McElroy v. Schornstein, C.A. No. 7233-CS (Del. Ch. June 20, 2012).
Issue Addressed: Whether summary proceedings for dissolution under 8 Del. C. § 273 should be permitted to proceed as an exception to the first-filed rule under the McWane doctrine, in light of related actions outside of Delaware addressing Delaware issues.
Short Answer: Not under the circumstances of this case. Motion to Dismiss granted. Hat tip to Delaware corporate litigator Kurt Heyman for forwarding this case to me.
This action was filed pursuant to DGCL Section 273 seeking judicial dissolution of a business that was owned by two 50% shareholders. Section 273 allows for a summary proceeding in the nature of a “no-fault business divorce” when there is a deadlock between two 50/50 shareholders. Curiously, one of the parties previously filed a separate but similar action in New Jersey several months earlier. The first-filed rule, also known as the McWane doctrine, generally allows the court to exercise discretion to stay or dismiss a second-filed case in favor a prior action pending elsewhere in a court capable of doing prompt and complete justice involving the same parties and the same issues. An exception to that rule is when a summary statutory proceeding, such as one under Section 273, is filed as a “second action.” See cases cited at footnote 3.
The exception to the first-filed rule for summary proceedings is based on the theory that Delaware is the more appropriate forum, when a component of multi-forum litigation involves a summary proceeding, because Delaware has a strong interest in resolving issues concerning the internal affairs of a Delaware corporation promptly and efficiently. See cases cited at footnote 9.
An important factor here was that the prior filed action in New Jersey resulted in an Order entered by the New Jersey Court that regulated the conduct of the parties and imposed restrictions on the activities of the parties during the pendency of that action.
The Court of Chancery determined that the motion to dismiss the Section 273 summary proceeding should be granted for several reasons. First, the prior filed action in New Jersey involved substantially the same issues that would need to be determined in Delaware, and the New Jersey Court already entered an order addressing several of those issues, at least preliminarily.
The Court of Chancery also determined that the attempt by McElroy to proceed in Delaware was undercut by his filing of yet another action in California, the outcome of which would affect the actions of any receiver that might be appointed in Delaware in connection with the dissolution. Proceeding with the dissolution in Delaware and appointing a Delaware receiver would also interfere with the order that was already issued in New Jersey.
In light of the pending actions in both New Jersey and California involving the same parties and related issues, the Court concluded with reasoning that is eminently quotable:
“Three-ring circuses may delight children at Barnum & Bailey, but in this context, they create the sort of inefficiency, complication, and sheer waste McWane addresses.”