Barry M. Klayman and Mark E. Felger

Section 18-111 of the Delaware Limited Liability Act, 6 Del. C. Section 18-111, lists five categories of LLC disputes over which the Delaware Court of Chancery has jurisdiction: the provisions of an LLC agreement; an LLC's duties and obligations to its members and managers; the duties and obligations between and among the members, managers and the LLC; the rights, powers or restrictions of the LLC or its members or managers; and any provision of the LLC Act or any other instrument, document, agreement or certificate contemplated by any provision of the LLC Act. Until recently, there were no cases definitively addressing the scope of Section 18-111's fifth jurisdictional category. In Sun Life Assurance Company of Canada—U.S. Operations Holdings v. Group One Thousand One f/k/a Delaware Life Holdings, CA No. N18C-07-173 AML CCLD (Del. Super. Mar. 29, 2019), Judge Abigail LeGrow was called upon to do just that.

The dispute arose out of Group One Thousand One's (G1001) purchase of several of Sun Life's subsidiaries. Sun Life brought a breach of contract action in Superior Court against G1001 for failing to pay over a tax refund that Sun Life alleged belonged to it under the stock purchase agreement. G1001 moved to dismiss or transfer the action under the agreement's forum selection clause, which designated the Court of Chancery as the parties' first choice of forum for any action arising under the agreement.

The issue before LeGrow was whether Sun Life's breach of contract claim fell within the statutory grant of authority to the Court of Chancery in the LLC Act or sought equitable relief so that the Chancery would have subject matter jurisdiction. If it did not, the case could not be transferred to the Court of Chancery and would remain in Superior Court.

G1001 contended that Section 18-111's fifth jurisdictional category conferred jurisdiction on the Court of Chancery over all contract disputes involving an LLC. G1001 argued that the section granted Chancery jurisdiction to interpret and enforce any and all documents by which any permissible purpose enumerated in the LLC Act may be accomplished. The parties' dispute fell within the fifth category, because it involved the interpretation and enforcement of the Stock Purchase Agreement, an agreement “contemplated” by Section 18-106(b) of the LLC Act, which confers on a limited liability company powers relating to the entity's business, purpose or activities, including the authority to enter into contracts.

LeGrow rejected G1001's literal interpretation of the statute, concluding that it led to an absurd result. Under that interpretation, Section 18-111 would grant the Court of Chancery jurisdiction over every action touching, however tangentially, any contract involving an LLC. LeGrow reasoned that if the General Assembly intended to confer jurisdiction over nearly any matter in which an LLC is a party, it would have done so more clearly.

Under recognized cannons of statutory interpretation, if the literal interpretation of a statute would be absurd, the statute is ambiguous. The court then must determine the statute's meaning in a way that promotes its apparent purpose and harmonizes it with other statutes within the statutory scheme.

LeGrow looked to the statute's synopsis for evidence of the legislative intent. The synopsis for the bill that amended Section 18-111 to add the fifth jurisdictional category stated the purpose of the amendment was to clarify the jurisdiction of the Court of Chancery with respect to matters pertaining to Delaware limited liability companies. She found nothing in the legislative history to indicate that Section 18-111 was intended to expand substantially the Court of Chancery's jurisdiction. She found that the fifth category was likely intended to be a catch-all provision to capture other agreements or documents not enumerated within the first four jurisdictional categories. She concluded that the only reasonable interpretation of the language was that the General Assembly intended it to apply to a document or instrument expressly or explicitly contemplated by the act, since interpreting or enforcing such a document likely would require the Chancery Court to interpret or enforce the act. Where the act explicitly defines a particular power or obligation of an LLC or its members, and a document or instrument is created arising from that power or obligation, the Court of Chancery has jurisdiction over a dispute involving that document or instrument. According to LeGrow, this interpretation avoids an absurd result and eliminates the artificial distinction between an action to interpret or enforce the LLC Act and one to interpret or enforce a document expressly referenced or contemplated by the act.

Returning to the Stock Purchase Agreement, LeGrow found it was not expressly referenced or contemplated by the LLC Act. The broad power to contract arising from Section 18-106(b) is not explicit in the statute, nor does the statute expressly reference stock purchase agreements. The General Assembly did not grant the Court of Chancery jurisdiction over all stock purchase agreements or asset purchase agreements, and the fifth jurisdictional category in Section 18-111 could not be read so as to give the Court of Chancery jurisdiction over stock purchase agreements without including all other contracts into which an LLC might enter.

G1001 also argued that Sun Life was actually making a claim for specific performance by seeking release of the tax refund, and therefore it was asserting an equitable claim over which the Court of Chancery had jurisdiction. LeGrow rejected this argument, too. Unlike other cases cited by G1001, this case did not involve funds held in an escrow account and was not about compelling an escrow agent to release specific funds. Instead, Sun Life was seeking money damages from a party allegedly obligated to pay over the refund. Nothing indicated that the refund was separated or segregated or that collection of a money judgment would be impossible. Judgment in an amount equivalent to the refund would adequately remedy the harm to Sun Life of nonpayment. Sun Life had an adequate remedy at law, so there was no need for specific performance or other equitable relief. Since there were no grounds for jurisdiction in the Court of Chancery, the motion to dismiss or transfer was denied.

The case is significant for two reasons. First, it stands as a reminder that the parties cannot manufacture subject matter jurisdiction by means of a forum selection clause in a contract. Their choice of forum will be honored only to the extent that subject matter jurisdiction in the designated court exists. Second, the case delineates the extent of the fifth jurisdictional category—the catch-all provision—in Section 18-111 of the Delaware LLC Act. It adopts a common-sense interpretation of a provision that, given its literal interpretation, would have created unlimited jurisdiction in the Court of Chancery for any case that involved a contract with a Delaware LLC.

Barry M. Klayman is a member in the commercial litigation group and the bankruptcy, insolvency and restructuring practice group at Cozen O'Connor. He regularly appears in Chancery Court.

Mark E. Felger is co-chair of the bankruptcy, insolvency and restructuring practice group at the firm.