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An Ounce of Preservation Is Worth a Pound of Argument

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October 29, 2014
Morris James LLP
Delaware Business Court Insider

Because the Delaware Supreme Court decides so few cases, it is not uncommon to believe it will jump at the chance to decide an issue it has not seen before. Two recent decisions from the court, however, highlight the important procedural limitations imposed by Supreme Court Rule 8 on the court's ability to decide issues before it, even the novel or interesting ones. In both of these decisions, the Supreme Court declined to address unsettled questions of Delaware law because the appellant failed to raise the argument made on appeal to the Delaware Court of Chancery. More importantly, the Supreme Court also revealed that it looks at the "interests of justice" exception to Rule 8 more narrowly in a corporate or commercial case, making it more important that all of the relevant arguments are presented to the trial court or well planned on appeal.

In Huatuco v. Satellite Healthcare, CA No. 8465-VCG (Del. Ch. Dec. 9, 2013), the defendant moved to dismiss the plaintiff's petition for judicial dissolution of a limited liability company on the grounds that the operating agreement expressly limited the members to only the rights set forth in the agreement but omitted the right to seek judicial dissolution. The plaintiff argued that this language applied only to the rights set forth in that particular section of the agreement, and therefore did not bar judicial dissolution. The plaintiff also argued that the Chancery Court's decision in R&R Capital v. Buck & Doe Run Valley Farms, CA No. 3803-CC (Del. Ch. Aug. 19, 2008), which held that the right to seek a judicial dissolution in the Delaware Limited Liability Company Act may be modified by contract, was distinguishable because the defendant did not prove the waiver was knowing and voluntary as required by R&R Capital. The Chancery Court disagreed with the plaintiff's contractual interpretation and found that R&R Capital did not require proof of a knowing and voluntary waiver, particularly given the plain language of the agreement.

On appeal, in addition to arguing that the Chancery Court incorrectly interpreted the agreement, the plaintiff argued that the court incorrectly decided R&R Capital and the LLC Act provides a nonwaivable right to seek judicial dissolution. While this issue may have been of interest to the Supreme Court and the development of the law of Delaware limited liability companies, the Supreme Court refused to consider the argument, holding that the appellant never made this argument to the Chancery Court, so it would not be considered on appeal. The Supreme Court then held that the Chancery Court interpreted the agreement correctly and affirmed.

More recently, in RockTenn CP v. BE&K Engineering, --- A.3d --- (Del. Oct. 16, 2014), the Supreme Court again refused to consider an issue on appeal on the grounds that it had not been raised below. In the Chancery Court, BE&K Engineering Co. sought an anti-suit injunction to prevent the defendants from pursuing claims in Georgia arising out of a contract that contained a forum selection clause choosing Delaware as the exclusive forum. The plaintiff's argument relied, in part, on statements made in pleadings in the Georgia action by RockTenn that the claims asserted in the Georgia action arose out of the contract with the Delaware forum-selection clause. BE&K argued that these statements in the Georgia action were judicial admissions binding on RockTenn. RockTenn argued these statements were not binding because they were a statement of law, which do not qualify as judicial admissions.

On appeal, in addition to making the arguments it made below, RockTenn also argued that the Chancery Court erred in holding that the statements in the Georgia action were binding judicial admissions because they were made in a separate proceeding. The Supreme Court noted that this "novel" and "interesting" argument raised arguments it had not considered before, but it would not address it because RockTenn had not raised it with the trial court. In reaching this conclusion, the Supreme Court noted that "in a commercial dispute like this that does not involve fundamental rights, like child custody or a criminal defendant's liberty, the interests of justice would be disserved, not furthered, by allowing the appellants to raise this issue for the first time on appeal."

These decisions show the importance of properly preserving arguments in the trial court. Interestingly, in both Huatuco and RockTenn, the appellants argued that notwithstanding their failure to raise the argument to the trial court, their claims on appeal should be considered for plain-error review. Although the Supreme Court did not address the plain-error argument specifically in either written decision, at oral argument in RockTenn the Supreme Court appeared to have difficulty accepting the proposition that the error was so obvious as to merit reversal for plain error yet not so obvious that the sophisticated law firm hired to represent the defendant did not make the argument to the Chancery Court.

More importantly, however, the RockTenn decision and some comments by the court during oral argument revealed that the Supreme Court may look at the interests of justice exception to Rule 8 differently when it comes to commercial cases. To paraphrase the comments of the Supreme Court during oral argument in RockTenn, how is the system of justice served if the Supreme Court permits sophisticated parties in commercial cases of sufficient magnitude to raise arguments for the first time on appeal?

Thus, while all appellants should be wary of raising an argument for the first time on appeal, appellants in corporate and commercial cases should have a plan to address this concern if they plan to make arguably new arguments on appeal.

Delaware Business Court Insider  |  October 29, 2014

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