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Delaware Supreme Court Clarifies Director/Officer Implied Consent Statute and Rejects Hana Ranch

Posted In Jurisdiction

Hazout v. Tsang Mun Ting, No. 353, 2015 (Del. February 26, 2016)

Rejecting the Court of Chancery’s narrow reading of the director/officer implied consent statute in Hana Ranch, Inc. v. Lent, 424 A.2d 28, 30 (Del. Ch. 1980), an interpretation that had been followed by lower courts for decades, the Delaware Supreme Court ruled that a non-resident officer sued in Delaware is subject to personal jurisdiction in actions brought “by or on behalf of, or against” the corporation if that officer “is a necessary or proper party” to the case, even if the case does not involve an alleged breach of the officer’s fiduciary or statutory duties.

The plaintiff alleged that Marc Hazout, a director and officer of Silver Dragon, had negotiated for the plaintiff and other investors to loan Silver Dragon $3.4 million. Once the relevant agreements were ready for signature, the investors wired the first $1 million to Silver Dragon.  However, the deal did not close.  Rather than returning the funds, the plaintiff alleged that Hazout transferred $750,000 to Travellers International, a company he controlled. Accordingly, the plaintiff filed an action against Silver Dragon, Hazout, and Travellers for a variety of claims, including fraud and unjust enrichment.  Hazout moved to dismiss, arguing that the implied consent statute did not supply the Superior Court with personal jurisdiction over Hazout because the alleged claims did not implicate his fiduciary obligations as an officer or director.  The Superior Court denied the motion to dismiss.

On an interlocutory appeal, relying on Hana Ranch, Hazout argued that Section 3114(b) only supplied jurisdiction over Delaware officers for claims arising out of their duties as officers, such as fiduciary duties.  The Supreme Court disagreed with this narrow interpretation and emphasized that the implied consent statute supplied two provisions addressing officer consent.  Specifically, every nonresident who “accepts election or appointment as an officer” of a Delaware corporation “shall, by such acceptance or by such service, be deemed thereby to have consented to the appointment of the registered agent of such corporation … as an agent upon whom service of process may be made in all civil actions or proceedings brought in this State, [1] by or on behalf of, or against such corporation, in which such officer is a necessary or proper party, or [2] in any action or proceeding against such officer for violation of a duty in such capacity, whether or not the person continues to serve as such officer at the time suit is commenced.”  10 Del. C. § 3114(b) (emphasis and numbers added).  In Hana Ranch, interpreting the same language in the director context, the Court of Chancery recognized the existence of the comma after “necessary or proper party” and the disjunctive “or,” but still ruled that the statute must be limited to claims addressing the “rights, duties, and obligations which have to do with service as a director of a Delaware corporation.”  Hana Ranch, 424 A.2d at 30.  Chancellor Marvel in Hana Ranch appears to have been concerned with potential unconstitutional application of the “necessary or proper” provision if it were to be read as a separate basis from the “violation of a duty” as a director provision.

Rejecting Hana Ranch’s approach, the Delaware Supreme Court explained:

 [W]e do not believe that it is a proper role for the Judiciary to excise a clear category set forth in § 3114(b), simply because there might be cases where it is susceptible to an overly broad reach. We understand that a decision of the Court of Chancery issued many years ago took that approach, but this Court has never ruled on that approach and we do not embrace it. Rather, under settled principles of statutory interpretation, it is our obligation to give effect to the plain language of statutes to the extent we can do so without offending any supervening constitutional limits. As both Chancellor Allen and Chancellor Chandler pointed out, that can be done in the case of § 3114 by ensuring that any exercise of personal jurisdiction under the statute is also consistent with due process, by applying the established minimum contacts test from International Shoe and its progeny.

The Delaware Supreme Court went on to hold that the necessary or proper party provision was not facially unconstitutional as it contained textual safeguards to prevent an overly broad reading.  Specifically, the provision only applies to cases in which the corporation is a party and the director is a “necessary or proper party.”  According to the Court, “[t]hrough this means, the General Assembly therefore required that there be a close nexus between the claims involving the corporation which made it a party to the suit, and the conduct of the nonresident fiduciary.”

Applying the plain language of the statute, the Court found it conferred personal jurisdiction over Hazout.  First, as required by the statute, Silver Dragon was a party.  Second, although he was not a “necessary” party because the case could proceed to a final judgment against Silver Dragon, Hazout was a “proper” party because of his legal interest in the matter and because the claims against him arose out of the same facts and occurrences as the claims against Silver Dragon.  Finally, the Court noted the nexus between the alleged wrongs and Hazout’s corporate management role as he was alleged to have committed the alleged wrongs through his power as an officer of Silver Dragon.

Applying Due Process Clause analysis, the Court found this was “not in our view a close question.”  The Court noted that by becoming a director and officer of a Delaware corporation, Hazout had “purposefully availed himself of certain duties and protections under our law.”  Moreover, all of the claims against him “involve his actions in his official capacity of negotiating contracts that involved the change of control of a Delaware public corporation.”



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