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District Court Applies Delaware Statute of Limitations Carve Out For Fiduciary Claims, Denies Summary Judgment

Norman v. Elkin, 2007 WL 2822798 (D.Del. Sept. 26, 2007)

In this action the District Court evaluated the application of the statute of limitations to claims that a corporate fiduciary engaged in self-dealing at the corporation’s expense. Plaintiff was a 25% shareholder in a closely-held Delaware corporation with Pennsylvania headquarters, formed to participate in the wireless communications industry. Defendant #1 owned the remaining shares of the corporation, and also served as its President and sole director. Plaintiff alleged that Defendant #1 breached his duties to the corporation when he personally obtained newly-issued communications licenses from the FCC, then sold them along with the corporation’s pre-existing licenses to a third party, keeping the proceeds of the sale himself. Plaintiff further alleged that Defendant #1 took the action without notifying Plaintiff in his capacity as a shareholder, without holding an annual meeting, and without making any disclosure of the sale. Plaintiff sued Defendant #1, along with his wholly owned corporation and another corporate officer, in the Delaware Court of Chancery for breach of contract, unjust enrichment, declaratory relief, and breach of various fiduciary duties. Defendants removed the action to District Court based on diverse citizenship and moved for summary judgment, arguing that all claims were time-barred.

The parties disagreed as to whether Delaware or Pennsylvania statute of limitations law governed. The Court rejected Plaintiff’s argument that Delaware’s internal affairs doctrine warranted application of the Delaware statute of limitations, concluding that it was inapplicable because it pertains only to substantive law, whereas the issue of statute of limitations is a procedural issue. Rather, the Court accepted Defendants’ argument that Delaware’s borrowing statute applied, such that the time limit on the action was governed by the shorter of Delaware’s statute of limitations or the statute of limitations of the jurisdiction where the action arose. Applying the borrowing statute, the Court determined that Pennsylvania’s two year statute of limitations applied to all of Plaintiff’s claims other than the breach of contract claim, to which Pennsylvania’s three year statute of limitations applied. The Court further concluded that all of the claims were therefore time-barred unless the statutes were tolled. Plaintiff argued that under Delaware’s carve out to the statute of limitations, Defendants could not assert the statute of limitations defense because Defendant #1 was a corporate fiduciary who personally benefited from the alleged wrongdoing. The Court concluded that Plaintiff did allege wrongful self-dealing by a corporate fiduciary, and therefore the statute of limitations was tolled until Plaintiff knew or had reason to know of the facts constituting the alleged wrongdoing. The Court denied summary judgment on the basis that the date on which Plaintiff knew or should have known of the alleged wrongdoing was a material fact in dispute.