Court of Chancery Stays Action for Violation of Rule against Claim Splitting Pending Resolution of a Duplicative Federal Action
Goureau v. Lemonis, C.A. No. 2020-0486-MTZ (Del. Ch. Mar. 30, 2021)
Delaware follows the modern “transactional” view of claim splitting, which bars a plaintiff from bringing duplicative proceedings in different courts simultaneously based on different causes of action arising from the same transaction or from a common nucleus of operative facts. The rule against claim splitting is intended to avoid burdening defendants with the defense of duplicative suits in different courts, and to prevent a plaintiff from obtaining “two bites at the apple” or a potential double recovery. A plaintiff who violates this rule may face dismissal or a stay pending resolution of the duplicative action.
In 2014, plaintiffs appeared on a business-themed reality television show. Defendant was the presenter on the show and offered plaintiffs $800,000 in exchange for a 30% ownership stake in their company, which they accepted. Six years later, plaintiffs filed two substantially overlapping actions against defendant and associated entities, one in the Court of Chancery and one in the United States District Court for the Southern District of New York. Plaintiffs’ claims in both actions arose from a shareholder agreement between plaintiffs and defendant that gave defendant leverage and governance authority over their company, which he allegedly used to increase the company’s debt obligations to him. He then pressured them to join another leveraged entity that benefited defendant, but rendered plaintiffs’ equity in their company worthless.
Applying the rule against claim splitting, the Court stayed the Chancery action pending resolution of the federal action. The Court ruled that Delaware courts take a “transactional” approach to claim splitting, and therefore bar overlapping complaints that arise from the same transaction or from a common nucleus of operative facts. Here, comparing the two complaints, the Court determined that the Chancery and federal actions arose from a connected series of transactions and the same common nucleus of operative facts, even if the federal action focused on the specifics of the 2014 transaction and the Chancery action focused on the parties’ subsequent business relationship. Both complaints alleged facts across the same time period, from plaintiffs’ episode in 2014 to defendant’s looting of their company’s stores in 2020. As alleged, these events arose from a common self-interested motivation. Moreover, plaintiffs’ interconnected allegations and resultant theories of recovery are a “convenient trial unit.” In staying rather than dismissing the Chancery action, the Court explained that the Chancery action involved a statutory dissolution of a Delaware entity, which is an action unique to the Court of Chancery. The Court reasoned that a decision on the merits of plaintiffs’ claims in the federal action would inform whether dissolution was appropriate.