Chancery Court Holds that both Exclusive and Nonexclusive Forum Selection Clauses Can Supplant the McWane First Filed Doctrine

Apr 20 2015

The Chancery Court held that the McWane first filed doctrine does not necessarily require a complaint to be dismissed or stayed in favor of a case pending in another state involving similar claims, parties, and facts, when the claim is based on an agreement including a bargained for, nonexclusive and irrevocable forum selection clause.

On April 15, 2015, the Chancery Court in Utilipath v. Baxter, C.A. No. 9922-VCP (Del. Ch. April 15, 2015) (Parsons, V.C.) denied a Motion to Dismiss a complaint attempting to compel enforcement of an alternative dispute resolution (“ADR”) provision in a Redemption Agreement as it pertained to a dispute over closing net working capital. Prior to August, 2013, defendants Baxter McLindon Hayes, Jr., Baxter McLindon Hayes III, and Jarrod Tyson Hayes (the “Hayes Defendants”) were the sole members of defendant Utilipath, LLC (“Old Utilipath,” and together with Hayes Defendants, the “Defendants”), a North Carolina LLC. In August 2013, the Hayes Defendants transferred all of their membership interests in Old Utilipath to defendant Utilipath Holdings, Inc. (“Holdings”), a North Carolina corporation. Subsequently Old Utilipath merged with plaintiff Utilipath, LLC, (“Utilipath”) a Delaware LLC, resulting in Holdings becoming the parent company of Utilipath.

On August 19, 2013, Utilipath and the Defendants entered into a Redemption Agreement, pursuant to which Utilipath purchased all of its Class A membership units from the Defendants for $15,750,000. The Redemption Agreement, which provided for the possibility of a post-closing purchase price adjustment based on Utilipath’s net working capital, contained two clauses relevant to this action: (1) an irrevocable, non-exclusive forum selection clause, allowing for jurisdiction in Delaware courts and waiving any objection by a party that a Delaware court is an improper or inconvenient forum; and (2) an ADR provision, providing for the appointment of an independent accounting firm to settle any disputes over a net working capital adjustment payment. Post closing, the parties disagreed over the net working capital adjustment, triggering the ADR provision in the agreement. The Defendants, however, refused to comply and submit their dispute to an independent accounting firm.

Consequently, on December 31, 2013, Utilipath first filed a complaint against the Defendants in the Chancery Court, subsequently amending its complaint on April 11, 2014. When the Defendants moved to dismiss the amended complaint, however, Utilipath filed a voluntary dismissal under Court of Chancery Rule 41(a)(1) on June 21, 2014. Next, on March 21, 2014, NewSpring Mezzanine Capital, LP (“NewSpring”), an investor and member of Utilipath, filed a complaint, stemming from the same overall transaction, in the United States District Court for the Eastern District of Pennsylvania (the “Pennsylvania Action”). The Pennsylvania Action, currently pending, contains eighteen counts, some of which include unjust enrichment, fraud, and breach of contract.

Utilipath, now a cross-claim plaintiff in the Pennsylvania Action, filed a number of cross claims originating from the Redemption Agreement, among other various claims involving additional agreements, against the Defendants. In response, the Defendants filed cross claims against Utilipath. Utilipath moved to dismiss, arguing in part that the cross claims related to the net working capital dispute should be dismissed or stayed in favor of ADR. On November 12, 2014, the court in the Pennsylvania Action denied Utilipath’s motion, holding that a dismissal in favor of arbitration was not warranted based on the record.

Utilipath again filed a complaint in the Chancery Court bringing the current action against the Defendants to compel compliance with the ADR provision regarding the dispute over the net working capital. In return, Defendants sought to dismiss the complaint, arguing (1) the McWane first-filed doctrine requires a stay or dismissal in favor of the Pennsylvania Action; (2) Utilipath’s complaint violates Court of Chancery Rule 15(aaa), and (3) the ADR provision is merely an “agreement to agree.” The Chancery Court denied the Defendant’s motion to dismiss, rejecting all three arguments. The Court first addressed whether the McWane doctrine requires dismissal.

The McWane doctrine requires that if litigation is first commenced in a particular jurisdiction, it must be confined there to deny the defendant the ability to override a plaintiff’s choice of forum. As a result, the Court has “broad discretion to grant a stay ‘when there is a prior action pending elsewhere, in a court capable of doing prompt and complete justice, involving the same parties and the same issues,’” citing In re the Bear Stearns Cos. S’holder Litig., 2008 WL 959992, at *5 (Del. Ch. Apr. 9, 2008)(quoting McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng’g Co., 263 A.2d 281 (Del. 1970). The Court, however, highlighted that the McWane doctrine, a rule of common law, can be overridden by a legally enforceable forum selection clause, as the Delaware Supreme Court held in Ingres Corp v. CA, Inc., 8 A.3d 1143, 1145 (Del. 2010).

Furthermore, the Court held that although Ingres involved an exclusive forum selection clause, nothing in the opinion prevents its application to a nonexclusive forum selection clause, especially when the parties, as here, mutually bargained for the right to bring suit in the Chancery Court and promised to “waive any objections” on the basis of improper or inconvenient forum. Importantly, however, the Court stated that given the nonexclusive nature of the forum selection clause it “conceivably” could stay the action under a more developed record, or different facts, seemingly at a later stage of litigation. Further considering the underpinning notions of comity and an efficient justice system, the Court noted that while the Pennsylvania Action involves similar parties and claims, the claims are significantly different than those in its court. The Court, therefore, determined that the unambiguous language of the bargained for and irrevocable, nonexclusive forum selection clause provided Delaware courts with jurisdiction and precluded dismissal under the McWane doctrine.

Next, the Court rejected the Defendant’s argument that Utilipath violated Court of Chancery Rule 15(aaa) by filing its current complaint after its prior Delaware action, involving similar claims and parties, was dismissed. Rule 15(aaa) requires that a party intending to amend its pleading in response to a Motion to Dismiss must do so no later than the time when that party’s answering brief is due, or else risk dismissal with prejudice. The Court explained that Utilipath’s voluntary dismissal under Court of Chancery Rule 41(a) was (1) a proper response to a motion to dismiss when filed prior to the time when an answering brief on the motion is due, and (2) filed before such answering brief was due, as nothing in the record indicated otherwise. Under these circumstances, the Court held, a later complaint by the same plaintiff is not barred by Rule 15(aaa).

Finally, the Court flatly rejected the Defendant’s argument that the ADR provision is an unenforceable “agreement to agree,” for failing to provide a procedure to select the arbitrator. The Court pointed out that while an agreement must delineate all material and essential terms of the future contract in order to be enforceable, the Federal Arbitration Act provides a clear method by which a party can request a court to appoint an arbitrator in the event the underlying agreement is silent.

Utilipath v. Baxter, C.A. No. 9922-VCP (Del. Ch. April 15, 2015) (Parsons, V.C.)