29 June 2021

Sometimes the Best Defense Is Just … a Defense

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On June 16, 2021, the Delaware Court of Chancery denied the plaintiffs’ motion for partial judgment on the pleadings regarding portions of their declaratory judgment claim filed in Dr. Thomas Markusic, Dr. Maxym Polyakov, et al. v. Michael Blum, Patrick Joseph King, et al.  Plaintiffs filed the declaratory judgment action in an attempt to preempt their adversary’s potential claims, and Chancellor McCormick’s rejection of the requested declaratory relief offers a key lesson for litigants contemplating a similar preemptive action.

Background

This litigation centers on Firefly Space Systems, Inc. (Original Firefly), an aerospace firm founded by plaintiff Markusic and defendants Blum and King.  Markusic was the sole director of Original Firefly and ultimately approved selling the company’s debt to another entity (EOS).  Original Firefly subsequently filed for Chapter 7 bankruptcy protection and went out of business.  EOS then changed its name to Firefly Aerospace, Inc. (New Firefly) and appointed Markusic as its CEO.

In September 2019, plaintiffs (including New Firefly and Markusic) filed a declaratory judgment action against defendants, Original Firefly’s stockholders, seeking declarations on seven different issues.  Defendants filed a complaint in California state court in connection with “the alleged usurpation of Original Firefly’s assets in circumvention of Defendants’ economic interests in Original Firefly,” and also filed compulsory counterclaims in the Delaware action (then Vice Chancellor McCormick subsequently granted plaintiffs’ motion to dismiss those counterclaims in August 2020).

Plaintiffs subsequently moved for judgment on the pleadings with respect to four of the seven issues that are the subject of their declaratory judgment action.  As explained further below, these requests sought broad determinations that the defendants were without standing to pursue claims, that there had been no aiding and abetting breach of fiduciary duties, that defendants could not split claims across multiple jurisdictions, and that defendants could not prevail on any of various claims against plaintiffs.

The Court’s Decision

Chancellor McCormick denied plaintiffs’ motion for judgment on the pleadings in its entirety, determining that each request was overbroad, improper, or involved circumstances of plaintiffs’ own making:

  • Denial of declaration that defendants broadly lacked standing to pursue claims: Chancellor McCormick denied plaintiffs’ request on the grounds that it was overly broad and would “require the court to evaluate every possible claim” the defendants could potentially bring against Mankusic. Chancellor McCormick also held that plaintiffs’ request was “overripe,” reasoning that because affirmative claims were pending in California, deciding the declaratory versions in Delaware would “risk the unnecessary burdening of the court’s resources and the possibility of inconsistent factual and legal findings between the courts.”
  • Denial of declaration that defendants could not pursue aiding and abetting claims: Chancellor McCormick swiftly denied the request for a declaration that plaintiffs did not aid and abet any alleged breaches of fiduciary duty, reasoning that the only fiduciary duty claims raised had already been dismissed in the Court’s August 2020 decision, and thus there was no “active controversy” for the Court to decide.
  • Denial of declaration that defendants could not split their claims between California and Delaware: Plaintiffs contended that Delaware should be the exclusive forum for all of defendants’ claims, but Chancellor McCormick concluded that it was plaintiffs “who defensively chose this court in an effort to deprive Defendants, who are the natural plaintiffs, of the ability to decide the appropriate forum in which to bring their claims.” The Court reasoned that the “legal bar against claim splitting is not intended to reward this sort of behavior by Plaintiffs,” and thus the rule against claim splitting was inapplicable to the California action.  The Chancellor concluded with a final reproach: “[B]ecause plaintiffs filed here preemptively—if Plaintiffs now face prejudice as a result of proceeding in two jurisdictions, it is of their own making.”
  • Denial of declaration that defendants could not prevail on various claims: The Court also denied plaintiffs’ requests with respect to claims defendants were pursuing in the California action. Chancellor McCormick found that this declaration failed for the same reasons as did the first and second declarations: the claims relating to breach of fiduciary duty already had been dismissed, and the California court was best suited to adjudicate the merits of the non-declaratory claims before it.

Conclusion

While the best defense is often a good offense, that’s not always the case.  Parties considering defensive declaratory judgment actions should carefully tailor the sought-after relief and consider inefficiencies that may result.