RWI Acquisition LLC v. Todd, C.A. No. 6902-VCP (Del. Ch. May 30, 2012).

Issues Addressed

(1) Whether the Court of Chancery had personal jurisdiction over the member of a Delaware LLC; and (2) Whether the Court could or should stay the first-filed Delaware action, sua sponte, in favor of a later-filed related proceeding in New Mexico.

Short Answer

The Court determined that it would stay the Delaware action sua sponte in the interest of “judicial economy, efficiency, and comity,” and the Court also held that Delaware was an improper forum to determine what interest, if any, a non-resident member had in the Delaware LLC.

Background

This case began as a declaratory judgment pursuant to Section 18-111 of the Delaware LLC Act to determine the duties, obligations and liabilities, if any, of a Delaware limited liability company to one of its initial members.  The one-count complaint sought a judicial declaration that the individual defendant, a resident of New Mexico, was no longer a member of the Delaware LLC and did not have any equity or other interests in the Delaware LLC.

The individual defendant, named Todd, filed a motion to dismiss under Court of Chancery Rules 12(b)(2) for lack of personal jurisdiction and 12(b)(3) for improper venue.

The Court concluded that the forum selection clause in the employment agreement of Todd, which paralleled a similar provision in a related stock purchase agreement, precluded the Court from determining what effect, if any, Todd’s termination from a related entity had on his rights in the Delaware LLC.  In addition, the Court determined that it did not have the ability to definitively decide whether Todd continued to hold any interest in the Delaware LLC until a Court in New Mexico determined other related rights.  Thus, on its own initiative the Court stayed this action as a matter of judicial efficiency, and in deference to the apparent intent of the contracting parties to prefer proceedings subsequently filed in New Mexico.

RWI Acquisition LLC (“RWI Del.”) sought a judicial declaration that Todd was no longer a member of RWI Del.  Todd is a New Mexico resident whose only connection with the State of Delaware apparently is his involvement with RWI Del.  RWI Del. was formed in 2007 as the vehicle to effect a substantial investment in a New Mexico corporation that Todd founded in 1974, referred to as RWI – N.M.  The complaint alleges that upon the termination of his employment with RWI – N.M., Todd forfeited his membership interest in RWI Del.  In connection with the investment transaction in 2007, the following agreements were entered into:  (1) The operating agreement of RWI Del.; (2) The stock purchase agreement (“SPA”) memorializing RWI Del.’s purchase of the stock Todd owned in RWI – N.M.  (The SPA had a forum selection clause providing that New Mexico is the “sole and exclusive” forum for any disputes); (3) The subscription agreement by which Todd received units in RWI Del.; (4) A Members’ Agreement which restricted the transfer of units in RWI Del.; (5) The employment agreement between RWI – N.M. and Todd which contained a forum selection clause in favor of the state and federal courts in New Mexico.  These agreements had overlapping references.

In connection with the attempt to terminate Todd for cause, the issue arose about whether or not the new majority owner could exercise its right to purchase the interests of Todd in RWI Del. for a purchase price of “zero,” allegedly based on the terms of one of the parties’ agreements.

Todd’s motion to dismiss was based on the argument that he did not “transact any business in the state” within the meaning of the long-arm statute in Delaware at Section 3104(c) of Title 10 of the Delaware Code, and even if he had, he lacks the minimum contacts necessary for constitutional muster.  He also claimed that he was not a manager and therefore the implied consent provisions of Section 18-109(a) did not apply.

In response, the plaintiff asserts that by co-forming a Delaware LLC, he was transacting business in the state, and that the implied consent statute is sufficient to confer personal jurisdiction because it involves the “business” of the LLC for purposes of Section 18-109(a).

Analysis

The Court began its analysis by relying on the maxim that Delaware courts “afford great weight to a plaintiff’s choice of forum.  Only extraordinary circumstances can supersede a plaintiff’s right to select its choice of forum.”  See footnote 28.  One notable exception to this rule is the routine deference that Delaware courts give to forum selection clauses.  The Court recognized prior case law that defers to a forum selection clause where the parties use express language that excludes all other courts before which the parties can bring an action, and such a forum selection would support a motion to dismiss under Court of Chancery Rule 12(b)(3).  See Ashall Homes Ltd. v. ROK Entm’t Gp. Inc., 992 A.2d 1239, 1245 (Del. Ch. 2010).  The Ashall case was highlighted on this blog here.

The Court determined that in order to decide the interests of Todd in the Delaware LLC, it would first need to decide, among other things, the rights that Todd had under his employment agreement.  The employment agreement, however, provides that any lawsuit related to that agreement may only be brought in the state or federal courts within the state of New Mexico.  The Court reasoned that it would be contrary to the intent of the parties for the Court of Chancery to resolve issues contrary to that forum selection clause.  Therefore, based on the fact that Delaware is not a proper venue for determining the relevant issues, the Court granted the motion to dismiss on that basis.  See footnotes 49 and 50 and accompanying text.

Decision of Court to Stay Delaware Case Sua Sponte

The Court considered whether it could bifurcate the issues that needed to be decided by a court in New Mexico with issues that were not subject to the forum selection clause.  The Court of Chancery observed that a second-filed action is pending in New Mexico with competent jurisdiction to hear all of the parties’ disputes.

The Court of Chancery therefore raised sua sponte whether the action should be stayed as a matter of judicial efficiency and consistent with the intent of the parties.  See footnote 55.  The Court referred to a prior decision of the Court of Chancery in Ashall Homes in which the Court granted a motion to dismiss for improper venue based on forum selection clauses.  In that case, the Court described the policy reasons for having disputes adjudicated in one court. 

Those policy reasons promoting efficiencies, and avoiding “claims splitting,” animate doctrines such as res judicata and the McWane Doctrine.  The Ashall opinion describes those doctrines as a means to encourage litigants to litigate their disputes in one place and “not force the defendants to unnecessarily expend resources on what would essentially be the same defense in multiple venues.”

Conclusion

The Court in the instant case emphasized that:  the interest of the Court of Chancery “in regulating the internal affairs of Delaware entities does not automatically preclude it from considering obvious inefficiencies and common sense reasons in favor of permitting another competent court to hear an otherwise conventional contract claim.”  In sum, the Court concluded that the first-filed Delaware proceeding should be stayed in the interests of judicial economy, efficiency and comity.