Choice Hotels International, Inc. v. Columbus-Hunt Park Dr. Bnk Investors, L.L.C., No. 4353-VCP (Del. Ch. Oct. 15, 2009), read corrected opinion here (and letter accompanying corrected version here.) This Chancery Court decision involves a dispute pursuant to Section 18-110 of the Delaware LLC Act regarding who the proper manager of the LLC is (analogous to DGCL Section 225), but before the Court could address those substantive issues, it needed to address a procedural entanglement that arose due to the parties having other litigation pending among them in another jurisdiction.
This Chancery Court opinion granted a Motion to Stay this Delaware dispute regarding the governance of an LLC, in order to allow a previously filed Maryland lawsuit between the parties to proceed.
Compare this result with the very recent decision in another case by the Delaware Court of Chancery that denied a Motion to Dismiss or Stay a Delaware suit despite pending litigation between the parties elsewhere, in the matter styled: Total Holdings USA, Inc. v. Curran Composites, Inc., No. 4494-VCS (Del. Ch. Oct. 9, 2009), read opinion here. A very short overview of the Total Holdings case is available on this blog here.
In this Choice Hotels decision, the Court provides an extensive factual background and procedural history of the competing lawsuits in which the parties are involved in different states. Within the 34-page opinion, the Court provides a “mini-treatise" on the various rules and policy reasons, as well as court decisions and standards, that are applied in Delaware to determine whether a lawsuit in Delaware will be stayed in favor of litigation pending in other states between the parties, or whether the Delaware court will hear the case before it instead of favoring a similar case proceeding between the parties in another jurisdiction.
This case and the Total Holdings case, supra, decided within a week of each other by two different members of the Court of Chancery, involving completely different factual and procedural circumstances, provide a juxtaposition of two different results reached by courts who had to decide which competing similar lawsuits would proceed. Admittedly, these two recent Chancery decisions involved much different sets of circumstances and the legal issues were not the same, but the common thread between them was that a decision had to be made about whether a Delaware case would be stayed or allowed to proceed in light of a related case pending elsewhere.
In Total Holdings, the Court of Chancery denied a Motion to Stay or Dismiss, but in the Choice Hotels case the Court granted it. This is an indication that there is no simple “bright line test” that would allow one to easily predict when a case will be stayed or dismissed in favor of similar or related litigation between similar or identical parties, pending simultaneously in more than one forum. In part this lack of predictability is due to the intensely factual nature of the analysis. In one sense, this Choice Hotels decision by the Court of Chancery can be simplistically summarized by saying that "the Court applied the ‘first-filed rule’ to allow the lawsuit between the parties that was filed first in another state to proceed and thus stayed the subsequently filed Delaware lawsuit.” However, that would not be a meaningful assessment of the somewhat complex factual and procedural history involved with the very nuanced legal principles that the Court wrestled with in this case.
This short blog overview assumes some familiarity with the first-filed rule–also known as the McWane doctrine.
Special Consideration Given To Summary Proceedings Even When Delaware is Second Suit.
The McWane doctrine and the forum non conveniens analysis are both tempered by the competing policy priority that is enjoyed by lawsuits that are given statutory status as “summary proceedings” such as actions filed under 8 Del. C. Section 225 or 6 Del.C. Section 18-110, both of which provide a procedure for a swift resolution of cases involving a contest for control to determine who the rightful directors of a corporation are, or who the valid managers are of an LLC.
Specifically, the Court recognized that :
“in cases where rapid resolution of a corporate governance dispute is needed and a non-Delaware court is not in a position to provide expedited adjudication and prompt justice, the courts typically will deny a Motion to Stay the Section 225 or Section 18-110 action in Delaware because the policies underlying those sections take precedence over the policies underlying McWane." (See footnote 41.)
However, the Court cited cases at footnotes 42 and 45 to acknowledge that the policies underlying Section 225 will not invariably compel the denial of a Motion to Stay in every situation, but rather when faced with a Motion to Stay a summary action, the Court must balance the McWane policies of comity in promoting the efficient administration of justice against the policies underlying the summary nature of the Delaware action.
The Court applied the familiar McWane factors to this case and also discussed the applicability of the forum non conveniens standard which is triggered when it is unclear whether a related case was filed first. It also may be applicable when multiple actions are contemporaneously filed.
Court Rejects Ad Hominem Attack
In footnote 27, the Court addresses a matter of interest far beyond this case. The Court rejected an ad hominem attack that Choice Hotels mounted against the principal of the defendant, based on prior criticism in another case by another member of the Court of Chancery who lambasted the party as not being trustworthy. This argument used up about one third of the plaintiff’s brief according to the Court’s estimate. Choice Hotels tried to use that prior expression of judicial disapproval, unsuccessfully, based on the maxim of falsus in uno, falsus in omnibus. The Court rejected the arguments because regardless of the condemnation in the prior case of his truthfulness, there were no specific facts averred that were relevant to the instant action that would support drawing such a negative reference from the past conduct of the defendant’s principal.
Excerpts of Court’s Reasoning
Among the McWane factors applied by the Court was whether "prompt and complete justice" was availabe in the Maryland courts where the other case(s) were pending. Extensive review of the various Maryland case management options revealed that Maryland has a type of "business court" that the Chancery Court found: "…may not be as quick as a summary proceeding under Section 18-110, but it still appears capable of providing an efficient and reasonably prompt resolution of the business entity issues raised by [the plaintiff’] in Delaware."
The Court’s reasoning to support its grant of the motion to stay was buttressed by its observation that: "If I refuse to stay the Delaware Action, it seems quite possible that overlapping litigation will proceed on two fronts."
In its concluding rationale, the Court explained that the policy animating the McWane doctrine also applies to "a single party filing two or more actions in diverse forums and thereby forcing the nonfiling party to expand its efforts significantly."
Court Rejects Argument that Fraud Claims Are Waivable by Agreement
As an aside to its analysis, the Court also addressed a important issue that has broad application in many cases. The plaintiff in this Delaware case asserted that a waiver that the defendant in the Delaware case signed would prevent him from raising defenses to a certain agreement. However, the Court would not agree that Delaware law prevents an intentional fraud defense to enforcement of an agreement, relying on Abry Partners V, L.P v. F & W Acq. LLC, 891 A.2d 1032, 1035 (Del Ch. 2006). The Court quoted from Abry, a case that involved two sophisticated parties arguing over a stock purchase agreement, and which addressed whether public policy would allow enforcement of a provision that limited liability for misrepresentation of fact:
… when a seller intentionally misrepresents a fact embodied in a contract–that is, when a seller lies–public policy will not permit a contractual provision to limit the remedy of the buyer to a capped damage claim.
On a more macroeconomic level beyond the concerns of this case, it is also noteworthy to mention in passing that at least one corporate law scholar has suggested that Delaware Courts should consider refraining from addressing certain cases that arise in connection with the threat of increasing federal jurisdiction over corporate law–issues which are in no way raised in this case, but some of the legitimate procedural and policy reasons on which a Delaware court may rely for refraining to consider a case before it, are referenced in this case. See footnote 28 citing In Re Bear Stearns Cos. S’holder Litig., 2008 WL 959992 (Del. Ch. April 9, 2008). See generally Professor Edward Rock’s recent lecture, here, addressing the broader policy issues (not applicable to the facts of this case), regarding when it might be preferable for a Delaware court to refrain from hearing a case before it. Although the good professor referred in his recent presentation primarily to the federal government being an indispensable party (as a majority shareholder) under Rule 19, some of the reasons for abstaining in this opinion may be generally relevant to his conceptual discussion.