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In a matter of first impression, the Delaware Supreme Court in Whittington v. Dragon Group, L.L.C., No. 392, 2009 (Del. Dec. 18, 2009), in a divided decision, resolved a split of authority in the Delaware trial courts regarding the requirements necessary to prove specialty contracts or contracts under seal.  Read opinion here.  The decision appealed from by the Court of Chancery was highlighted on this blog here.

Kevin Brady and Ryan Newell of the Connolly Bove firm prepared this synopsis.

Under the new bright line rule “in the case of an individual, in contrast to a corporation, the presence of the word ‘seal’ next to an individual’s signature is all that is necessary to create a sealed instrument, ‘irrespective of whether there is any indication in the body of the obligation itself that it was intended to be a sealed instrument.’”

Background

In 2006, Plaintiff Frank C. Whittington, II filed suit in the Court of Chancery to enforce his alleged rights in a Delaware LLC, Dragon Group, L.L.C. (“Dragon Group”). In addition to Dragon Group, the remaining defendants included Whittington’s four siblings. With the underlying facts dating back to a settlement agreement from 2001, the Court of Chancery barred Whittington’s claims under the doctrine of laches, using the analogous three year statute of limitations for breaches of contract under 10 Del. C. § 8106.

Laches and the Statute of Limitations

The Court began its analysis with a brief summary of the doctrine of laches:

Both the doctrine of laches and statutes of limitations function as time bars to lawsuits. Unlike a statute of limitations, the equitable doctrine of laches does not prescribe a specific time period as unreasonable. Laches is an unreasonable delay by a party, without any specific reference to duration, in the enforcement of a right, and resulting in prejudice to the adverse party. An unreasonable delay can range from as long as several years to as little as one month. The temporal aspect of the delay is less critical than the reasons for it. In some circumstances even a long delay might be excused.

In referencing the Supreme Court’s 2009 decision in Reid v. Spazio, the Court said:

Under ordinary circumstances, a suit in equity will not be stayed for laches before, and will be stayed after, the time fixed by the analogous statute of limitations at law; but, if unusual conditions or extraordinary circumstances make it inequitable to allow the prosecution of a suit after a briefer, or to forbid its maintenance after a longer period than that fixed by the statute, the [court] will not be bound by the statute, but will determine the extraordinary case in accordance with the equities which condition it.

While statutes of limitations always operate as a time bar to actions at law, they are not controlling in equity. Indeed, the doctrine permits the Court to hold a plaintiff to a shorter period if the plaintiff should have acted “with greater alacrity, and when the plaintiff’s failure to seek equitable relief with alacrity threatens prejudice to the other party.” In citing Reid, the Supreme Court stated that there are three elements required to prove laches: (i) knowledge by the claimant; (ii) unreasonable delay in bringing the claim; and (iii) resulting prejudice to the defendant.

Analogous Statute of Limitations

In determining which statute of limitations should apply by analogy to a suit in equity, the Supreme Court stated that the general rule is that “the applicable statute of limitations should be applied as a bar in those cases which fall within that field of equity jurisdiction which is concurrent with analogous suits at law.” The Court of Chancery concluded that “Frank’s claims ultimately are predicated upon the AIP and that this action is ‘based upon a promise’ within the meaning of section 8106.”

The “Contract Under Seal” Exception

The Supreme Court noted that there is an exception to the three year statute of limitation period for “specialty contracts” or “contracts under seal.” and those contracts generally have a twenty year limitation period. In the Court of Chancery, Franks argued that the settlement agreement was a contract under seal because the word “seal” appeared beside the signature line for each signatory. Relying upon a 1993 Superior Court decision in American Telegraph Co. v. Harris Co., 1993 WL 401864 (Del. Super. Sept. 9, 1993), the Court of Chancery held that under New York law, in order for there to be a contract under seal (excluding documents of debt such as mortgages or promissory notes if they contain the most minimal reference to a seal) there must be evidence of clear intent to enter into a contract under seal. The Harris court held that “for an instrument other than a mortgage to be under seal, ‘. . . it must contain language in the body of the contract, a recital affixing the seal, and extrinsic evidence showing the parties’ intent to conclude a sealed contract. . . .’” Finding no such evidence, the Court of Chancery held that the AIP was not a contract under seal.

While the Court of Chancery applied Harris, the Supreme Court recognized that there was a split of authority in the Delaware trial courts as to what constitutes a sealed instrument, other than a mortgage or deed. Unlike Harris, the Orphan’s Court in In re Beyea’s Estate 15 A.2d 177, 180 (Orphan’s Ct. 1940), held that the mere inclusion of the word “seal” is sufficient to form a contract under seal “irrespective of whether there is any indication in the body of the obligation itself that it was intended to be a sealed instrument.”

The Supreme Court in a divided decision, decided that in the absence of legislative guidance, it would follow the ruling of In re Bayea’s Estate. In resolving the split, the Court held, “[t]he opinion in Beyea’s Estate provides a bright line standard that is easily applied. Accordingly, we hold that in Delaware, in the case of an individual, in contrast to a corporation, the presence of the word ‘seal’ next to an individual’s signature is all that is necessary to create a sealed instrument, ‘irrespective of whether there is any indication in the body of the obligation itself that it was intended to be a sealed instrument.’” As a result of the Court’s findings, the case was remanded to the Court of Chancery for reconsideration by applying the 20 year statute of limitations by analogy.


Justice Jacobs’ Dissent

Justice Jacobs in his dissent stated that the bright line created by the majority “represents an inadvisable policy choice that would frustrate the reasonable expectations of parties to many commercial contracts.” Justice Jacobs opined that the majority’s deference to a bright line standard came at the expense of another policy: “creating a period of repose from litigation after a prescribed period of time.” Unless the Delaware General Assembly abolishes the contracts under seal, Justice Jacobs believed this new rule will be troublesome. In concluding that he would have affirmed the Court of Chancery, Justice Jacobs explained:

To state it more plainly, in today’s modern commercial environment, it is unreasonable and (I submit) an inadvisable policy to subject parties to commercial contracts to the risk of litigation for twenty years without requiring at least minimally persuasive evidence that the parties intended that result. In my view, the common law rule should be that the use of the boilerplate term “seal,” without more, should be insufficient to visit twenty years of exposure to litigation upon contracting parties.

 

Whittington v. Dragon Group, L.L.C., No. 2291-VCP (Del. Ch., June 11, 2009), read opinion here.

Among the several prior decisions of the Chancery Court in this case, the two most recent have been summarized on this blog and are available here.

Overview

This Chancery Court decision is one in a series of Delaware decisions involving a dispute among family members of ownership in a Delaware business entity. The present case arises from the different interpretation of a court order entered over five years ago which attempted to resolve one of the intra-family squabbles. The defendants contend that the plaintiff is not a member of the entity, while the plaintiff seeks a judicial order to compel the defendants to recognize his interest in that entity. The court concluded that the plaintiff was barred by laches from seeking relief because he unreasonably delayed the filing of his complaint for over two years and during that period of time the entity involved extinguished liabilities and the defendants undertook certain risks that were not shared by the plaintiff.

The decision provides an extensive definition and rationale for the concept of laches and why the equitable defense of laches does apply in this case.

Examination of the Equitable Defense of Laches

Of particular note is the concept that laches can be applied to prevent a claim that is filed within the applicable statute of limitations when equitable relief is sought. For example, the court explained that where, as in this case, a claim for specific performance requiring a party to perform its contractual duties is filed, it invokes a “stricter requirement for prompt action by the plaintiff, and a plaintiff may not wait the full period of three years set forth in 10 Del. C. Section 8106 to seek such relief.” (See footnote 44. See also footnotes 42, 43 and 45.)

When applying a bar of laches to a claim that was filed within the statute of limitations, there must be either procedural prejudice, for example where a delay prevented a party from calling a crucial witness who has become unavailable; or substantive prejudice, such as when a party suffers a financial detriment by relying on the failure of the plaintiff to seek relief in a timely manner. (See footnotes 46 and 47.) The court also discussed the concept of “inquiry notice” which exists when a plaintiff becomes aware of “facts sufficient to put a person of ordinary intelligence and prudence on inquiry which, if pursued, would lead to the discovery of injury. A plaintiff is expected to act with alacrity once he has reason to suspect that his rights have been violated, and a statute of limitations runs from the point at which the plaintiff, by exercising reasonable diligence, should have discovered his injury.” (See footnotes 49 and 50.) The court found that even under several alternative findings of facts, that the plaintiff simply waited too long to pursue his claims and that it would be inequitable to permit such a delay even if the claim was filed within the applicable statute of limitations.

The court also rejected an argument that the alleged unclean hands of the defendants, based on the facts of this case, prevented the use of laches as a defense. (See footnote 54.)

In sum, the court emphasized that for the applicability of laches, “the length of delay may be less important than the reasons for it. . . . Additionally, the touchtone of the laches inquiry is whether an inexcusable delay leads to an adverse change in the conditions or relations of the property or parties.” (See footnotes 56 and 57.)

Conclusion

In closing, the court quoted the well known equitable maxim that: “equity aides the vigilant, not those who slumber on their rights.” After an exhaustive description of the facts, the court reasoned that the specific injunctive relief sought by the plaintiff required him to act with more alacrity than would apply if he were requesting monetary damages, and in this case it would be inequitable to ignore the “sluggishness in bringing his claims.”

 

Whittington v. Dragon Group, L.L.C., (Del. Ch., Sept. 30, 2008), read opinion here.  [The opinion refers to several prior Chancery Court decisions in this case for more factual background, one of which was summarized on this blog here.]

In this latest iteration of this long-running intra-family dispute, the Court denies a Motion for Summary Judgment, finding genuinely disputed issues of material fact in the following four categories that were discussed at length in this 22-page opinion:

1) The date when a cause of action for violation of a Settlement Agreement arose, such as to trigger the commencement of the limitations in Section 8106 of Title 8 of the Delaware Code (which provides for a 20-year statute of limitations for documents “under seal” as opposed to the conventional 3-year statute of limitations for other contracts);

2) Whether there were mitigating circumstances that would warrant tolling the statute of limitations based on equitable principles and the length of time, if any, for which the statute should be tolled;

3) Whether in view of the claims for injunctive relief and specific performance, the delay in filing this action was unreasonable (see  doctrine of laches); and

4) Whether the defendant suffered material prejudice due to the failure to file this action until July 2006. See generally footnote 18 for the Court’s reference to cases that support the general principle that summary judgment may be denied “when the record indicates a material fact is in dispute or if it seems desirable to inquire more thoroughly into the facts in order to clarify the application of law to the circumstances.”

 

Whittington v. Dragon Group LLC, 2008 WL 2316305 (Del. Ch., June 6, 2008), read opinion here. This opinion addresses issues against the backdrop of sibling warfare (in the form of business litigation). The key issues addressed by the court were:

1) describing the requirements in Delaware for a contract (other than a mortgage or promissory note), to be considered "under seal" such that the longer 20-year statute of limitations would apply as compared to the conventional 3-year statute;

2) laches as a defense and juxtaposed with the applicable statute of limitations and when the cause of action accrued;

3) Also notable was the reference in the opinion to prior decisions in this case in which the court found enforceable a settlement agreement that contemplated other ancillary "agreements within the agreement". That is, the settlement terms included reference to other agreements that the parties were to negotiate and were to finalize separately from the central agreement. The court, in prior rulings cited in this opinion, held that the primary agreement was still enforceble even if the parties were not able to finalize the ancillary agreements that were subsequently to be entered into after the central agreement was signed.