Judge Davis Denies Motion to Dismiss but Bars Plaintiffs’ Contractual Claims

February 16, 2017

Publication

In JCM Innovation Corp. v. FL Acquisition Holdings, Inc., C.A. No. N15C-10-255-EMD-CCLD, Judge Davis granted in-part and denied in part defendants FL Acquisition Holdings, Inc. and American Capital Ltd.’s motion to dismiss plaintiffs JCM Innovation Corp. and JCM American Corporation’s (collectively, “JCM”) complaint relating to JCM’s purchase of FutureLogic Group, Inc. (“FutureLogic”) from the defendants. JCM initiated the action alleging that the defendants fraudulently induced JCM into buying FutureLogic, intentionally misrepresented the viability of FutureLogic’s product (Gen3: a casino gaming printer), willfully sold JCM a defective product, and breached the asset purchase agreement between the parties.

The defendants’ motion to dismiss alleged that the Court lacked jurisdiction. Specifically, the defendants pointed to the jurisdiction provision in the purchase agreement that submits exclusive jurisdiction to the Delaware Court of Chancery and only permits JCM to file in another Delaware court if the Court of Chancery is unavailable. In support of its argument, the defendants claimed that 10 Del. C. § 346—which grants exclusive jurisdiction to the Court of Chancery—governs the parties’ technological dispute due to the printers sold to JCM. The Court, however, noted that the purchase agreement did not mention Section 346, and Judge Davis refrained from reading in Chancery jurisdiction “where the parties clearly did not intend to create it.” The defendants also compared JCM’s purchase of FutureLogic to the sale of securities, thus subjecting the transaction to Section 111 of Title 8, which grants Chancery jurisdiction to hear claims in connection with a corporation’s sale of its stock. However, the Court held that while FutureLogic stock was sold to JCM, FutureLogic was not the seller of the stock, so the agreement is more accurately an asset purchase agreement.

The defendants also claimed that the purchase agreement required mandatory ADR before the parties may engage in litigation. Nonetheless, the Court concluded that the purchase agreement only required the parties to go through a post-closing procedure to resolve discrepancies in the purchase price and to make post-closing adjustments. That same procedure was not required before litigating other claims like those at issue.

The defendants additionally pointed to the exclusive remedy provision in the purchase agreement as evidence that JCM’s breach of contract, indemnity, implied covenant of good faith and fair dealing, and unjust enrichment claims all fail because the agreement expressly limits available remedies. Citing to Delaware’s public policy against fraud, the Court held that JCM’s fraud and unjust enrichment claims may proceed, but agreed with the defendants that the exclusive remedy provision bars JCM’s contractual claims.

Furthermore, the Court held that JCM’s fraud claim was adequately pled, enabling it to survive the defendants’ motion to dismiss. Similar to the fraud argument at issue in Narrowstep, Inc. v. Onstream Media Corp., 2010 WL 5422405, at *15 (Del. Ch. Dec. 22, 2010), JCM adequately alleged that the defendants repeatedly misled JCM throughout the negotiation and signing, thus using the purchase agreement as the “instrument” to perpetrate “‘its broader scheme’ to defraud JCM.” Because the fraud claim was different from the breach of contract claim, Judge Davis held that JCM had validly pled claims for fraud and unjust enrichment.

Analysis: This case highlights that the subject matter jurisdiction of Delaware’s Court of Chancery has its limits. Fortunately, the Superior Court’s Complex Commercial Litigation Division is well suited to handle complex business disputes similar to cases filed in the Court of Chancery. Moreover, the Complex Commercial Litigation Division is rapidly developing a body of case law regarding the ability to plead fraud claims in a sale of business transaction. Indeed, a number of Superior Court cases have addressed fraud in connection with various purchase agreements. See, e.g., Trueblue, Inc. v. Leeds Equity Partners IV, LP, N14C-12-112 WCC CCLD; McCann Aerospace Machining, LLC v. John W. McCann, C.A. No. N16C-02-164 EMD CCLD; ITW Global Investments Inc. v. American Industrial Partners Capital Fund IV, L.P., N14C-10-236 JRJ CCLD.