This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Delaware Court of Chancery recently decided Zhongpin Inc. shareholders’ battle to force the food processor’s director and officer insurer to pay the $41.3 million Chancery Court judgment they won by challenging an unfairly-priced buyout must be fought in the Delaware Superior Court. Rodriguez et al. v. Great American Insurance Co., No. 2020-0387-JRS letter opinion issued (Del. Ch. Oct. 20, 2021).

Vice Chancellor Joseph Slights’ Oct. 20 decision dismissed the plaintiff shareholders’ insurance action from the Chancery Court, but not because they lacked standing or that there was no coverage for the default judgment he had awarded them in an underlying breach-of-duty action, as defendant Great American Insurance Company contended. He said he never reached those issues because Delaware law required him to first make a sua sponte ruling as to whether the insurance action was essentially a damages recovery suit that did not belong in a court of equity such as Chancery–but rather belonged in Delaware’s trial court of general jurisdiction: the Superior Court. Notably, Vice Chancellor Slights previously served as a judge on the Superior Court in its Complex Commercial Litigation Division.

Corporate and insurance law specialists will find the letter opinion of interest since it appears to shut the Chancery Court door on additional exceptions to the long-standing rule that has kept D&O disputes in the state’s Superior Court.

Rejected Arguments

After supplementary briefing, Vice Chancellor Slights rejected arguments from both parties that he could retain subject matter jurisdiction based on:

(a) Statutory authority and 8 Del. C. § 145(g) empowering corporations to procure insurance and Section 145(k)’s grant of plenary authority with respect to indemnification. The vice chancellor said a similar statutory argument was squarely addressed and rejected in Massachusetts Mutual Life Insurance Co. v. Certain Underwriters at Lloyd’s of London, 2010 WL 2929552, at (Del. Ch. July 23, 2010), where the plaintiffs sought to compel coverage and the payment of a claim under a D&O policy directly against the insurer. That court found “This is precisely the type of dispute that fits squarely within the jurisdiction of our Superior Court.”

(b) The clean-up doctrine — invoked where the court that exercised jurisdiction over an underlying action is empowered to adjudicate a dispute arising from the plaintiff shareholders attempt to enforce their underlying judgment. The vice chancellor said in order to exercise that power, he would have to be able to answer “yes” to questions as to whether jurisdiction over the claims would:

1) resolve a factual issue which must be determined in the proceedings;
2) avoid a multiplicity of suits;
3) promote judicial efficiency;
4) do full justice;
5) avoid great expense;
6) afford complete relief in one action; or
7) overcome insufficient modes of procedure at law.

The litigation sprang from a 2012 squeeze-out of Zhongpin investors by Xianfu Zhu, the company’s de facto controlling stockholder. Zhu caused Zhongpin to enter a transaction with two of his wholly owned entities whereby the minority stockholders of Zhongpin were cashed out for inadequate consideration. That transaction prompted breach-of-duty claims against the Class Action Defendants that resulted in Slight’s default judgment after Zhu and his directors and offices stopped paying their defense firm, failed to hire a replacement and stopped defending the action, the court said.

The insurance action
Following the default judgment, the plaintiff shareholders tried to collect from the D&O insurer on behalf of the company because it came in a derivative action and because Zhu, the directors and officers and company and its assets were in China and allegedly could not be located, let alone reached.

Plaintiffs argued that the GAIC policy covered losses incurred during the time frame of the wrongdoing alleged in the underlying action and that the losses are not excluded, but the insurer countered that the plaintiffs had no standing to seek coverage under the D&O Policy, the claims arose outside the coverage period, and the claims are governed by several exceptions or failures of conditions in the policy. GAIC refers to the D&O Policy’s No Action Clause, which says:

“No action shall be taken against the Insurer unless, as a condition precedent thereto, there shall have been full compliance with all the terms of this Policy” and
“The Insureds shall not incur Costs of Defense, or admit liability, offer to settle, or agree to any settlement in connection with any Claim without the express prior written consent of the Insurer”.

A court of limited jurisdiction
The vice chancellor noted that the Court of Chancery is a court of “limited jurisdiction;” and maintains subject matter jurisdiction only when:
(1) the complaint states a claim for relief that is equitable in character,
(2) the complaint requests an equitable remedy when there is no adequate remedy at law or
(3) Chancery is vested with jurisdiction by statute.

He concluded that none of those conditions are present here because, “At heart, the [Plaintiffs] assert that [GAIC] . . . [has] not fulfilled [its] obligations under [its] [] policies. This is fundamentally a breach of contract action for money damages, which is the traditional province of the Superior Court.” Transfer to Superior Court will not involve delay while another judge is forced to become familiar with a complex case, he said, because the insurance action is separate and new and plays to the experience and strength of the Superior Court.
Finally, the vice chancellor volunteered to finish the case if needed as a temporary Superior Court judge—using his pre-Chancery experience in that court.

The Oct. 20 opinion only decided what court would try to resolve a number of novel and interesting issues in a unique insurance case – complicated by the fact that Zhongpin had merged into a Delaware shell corporation but had few corporate ties to the U.S. In addition to the standing, coverage and other questions to be answered:

Even if the plaintiffs could access the insurance proceeds, how would the court resolve the GAIC policy requirements that Zhongpin defend the underlying shareholder suit and get permission to settle it — considering that the company’s owners, officers and directors had apparently abandoned the litigation?

If the plaintiffs won a coverage decision for the underlying derivative suit, would they contest a decision to send the funds to Zhongpin management somewhere in China on behalf of the shareholders?