A recent decision from the Delaware Court of Chancery provides practical insights into the requirements for imposing personal jurisdiction in Delaware over non-residents involved in the formation of a Delaware entity. The act of forming a Delaware entity only, without more, is not sufficient to impose personal jurisdiction in Delaware over a non-resident involved in the formation.
The case of Baier v. Upper New York Investment Company LLC, C.A. No. 6896-VCS (Del. Ch. April 16, 2018), involves lengthy litigation among siblings over the division of the inheritance from their parents’ estate. The estate involved assets in many foreign countries and some of those assets were titled in Delaware entities. A prior decision addressed more detailed factual background in the matter, in an opinion styled: de Adler v. Upper New York Inv. Co. LLC, 2013 WL 5874645 (Del. Ch. Oct. 31, 2013).
Mere Formation Not Enough:
The most noteworthy statement of law in this case with the most widespread application to corporate and commercial litigators (although not a new statement of the law), is the court’s ruling that the “mere formation of a Delaware entity, without more, is insufficient for this Court to exercise jurisdiction. Rather, the act of formation must be ‘an integral component of the total transaction to which [the] cause of action relates.’” See footnotes 88 to 92.
Single-Act Long-Arm Statute:
The court refers to Delaware’s long-arm statute, at Section 3104(c)(1) of Title 10 of the Delaware Code as a “single act” statute. This requires that the non-resident defendant’s act of transacting business in Delaware must have a nexus to the claim against that non-resident defendant.
Also notable was the court’s description of the slightly different standard that applies when a motion to dismiss based on personal jurisdiction is analyzed prior to any jurisdictional discovery–in which case only a prima facie showing is necessary. Once, however, jurisdictional discovery is completed, one must allege specific facts to support personal jurisdiction. See footnotes 76 and 77. The court then discussed the familiar two-step personal jurisdictional analysis where the court first assesses whether there is a statutory basis for personal jurisdiction, and then, secondly, determines whether its exercise of personal jurisdiction over a non-resident defendant is consistent with the Due Process Clause of the Fourteenth Amendment to the United States Constitution. See footnotes 81 and 82.
Jurisdiction over Managers of LLC:
The court also discussed the concept of when a manager of an LLC is subject to personal jurisdiction under Section 18-109 of the Delaware LLC Act. See page 26.
Latches as an equitable defense was also discussed in connection with the general rule that due to the factual nature of the requisite analysis of the applicability of latches, a ruling on that argument is generally not suitable for a motion to dismiss–but this case was an exception to that rule. See pages 28 and 29. Thus, laches was a separate basis to dismiss the claims even if personal jurisdiction were appropriate.
Law of the Case
The court also discussed the “law of the case” doctrine, which equally applies to decisions of courts from other countries involving the same issues between the same parties, in which case the principle of comity also militates against re-litigation of issues previously decided.