In K&K Screw Products, LLC v. Emerick Capital Investments, Inc., C.A. No. 5633-VCP (Del. Ch. August 9, 2011), read opinion here, the Court of Chancery addressed defendant’s motion to dismiss the complaint for lack of subject matter jurisdiction and plaintiff’s motion for summary judgment on its ten claims for declaratory judgment. The background facts are complex so only a brief recitation of relevant facts will be provided in this summary.
In 1999, a company entered into an Asset Purchase Agreement to sell all of its assets to a buyer in exchange for, among other things, $60 million in cash, and an $11 million unsecured promissory note. The buyer took out loans secured by liens on the purchased assets. However, pursuant to a subordination agreement, the seller would not receive substantial payments on its promissory note until the senior secured loans were paid off. By 2001, the buyer was in financial distress and defaulted on its senior secured loans. The senior lenders agreed, however, not to foreclose on their liens and seize the company’s assets if the company obtained additional financing. Thereafter the buyer obtained an additional loan of $1.5 million and a $2.5 million guaranty of future payments. In addition, if and when the buyer paid back the cash loan, it also would be required to pay an additional lump sum of $5 million. The new cash loan would be secured by the company’s assets and would be senior to the seller’s promissory note.
The buyer brought suit seeking various declarations that it did not breach any duty, it did not commit any type of fraud when it entered into the transaction in 2001, but in the event that it breached a duty or committed fraud, those claims by the seller are time-barred. The buyer also has moved for summary judgment. The seller, among other things, moved to dismiss for lack of subject matter jurisdiction arguing that the buyer’s requested declarations do not present a ripe controversy.
The Court goes through a very helpful and informative discussion of a motion to dismiss under Rule 12(b)(1) and the case or controversy requirement. The Court noted:
Pursuant to Delaware’s Declaratory Judgment Act, 10 Del. C. § 6501, Delaware courts have the power ‘to declare rights, status and other legal relations whether or not further relief is or could be claimed’. The purpose of the statute is to provide parties whose legitimate interests are cast into doubt by the assertion or threat of assertion of adverse claims with an opportunity to obtain judicial resolution before their adversaries bring suit against them. The Act, therefore, is a practical timing device that permits courts to adjudicate controversies earlier than ‘the stage at which a matter is traditionally justiciable.’ The Act’s timing innovation, however, is subject to the limitation under Delaware law that declaratory relief is only available if an actual case or controversy between the parties exists.
The plaintiff, however, must meet all of the “prerequisites” of a live controversy in that the claims: “(1)… involv[e] the rights or other legal relations of the party seeking declaratory relief; (2) . . . in which the claim of right or other legal interest is asserted against one who has an interest in contesting the claim; (3) . . . between parties whose interests are real and adverse; [and] (4) [that involves an] issue . . . ripe for judicial determination.”
In the end of its analysis, the Court of Chancery found that the complaint pled a live controversy so it then turned to the plaintiff’s motion for summary judgment. The Court noted that the complaint alleged that the plaintiff was entitled to a declaratory judgment for ten specific declarations. For discussion purposes, the Court broke the claims into four groups – breaches of contract, breaches of fiduciary duties, breach of an implied covenant of good faith and fair dealing, and fraud.
With respect to the breach of contract claims, the Court found that the plaintiff was entitled to the declaratory relief it sought and held that K&K LLC did not breach the Seller’s Note or the Subordination Agreement by entering into the 2001 Transaction. With respect to the breaches of fiduciary duty, there is an interesting discussion of tolling issues, laches, the statue of limitations involving actions filed in Delaware and Illinois, and Delaware’s “borrowing statute.” In the end, the Court found that any breach of fiduciary duty claim that ECI might assert against the plaintiff arising out of the 2001 transaction was barred under the doctrine of laches and the analogous limitations periods under Delaware and Illinois law. With respect to the breach of an implied covenant, the Court decided that under Illinois law the plaintiff was entitled to summary judgment because the defendant could not assert an independent cause of action for breach of implied covenant. And finally as to the claims involving fraud or fraudulent conveyance, the Court found that the plaintiff was entitled to summary judgment in its favor for any fraudulent transfer or conveyance, fraud or fraudulent inducement claim that ECI might assert against K&K LLC based on the 2001 transaction because those claims were barred by the doctrine of laches and the analogous limitations periods under Delaware and Illinois law.
This summary was prepared by Kevin F. Brady of Connolly Bove Lodge & Hutz LLP.