Asking For Equity Is Not Enough: Chancery Clarifies Jurisdiction Pleading Requirements

Litigants before the Delaware Court of Chancery appreciate that the court scrutinizes its jurisdiction as a court of equity. One recent example, Buescher v. Landsea Homes Corp., focused on two questions. First, whether an alternative claim for specific performance can support equity jurisdiction when it is duplicative of a statutory claim for declaratory judgment. Second, whether a cause of action for negligent misrepresentation (a form of equitable fraud) can establish jurisdiction when the court believes such a claim to be unviable and likely merely a pretext for jurisdiction. Not surprisingly, the court concluded no to both questions. But it did so in the context of claims to an escrow fund established through an M&A transaction that may be surprising to some practitioners.

An Adequate Remedy at Law Can Defeat Jurisdiction

Buescher v. Landsea Homes Corp. involved a dispute arising out of the Defendant’s purchase of the Plaintiffs’ interest in an LLC and an escrow agreement created pursuant to that transaction. The Plaintiffs sought a statutory claim for declaratory judgment establishing their entitlement to the escrow funds. They also sought an equitable remedy of specific performance to direct the escrow agent to release the funds. Normally, seeking specific performance (an equitable remedy) will be sufficient to establish the Court of Chancery’s equitable jurisdiction. But the court highlighted an important caveat; when specific performance is likely to be rendered unnecessary by a statutory remedy, i.e., declaratory judgment, subject matter jurisdiction will not exist.

The Court of Chancery based its reasoning on a recent holding, ISS Facility Servs. v. JanCo FS 2, LLC, where similar to Buescher, the plaintiffs sought both declaratory judgment and specific performance. There, the Court of Chancery determined that the remedy of specific performance would be rendered superfluous by declaratory judgment. It is notable that both ISS and Buescher involved disputes with contracts with a third party to the dispute (an escrow agent) that was entitled to rely on any court order. In such a situation, the courts concluded that all that was needed was a statutory declaratory judgment; a request for specific performance was superfluous.

Artful Pleading for Equity Provides Jurisdiction When the Claim Appears Viable

Rather than dismiss for want of jurisdiction, the Court of Chancery in Buescher permitted the parties to file a joint brief to address whether equitable jurisdiction should be found based on a counterclaim cause of action for negligent misrepresentation, a form of equitable fraud. The court acknowledged that this claim would properly invoke equitable jurisdiction, but only if the claim, as pled, was a viable one. Equitable fraud, unlike a legal fraud claim, requires a special equitable relationship between the fraudster and the defrauded party. The court assessed the relationship between the parties and determined that the counterclaim failed to establish any equitable relationship, as the parties were merely contractual counterparties. Thus, the Court of Chancery found the equitable fraud claim unviable, and determined that jurisdiction could not be conferred over the matter.

Takeaways

• If an adequate remedy at law is available (such as declaratory judgment) and renders equitable relief (such as specific performance) superfluous, jurisdiction will not be found.
• When dealing specifically with issues involving third parties to the dispute, like directions to an escrow agent, it may be difficult to establish that an order of specific performance is necessary when a declaratory judgment could suffice.
• There is an open question of whether this same logic applies to claims between the parties, where an order of specific performance may add remedies beyond what could be achieved through a declaratory judgment.
• The court will evaluate the viability of equitable claims to determine its jurisdiction.

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