1999, the Italian companies conspired to breach the joint venture agreement in order to seize this business opportunity for themselves, through the formation of a Delaware entity, USRT Holdings LLC (“Holdings”). Reid, a minority shareholder of both USRT and Holdings, brought suit on his own behalf and derivatively on behalf of the companies in May 2001 in federal court in the Southern District of Texas. After his case was dismissed, Reid re-filed his claims in Texas state court and through a series of dismissals and appeals, Reid took his case literally to the United States Supreme Court (which denied his petition for certiorari) in October 2006.
On April 9, 2007, Reid filed suit in the Court of Chancery, against the Italian companies, who moved to dismiss the action as time-barred. The Court of Chancery granted the motion finding that: (i) the time during which Reid could file a timely action in Delaware expired on March 10, 2007; (ii) laches also barred Reid’s claim because it would have been barred by the statute of limitations and there were no mitigating circumstances; and (iii) the length of time between the challenged conduct and the filing of the action resulted in some prejudice to defendants’ ability to present a defense.
On appeal, Reid argued that: (i) his claim is preserved by the Delaware Savings Statute, 10 Del. C. § 8118(a); and (ii) his claim is not barred by laches. Since interpreting the Savings Statute was a question of law, the Delaware Supreme Court reviewed it de novo.
Are All Discretionary Appeals Encompassed Under the Delaware Savings Statute?
While Reid acknowledged that his complaint arises out of conduct that allegedly occurred in or around 1998 (well outside Delaware’s three-year statutory limitations period) he claimed that the action was still timely because it was preserved by the Delaware Savings Statute. That statute, which “reflects a public policy preference for deciding cases on their merits,” provides six exceptions to the applicable statute of limitations in certain instances where the plaintiff has filed a timely lawsuit, but is procedurally barred from obtaining a resolution on the merits.”
The dispute in this case focuses on whether all discretionary appeals are encompassed under the sixth prong of the statute which states: “if a judgment for the plaintiff is reversed on appeal or a writ of error; a new action may be commenced, for the same cause of action, at any time within one year after the abatement or other determination of the original action, or after the reversal of the judgment therein.” 10 Del. C. § 8118(a)
The Court of Chancery held that the statute was tolled during the time periods with respect to Reid’s discretionary appeals, but not the discretionary appeal to the United States Supreme Court. On appeal, Reid argued that “the grace period provided by Section 8118(a) should not commence until all appeals are resolved, including appeals as of right and those dependent upon a higher court’s discretion.” The defendants argued that “the grace period should be tolled only during the pendency of appeals as of right.”
The Supreme Court found that the Delaware Savings Statute applies to all discretionary appeals because: (i) it has a remedial purpose and is to be liberally construed; (ii) allowing a plaintiff to bring his case to a full resolution in one forum before starting the clock on his time to file in this State will discourage placeholder suits, thereby furthering judicial economy; and (iii) the prejudice to defendants is slight because in most cases, a defendant will be on notice that the plaintiff intends to press his claims.
As a result, the Supreme Court found that Reid’s claim, which was filed within six months of the conclusion of the Supreme Court appeal, was preserved and that the Court of Chancery erred in dismissing the complaint.
Laches v. Statute of Limitations
Reid also claimed that the Court of Chancery erred when it decided that his claims were barred by laches which requires: (i) knowledge by the claimant; (ii) unreasonable delay in bringing the claim; and (iii) resulting prejudice to the defendant. Although both laches and statutes of limitation operate as a time-bar to litigation, the Supreme Court noted that “[u]nder ordinary circumstances, a suit in equity will not be stayed for laches before, and will be stayed after, the time fixed by the analogous statute of limitations at law; but, if unusual conditions or extraordinary circumstances make it inequitable to allow the prosecution of a suit after a briefer period, or to forbid its maintenance after a longer period than that fixed by the statute, the [court] will not be bound by the statute, but will determine the extraordinary case in accordance with the equities which condition it.” (italics mine).
The Court of Chancery found that Reid’s claim was barred because there were no extraordinary circumstances that warranted equitably extending the time to file. The Supreme Court disagreed and in examining the issue from the opposite point of view, found that Reid’s action would be barred by the doctrine of laches “only if unusual conditions or extraordinary circumstances make it inequitable to allow the prosecution of his claim within the time allowed by law.” Apart from the length of the Texas litigation, the Supreme Court found no conditions or circumstances that would make it inequitable to allow Reid to proceed. As a result, the Supreme Court found that the Court of Chancery erred in dismissing the complaint based on laches.