Judge Davis Grants Motion to Dismiss and Finds that Alter Ego Liability Theories Belong in the Court of Chancery

February 13, 2019

Publication

In SARN Energy LLC v. Tatra Defense Vehicle A.S., C.A. No. N17C-06-355 EMD CCLD (Nov. 5, 2018) (“SARN II”), Judge Davis considered a motion to dismiss counterclaims raised by Tatra Defence Vehicle a.s. SARN II arises from the same transaction as SARN I. The counterclaims included two claims for breach of contract: failure to disclose tax information and disclosure of confidential information, as well as claims for alleged breach of the duty of good faith and fair dealing, defamation, and fraud. Judge Davis dismissed all but the breach of contract counterclaims. Judge Davis found the breach of contract counterclaims sufficiently pled to survive a motion to dismiss, but thought targeted discovery would be appropriate before eventual summary judgment. Judge Davis also noted that the breach of contract issues could be resolved with targeted discovery.

The remaining counterclaims against SARN Energy LLC arose out of letters that were sent to Tatra’s parent company Czechoslovak Group (“CSG”) and the Czech National Security Office, alleging that two of CSG’s board members were agents of nations hostile to NATO. These board members were also present at contract negotiations between SARN and Tatra. The letters were sent by an attorney for SARN after SARN’s final demand for payment went unfulfilled. The letters were written on SARN SD3 LLC (“SD3”) (a SARN affiliate) letterhead. The counterclaims for defamation and breach of the duty of good faith and fair dealing alleged that SD3 is an alter-ego of SARN and made false statements that were used to solicit defamatory articles about CSG.

Judge Davis dismissed these alter-ego claims, however, because Tatra failed to show that SARN made the defamatory statements alleged. In the pleadings, there was no connection between Tatra and CSG’s officers in the defamatory statements that would allow the harm to pass to Tatra. Thus, dismissal was appropriate. The duty of good faith and fair dealing counterclaim was also dismissed for this same reason (i.e., it arose out of actions by SD3). Because the required veil piercing for an alter-ego theory only could be brought in the Court of Chancery, Judge Davis dismissed those counterclaims. The final claim was one for fraud, which Judge Davis found duplicative of the breach of contract claims.

Analysis: Delaware’s court system retains the split between courts of law such as the Superior Court and equity courts such as the Court of Chancery. In resolving the alter-ego theories of liability, Judge Davis held, consistent with numerous other cases, that claims alleging an alter-ego theory must be brought in the Court of Chancery. See Yu v. GSM Nation, LLC, 2018 WL 2272708 (Del. Super. Ct. Apr. 24, 2018); Vepco Park, Inc. v. Custom Air Services, Inc., 2016 WL 1613654 (Del. Super. Ct. Feb. 25, 2016); and Marketing Prods. Mgmt., LLC v. HealthandBeautyDirect.com, Inc., 2004 WL 249581 (Del. Super Ct. Jan. 28, 2004).