Yours truly and my colleague Chauna Abner have published an article for the recent issue of The Delaware Business Court Insider on the titular topic. The analysis that determines when dual claims for breach of contract and breach of fiduciary duty based on substantially the same operative facts might survive a motion to dismiss, is often factually determinative, but for those who seek to “thread the needle”, our co-authored article based on Delaware decisions may be of practical usefulness. Though not based on a particular recently released Delaware Court of Chancery decision, the article addresses a perennial litigation issue that arises frequently, especially in the context of an LLC operating agreement that may modify fiduciary duties or not waive them at all.
Subsequent to the publication of our article, the Delaware Court of Chancery issued a decision that also covered this same issue. See In Re WeWork Litigation, Cons. No. 2020-0258-AGB (Del. Ch. Oct. 30, 2020).
Our article appears below with permission of The Delaware Business Court Insider:
The Exception to Pursuing Both Contract and Fiduciary Claims
Delaware courts have often thwarted plaintiffs’ pursuit of both a claim for breach of contract and a claim for breach of fiduciary duty when those claims arose out of the same facts.
By Francis G.X. Pileggi and Chauna A. Abner | October 28, 2020
Delaware courts have often thwarted plaintiffs’ pursuit of both a claim for breach of contract and a claim for breach of fiduciary duty when those claims arose out of the same facts. See, e.g., Edinburg Holdings v. Education Affiliates, 2018 Del. Ch. LEXIS 182, at *34 (Del. Ch. June 6, 2018).
More specifically, Delaware courts have held that “fiduciary duty claims may not proceed in tandem with breach of contract claims absent an independent basis for the fiduciary duty claims apart from the contractual claims.” See MHS Capital v. Goggin, 2018 Del. Ch. LEXIS 15, at *21 (Del. Ch. May 10, 2018) (emphasis added). This is a determining factor in deciding whether both claims may proceed to trial.
When both contract and fiduciary claims may not be tried together:
Under Delaware law, “‘where a dispute arises from obligations that are expressly addressed by contract, that dispute will be treated as a breach of contract claim.’” Thus, “any fiduciary claims arising out of the same facts that underlie the contract obligations would be foreclosed as superfluous.”
In Triple H Family L.P. v. Neal, 2018 Del. Ch. LEXIS 262 (Del. Ch. July 31, 2018), the Court of Chancery held that a party could not pursue both a breach of contract claim and a claim for usurpation of corporate opportunities because the claims related to the same behavior by the accused wrongdoer and sought the same remedies. (“Hoops alleges both breach of contract and usurpation of corporate opportunities related to the same behavior by Neal: failing to roll Neal Insurance into Omni. Hoops also seeks the same remedy for the alleged breach of contract and breach of fiduciary duty: disgorgement of half of the profits made by Neal Insurance before Omni was dissolved. I address only the breach of contract claim because the usurpation of corporate opportunities claim is duplicative.”).
Similarly, in Stewart v. BF Bolthouse Holdco, 2013 Del. Ch. LEXIS 215 (Del. Ch. Aug. 30, 2013), the Court of Chancery held that the plaintiff could not pursue its breach of fiduciary duty claim and reasoned that “the fiduciary duty claim here arises from a dispute relating to the exercise of a contractual right” and “do[es] not implicate potentially different remedies.”
When both contract and fiduciary claims may procced:
On the other hand, a party may pursue both contract claims and fiduciary claims when “the fiduciary duty claims depend on additional facts as well, are broader in scope, and involve different considerations in terms of a potential remedy.” Thus, the relevant inquiry in determining whether a party may pursue both contract and fiduciary claims is “whether there is some harm to be remedied through the lens of fiduciary duty which cannot be adequately compensated through enforcement of the contract.” See MHS Capital, 2018 Del. Ch. LEXIS 151 at *23 (internal quotation marks omitted).
In summarizing a prior decision allowing both contract and fiduciary claims to proceed to trial, the Court of Chancery explained that:
In Schuss, the plaintiffs alleged that the defendants had breached their partnership agreement by failing to make distributions to the plaintiffs in accordance with the terms of the agreement. The plaintiff further alleged that the defendants breached their fiduciary duties by leaving the partnership in a position where it could not satisfy any damages owed to the plaintiffs because the defendants had engaged in self-dealing conduct that included depleting the partnership funds and improperly shifting losses to the plaintiffs. Based on these allegations, th[e] court found that the fiduciary duty claim was not foreclosed by the breach of contract claim because ‘[a]lthough these fiduciary duty claims share a common nucleus of operative facts with the plaintiff’s breach of contract claim, they depend on additional facts as well, are broader in scope, and involve different considerations in terms of a potential remedy.
Stewart, 2013 Del. Ch. LEXIS 215 at **47-48 (quoting Schuss v. Penfield Partners, 2008 Del. Ch. LEXIS 73, at **4, 10 (Del. Ch. June 13, 2008)) (emphasis added).
The key takeaway is as follows: any party who wishes to pursue both contractual and fiduciary claims that arise out of the same facts may do so as long as those claims: “depend on additional facts as well, are broader in scope, and involve different considerations in terms of a potential remedy.”
Francis G.X. Pileggi is the managing partner of the Delaware office of Lewis Brisbois Bisgaard & Smith. His email address is Francis.Pileggi@LewisBrisbois.com. He comments on key corporate and commercial decisions, and legal ethics topics, at www.delawarelitigation.com, including the court’s holding in Edinburg Holdings, Inc., cited supra; the commentary of which is available here: https://www.delawarelitigation.com/2018/06/articles/chancery-court-updates/court-explains-when-dual-claims-for-breach-of-fiduciary-duty-and-breach-of-contract-can-be-pursued/
Chauna A. Abner is an associate with the firm.