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Will Delaware Still Take Your Case?

Articles & Publications

May 14, 2014
By: Edward M. McNally
Delaware Business Court Insider

Plaintiffs lawyers are questioning whether their cases will be heard by Delaware's courts. That concern is fueled by the Delaware Supreme Court affirmance of a trial court's dismissal of a case against DuPont Co., the ultimate Delaware corporation, on forum non conveniens grounds, in Martinez v. E.I. du Pont de Nemours & Co., 86 A.3d 1102 (Del. 2014). For if Delaware will reject a case as too inconvenient for a defendant like DuPont, whose headquarters is just four blocks from the courthouse, might not any defendant also have a case against it thrown out for the same reason? Of course, that is a too-broad reading of the Martinez case. Moreover, on April 28, the Court of Chancery sent a strong signal that the Delaware courts remain open to all, even foreign, plaintiffs.

First, a word about Martinez helps set the stage to discuss this recent Chancery Court decision. Martinez involved a Brazilian widow suing DuPont for the alleged negligence of a third-tier DuPont subsidiary located in Brazil whose actions all took place in Brazil. The very attempt to hold DuPont liable for its distant subsidiary's actions raised difficult questions of foreign law. Thus, under traditional Delaware notions of when it is fair to a defendant to force it to litigate in Delaware (the so-called Cryo-Maid factors), Martinez presented almost the very outer limits of the type of case a Delaware court would hear. What surprised most lawyers is that the court ruled in favor of the defendant DuPont—a party that could not have closer ties to Delaware. The fear was that for defendants with lesser Delaware connections, Martinez would virtually mandate the dismissal of any case filed by a foreign plaintiff over acts occurring outside of Delaware.

It is against that background that the Chancery Court in VTB Bank v. Navitron Projects, C.A. 8514-VCN (April 28, 2014), upheld a complaint filed by a Ukrainian company against a Delaware limited liability company, Development Max LLC. Significantly, Development Max had no ties to Delaware other than being formed there, and the acts complained of all took place in Ukraine involving a Ukrainian agreement. In short, the VTB Bank case looked a lot like Martinez.

The VTB Bank decision fairly assessed the relevant factors to decide a motion to dismiss on improper forum grounds. It noted the difficulty in accessing evidence, almost all of which was in Ukraine. It agreed that the relevant law was that of Ukraine, a factor favoring dismissal. It even noted that there were "glaring, practical difficulties to maintaining [the] litigation in Delaware," much as there were in Martinez. Yet the Chancery Court denied the motion to dismiss on the basis of an inconvenient forum. Why?

The decision turned on the court's concern that Delaware provide a remedy "in preventing the entities that it charters from being used as vehicles for fraud." Thus, because the plaintiff alleged that the Delaware entity, Development Max, was being used to defraud it and sought the appointment of a receiver, the court upheld the right of the plaintiff to sue in Delaware. Both fraudulent conduct and a particularly Delaware-based remedy of a receiver were necessary for the decision. Indeed, the court also cautioned that it might revisit its decision if the fraud claim proved too weak as a matter of Ukraine law to support the appointment of a receiver.

What, then, does VTB Bank really mean? It might be limited to just claims of fraud and a remedy such as dissolution that only a Delaware court can provide for a Delaware-formed entity. However, the decision's language seems to support a broader interpretation. The court, for example, stressed "Delaware's public interest in having [Delaware courts] oversee and rectify the conduct of Delaware entities [in a] compelling ... case." Does that extend to a deliberate breach of contract, negligence or other torts? If so, is VTB Bank consistent with Martinez?

In part, the answer lies in what role the Delaware court is asked to fulfill. For example, when the litigation focuses on the internal administration of a Delaware entity, the internal affairs doctrine means Delaware law will control. No Delaware court will dismiss a case turning on Delaware's entity laws for corporations, limited liability companies or similar entities. Delaware's interest in enforcing those laws of internal governance is just too great.

Similarly, there are some cases where only a Delaware court should grant the remedy needed to solve a dispute. Dissolutions of Delaware entities or appointments of a receiver are examples of those types of remedies. Other examples might be determining who are the members of a board of directors or whether a bylaw or charter provision is valid.VTB Bank was just such a case.

On the other hand, pure claims for damages that any court might award do not alone warrant litigating a claim against a Delaware entity in Delaware when that forum is too inconvenient. Merely labeling the defendant as a "vehicle for fraud" is not enough for a foreign plaintiff to successfully choose a Delaware forum when all the other Cryo-Maid factors favor dismissal on forum non conveniens grounds.

Properly understood, VTB Bank is consistent with Martinez. After all, a dismissal on forum non conveniens grounds still requires a showing of "overwhelming hardship." If an entity is formed in Delaware, that showing will be hard to make. And as VTB Bank teaches, Martinez does not permit Delaware defendants to avoid a Delaware court when egregious conduct is alleged involving that entity and when only a Delaware court may effectively provide a remedy.

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