Delaware Chancery Court Strengthens First-Filed Action Rule

by Katten Muchin Rosenman LLP
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The Delaware Court of Chancery recently stayed a Delaware action in favor of an earlier-filed Texas case because they dealt with substantially similar facts, even where the two lawsuits did not contain identical claims. The ruling emphasizes that filing a complaint in the early stages of a dispute is often necessary to guarantee that a party will be able to litigate the dispute in the preferred forum.

Plaintiff in the Delaware action brought breach of contract and breach of fiduciary duty claims, in connection with a jointly owned company. Plaintiff alleged that defendant, by acquiring a corporation without giving the company an opportunity to acquire it first, had personally usurped a corporate opportunity belonging to the company.

Defendant had preemptively filed an action in Texas two weeks earlier, asking for a declaratory judgment holding that defendant’s ownership of the disputed corporation did not constitute a breach of his contract with the company. Accordingly, defendant moved to dismiss or stay the Delaware action under the well-settled “first-filed action” rule, which gives discretion to Delaware courts to stay an action when “(1) there is a prior action pending elsewhere, (2) involving the same parties, (3) the same issues, and (4) the court in the other jurisdiction is capable of rendering prompt and complete justice.”

Plaintiff argued that the issues in the Texas action were not identical to those in the Delaware action as the two actions had different legal claims and the Delaware action was more expansive – concerning other alleged misconduct on defendant’s part.

The court held that although the issues were not perfectly identical, the first-filed rule only requires a showing that the two actions contain a “substantial or functional identity of issues or claims” based on the same common nucleus of operative facts. The court determined that despite the differences between the claims alleged in the two actions, both actions ultimately arose out of the dispute over defendant’s corporate acquisition and how it affected the company, and thus were substantially identical. The court also rejected the notion that the issues of Delaware law could not be competently resolved by the Texas court. Accordingly, the court granted defendant’s motion to stay the Delaware action until the Texas action was resolved.

Brookstone Partners Acquisition XVI, LLC, et al. v. Tanus, et al., Civil Action 7533-VCN (Del. Ch. Nov. 20, 2012) (internal citations omitted).

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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