Whittington v. Dragon Gp., C.A. No. 2291-VCP (Del. Ch. April 15, 2011), read opinion here. Five prior Chancery decisions (and one Supreme Court opinion), in this long-running internecine saga were highlighted on these pages here, here, here, here, here and here. In this latest opinion, the Court of Chancery examined the doctrines of claim preclusion, issue preclusion and judicial estoppel.   

Procedural Setting

This suit stems from a dispute over one member’s ownership interest in Dragon Group, L.L.C., a family-run business.  The plaintiff, Frank C. Whittington, II, (“Frank”), filed a complaint to compel his four siblings (the defendants) to recognize his membership interest in Dragon Group.  Additionally, Frank asked the court to determine his overall percentage of ownership in the company, conduct an accounting of the company, and determine his appropriate share of past distributions and profits with interest.

The defendants, who have been challenging Frank’s membership in Dragon Group for years, argue that the Agreement in Principle (“AIP”), the document that governs the membership interests, requires Frank to provide further documentation or performance to become a member.  However, Frank contends that these challenges are barred by the doctrines of claim preclusion and issue preclusion because prior litigation between the parties has already determined that the AIP is an “enforceable and freestanding agreement and contract” and that it needs no further documentation or performance by Frank to cement his membership.

Claim Preclusion

The Opinion addresses claim preclusion first by setting out the elements as follows:

(1) the original court had jurisdiction over the subject matter and the parties; (2) the parties to the original action were the same as those parties, or in privity, in the case at bar; (3) the original cause of action or the issue[] decided was the same as the case at bar; (4) the issues in the prior action must have been decided adversely to [the party opposing preclusion] in the case at bar; and (5) the decree in the prior action was a final decree.

The doctrine of claim preclusion not only applies to claims which were raised and decided in earlier litigation, “but also to claims that could have been raised and decided.”

Issue Preclusion

Issue preclusion “prevents a party from relitigating matters of fact that ‘were, or necessarily must have been, determined’ in a prior decision.” The elements of issue preclusion are:

(1) the same issue is presented in both actions; (2) the issue was litigated and decided in the first action; and (3) the determination was essential to the prior judgment.

The court found that all five elements of claim preclusion along with all three elements of issue preclusion were fulfilled in this matter.  Claim preclusion barred any argument that the AIP required further documentation or performance for Frank to become a member of Dragon Group,” and because the court already decided that Frank was a member of Dragon Group in prior litigation, that holding precludes the defendants from arguing that Frank is not a member.

The Doctrine of Judicial Estoppel

Frank claims, in addition to claim and issue preclusion, that his siblings are judicially estopped from denying his claim of 23.65% interest in Dragon Group.  Frank argues that his siblings’ representations in the earlier litigation suggesting that Frank’s membership interest was 23.65%, should estop them from contending otherwise in the present litigation.

Citing Capaldi v. Richards, the court found that “[U]nder the doctrine of judicial estoppel, a party may be precluded from asserting in a legal proceeding a position inconsistent with a position previously taken by him in the same or in an earlier legal proceeding.”  The doctrine of judicial estoppel exists to “protect the integrity of the judicial process by prohibiting parties from deliberately changing positions according to the exigencies of the moment.”  The Court looks to several factors in determining whether the doctrine of judicial estoppel applies:

First, a party’s later position must be clearly inconsistent with its earlier position.  Second, courts regularly inquire whether the party has succeeded in persuading a court to accept that party’s earlier position, so that acceptance of an inconsistent position in a later proceeding would create the perception that either the first or second court was misled….A third consideration is whether the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment if not estopped.

Additionally, “the contradictory statement must have been accepted by the court in the earlier action and relied upon by it in reaching its decision.”

The court found that the prior litigation did not result in a determination as to Frank’s ownership percentage in Dragon Group.  Thus, the court concluded that judicial estoppel did not bar the defendants from challenging the amount of Frank’s membership interest.  Following a trial on the merits, the court determined Frank’s membership percentage to be 18.81%.

Prejudgment Interest

In addition to the determination of membership and interest in Dragon Group, Frank sought prejudgment interest on any amounts due to him. 

Current Delaware law holds that “a successful plaintiff may be awarded prejudgment interest as a matter of right,” but that this is not a self-executing procedure.  The court explained that in order to get prejudgment interest, “the plaintiff must ask for it by way of at least a general allegation of damages in an amount sufficient to cover actual damages plus interest.” It is within the court’s discretion to award either compound or simple interest.

The court found that Frank was entitled to prejudgment interest compounded monthly at the legal rate that applied as of the first day of each month.