Chancery Declines to Dismiss Narrow Claims Relating to Entity’s Dissolution In Favor of Pending Related Action

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Hawkins v. Daniel, C.A. No. 2021-0453-JTL (Del. Ch. Aug. 24, 2021)

The Delaware courts utilize several doctrines to address motions to dismiss or stay in favor of related litigation, including McWane and Cryo-Maid, all of which turn on legal and practical considerations and the court’s discretion.  This decision illustrates the application of the well-established Cryo-Maid factors to a Delaware action alleging narrow claims related to an entity’s winding-up process where the parties were engaged in long-pending litigation elsewhere. 

Following a partnership’s dissolution, the majority interest holder brought derivative claims in the Delaware Court of Chancery seeking: (1) a declaration that, as part of the winding-up process, the partnership could sell shares constituting its principal asset free and clear of the voting authority delegated by irrevocable proxy to a proxyholder defendant; and (2) an injunction preventing the defendant proxyholder from interfering with that sale in a manner detrimental to the partnership’s interests.  Plaintiff’s claims therefore presented narrow issues relating to how, in the context of the winding-up process, the terms of an irrevocable proxy would apply and what fiduciary duties were owed in connection with maximizing the value of the partnership assets. 

The defendants moved to dismiss the complaint arguing that the doctrines of forum non-conveniens and claim splitting warranted dismissal in favor of litigation filed by the plaintiff eight years prior in New York involving, in part, challenges to the validity of the irrevocable proxy.  Notably, by the time the plaintiff filed the Delaware action, the sole issue before the New York court was the propriety of certain compensation awarded to the proxyholder defendant. 

In denying the motion to dismiss, the court applied a straightforward assessment of the Cryo-Maid factors, rather than tilting the analysis towards dismissal in favor of the prior-filed New York action pursuant to McWane.   The court reasoned that the Delaware action did not involve the same claims as the New York action and should proceed.  The Delaware action involved narrow issues that arose out of the partnership’s recent dissolution and winding up, which were not now and never had been part of the New York action.  The court also denied dismissal on improper claim splitting grounds because claim splitting requires that the competing claims arise out of the same transaction or from a common nucleus of operative fact.  Here, considering the same reasoning applied to the Cryo-Maid analysis, they did not.  Further, according to the court, efficiency favored the Delaware action proceeding, as the long-pending New York action was heading towards trial on separate claims and it made little sense to interject pleading stage issues.

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