Court Opinion

ID: 4426350
Source: CourtListenerOpinion
Date Created: 2019-08-16 17:02:26.784867+00
Date Added: 2024-06-11T14:52:59.036353
License: Public Domain

IN THE SUPREME COURT OF THE STATE OF DELAWARE

CLAUDIO BALLARD, KEITH                  §
DELUCIA, GARY KNUTSEN,                  §
SHEPHARD LANE, PETER                    §
LUPOLI, IRA LEEMON, JOHN                §   No. 337, 2019
KIDD, CELESTIAL PARTNERS,               §
LLC, VEEDIMS, LLC,                      §   Court Below–Court of Chancery
                                        §   of the State of Delaware
      Defendants Below–                 §
      Appellants,                       §   C.A. No. 2018-0274
                                        §
      v.                                §
                                        §
JPMORGAN CHASE BANK, N.A., §
individually, and on behalf of itself   §
and other creditors similarly situated, §
                                        §
      Plaintiff Below–                  §
      Appellee.                         §

                          Submitted: August 8, 2019
                           Decided: August 16, 2019

Before STRINE, Chief Justice; VAUGHN, and TRAYNOR, Justices.

                                     ORDER

      Upon consideration of the notice of interlocutory appeal, the supplemental

notice of appeal, their exhibits, and the Court of Chancery’s order denying

Defendants’ motion or certification of an interlocutory appeal, it appears to the

Court that:

      (1)     This appeal arises from a Court of Chancery decision granting in part

and denying in part a motion to dismiss filed by Data Treasury Corporation
(“DTC”), its directors, and certain affiliates (collectively, “Defendants”). The

following events preceded this ruling.

         (2)     On June 2, 2015, the United States District Court for the Eastern

District of Texas entered a judgment awarding JPMorgan Chase Bank, N.A.

(“JPMorgan”) damages in the amount of sixty-nine million dollars against DTC for

its breach of a licensing agreement (the “Judgment”). The Judgment was affirmed

on appeal1 but remains unpaid.

         (3)     JPMorgan filed two complaints in the Court of Chancery in aid of its

efforts to collect on the Judgment. The actions challenge DTC’s payment of

dividends, in different years, as unlawful under Sections 170, 172, 173, and 174 of

the Delaware General Corporation Law.2 In particular, JPMorgan alleges that

Defendants, knowing that DTC owed JPMorgan a large refund under the licensing

agreement, illegally issued dividends to stockholders and transferred funds to

insiders and affiliates in an effort to avoid paying JPMorgan.

         (4)     In the first action, JPMorgan seeks to recover under Section 174 for

dividends DTC paid in 2011 and 2012. Discovery is presently underway in that

action, and it is not at issue in this appeal.

         (5)     In the second action, which is the subject of this appeal, JPMorgan

sued Defendants to recover two categories of distributions that DTC allegedly

1
    823 F.3d 1006 (5th Cir. 2016).
2
    8 Del. C. §§ 170-74.

                                             2
made unlawfully to evade its liability to JPMorgan: (i) dividends DTC paid from

2006 to 2010; and (ii) other individual transfers DTC made to insiders from 2011

to 2013.

       (6)     Defendants moved to dismiss the complaint, arguing that JPMorgan

lacked standing under Section 174 to challenge the payments of dividends from

2006 to 2010 because it was not a creditor at that time. Defendants also argued

that JPMorgan’s fraudulent-transfer claims were untimely under the one-year

discovery period applicable to claims filed more than four years after a challenged

transfer under Section 1309(1) of the Delaware Uniform Fraudulent Transfer Act

(“DUFTA”)3 and that its unlawful-dividend claims were untimely under the six-

year limitations period in Section 174.4

       (7)     On July 11, 2019, the Court of Chancery issued an opinion granting in

part and denying in part Defendants’ motion to dismiss and, on July 19, 2019,

entered an implementing order. The Court of Chancery held that: (i) JPMorgan

had standing to assert a claim as a creditor of DTC under Section 174; (ii) the six-

year limitations period in Section 174 is a statute of repose, to which tolling

principles do not apply and, therefore, JPMorgan’s unlawful dividend claim with

3
  A cause of action with respect to a fraudulent transfer with actual intent to hinder, delay, or
defraud a creditor is extinguished unless it is brought “within 4 years after the transfer was made
or the obligation was incurred or, if later, within 1 year after the transfer or obligation was or
could reasonably have been discovered by the claimant.” 6 Del. C. § 1309(1).
4
  Under 8 Del. C. § 174(a), “[i]n case of any wilful or negligent violation of… § 173 of this title,
the directors under whose administration the same may happen shall be jointly and severally
liable, at any time within 6 years after paying such unlawful dividend… .”

                                                 3
respect to dividends that were paid from 2006 to 2010 was untimely; and (iii) the

one-year discovery period in Section 1309(1) begins to run when the fraudulent

nature of a challenged transfer—as opposed to the mere occurrence of the

transfer—is or could reasonably have been discovered and, therefore, JPMorgan

had timely filed claims challenging as fraudulent the dividends paid from 2006 to

2010 and the individual payments made to insiders from 2011 to 2013.

       (8)     On June 26, 2019, Defendants asked the Court of Chancery to certify

an interlocutory appeal from the court’s opinion and implementing order.

Defendants maintained that the opinion and order decided a substantial issue of

material importance because they permit JPMorgan’s challenge to Defendants’

dividends and other transfers, however old, to proceed under DUFTA. Defendants

further argued that the following Supreme Court Rule 42(b)(iii) factors weighed in

favor of granting interlocutory review: the opinion decided an issue of first

impression;5 the Court of Chancery’s interpretation of DUFTA conflicts with the

decisions of other Delaware trial courts;6 the question of law relates to the

construction or application of DUFTA, which has not been, but should be, settled

by this Court in advance of an appeal from a final order;7 review of the

interlocutory order may terminate the litigation;8 and review of the interlocutory

5
  Del. Supr. Ct. R. 42(b)(iii)(A).
6
  Del. Supr. Ct. R. 42(b)(iii)(B).
7
  Del. Supr. Ct. R. 42(b)(iii)(C).
8
  Del. Supr. Ct. R. 42(b)(iii)(G).

                                         4
order may serve considerations of justice.9 JPMorgan opposed the request for

certification but, in the alternative and in the event that the court were to certify the

appeal, cross-moved for certification of an interlocutory cross-appeal of the Court

of Chancery’s ruling that Section 174 is a statute of repose and that JPMorgan’s

Section 174(a) claim was untimely.

          (9)     On August 7, 2019, the Court of Chancery denied Defendants’

application for certification of an interlocutory appeal. Although the Court of

Chancery agreed that its decision decided three substantial issues of material

importance—a threshold consideration under Rule 42(b)(i)—it nevertheless

concluded that interlocutory review was not warranted, a conclusion the court

reached only after a careful balancing of the Rule 42(b)(iii) factors upon which

Defendants rely. We agree.

          (10) The Court of Chancery rejected—rightly, in our view—Defendants’

contention that review of the interlocutory order may terminate the litigation, a

relevant factor under Rule 42(b)(iii)(G). In particular, the court recognized that,

even if its holding concerning Section 1309(1)’s one-year discovery period were

reversed, at least some of JPMorgan’s claims would nevertheless survive. This is

so because the record suggests that JPMorgan did not know about the 2006 and

2007 dividends until February of 2018, less than one year before it filed suit.

Moreover, discovery is likely to shed light on a currently murky record regarding

9
    Del. Supr. Ct. R. 42(b)(iii)(H).

                                           5
when JPMorgan learned of the dividends paid between 2008 and 2010 and, in turn,

whether the claims relating to those dividends would survive the more restrictive

reading of Section 1309(1) advocated by Defendants. Add to this possibility the

fact that the first action JPMorgan filed challenging the 2011 and 2012

dividends—according to the Court of Chancery, a likely candidate for

consolidation—will not be abated by appellate review in this action and we are

compelled to agree with the Court of Chancery’s conclusion that the Rule

42(b)(iii)(G) factor does not weigh in favor of interlocutory review.

       (11) Relatedly, the Court of Chancery further concluded that appellate

review of some or all of the issues decided in the opinion may never be necessary,

dependent upon the outcome of discovery. For example, after the completion of

discovery, it may be that some or all of JPMorgan’s fraudulent-transfer claims

survive because no evidence is uncovered to show JPMorgan knew of certain

dividends paid more than a year prior to the filing of suit. As noted above, if that

were the case, these claims would survive even if the court’s decision concerning

the one-year discovery period in Section 1309(1) was reversed.

       (12) The Court of Chancery also rejected Defendants’ contention, which

curiously attempted to draw support from a purported “split in jurisdictions outside

of Delaware,”10 that the court’s interpretation of Section 1309(1)’s one-year

10
   Defendants’ Motion for Certification of Interlocutory Appeal, File & ServeXpress
Transaction ID 63630142, at p. 9.

                                              6
discovery period exception conflicts with other decisions of Delaware trial courts.

We agree with the Court of Chancery that there are no conflicts among Delaware

trial courts and that the key issues in this case appear to be of first impression in

Delaware.

       (13) Similarly, the Court of Chancery expressed “concern[] that a delay of

discovery in this action would impede a fair disposition of the merits,” pointing to,

among other things, the age of the underlying transactions, the intervening death of

a key witness, and “the record in the Texas action reflect[ing] efforts by DTC to

obstruct and delay discovery.”11 This concern resonates with us and weighs against

interlocutory review.

       (14) Applications for interlocutory review are addressed to the sound

discretion of the Court.12 Giving great weight to the trial court’s thoughtful and

thorough analysis and in the exercise of our discretion, this Court has concluded

that the application for interlocutory review does not meet the strict standards for

certification under Supreme Court Rule 42(b). Exceptional circumstances that

would merit interlocutory review of the Court of Chancery’s decision do not exist

in this case,13 and the potential benefits of interlocutory review do not outweigh the

inefficiency, disruption, and probable costs caused by an interlocutory appeal.14

11
   JPMorgan Chase Bank, N.A. v. Ballard, 2019 WL 3729389, at *4 (Del. Ch. Aug. 7, 2019).
12
   Del. Supr. Ct. R. 42(d)(v).
13
   Del. Supr. Ct. R. 42(b)(ii).
14
   Del. Supr. Ct. R. 42(b)(iii).

                                             7
    NOW, THEREFORE, IT IS ORDERED that the interlocutory appeal is

REFUSED.

                             BY THE COURT:

                             /s/ Gary F. Traynor
                             Justice

                               8