Qlarant, Inc. v. IP Commercialization Labs, LLC ( 2022 )

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
MORGAN T. ZURN LEONARD L. WILLIAMS JUSTICE CENTER
VICE CHANCELLOR 500 N. KING STREET, SUITE 11400
WILMINGTON, DELAWARE 19801-3734
January 25, 2022
Daniel M. Silver, Esquire John G. Harris, Esquire
McCarter & English, LLP Berger Harris LLP
405 North King Street, 8th Floor 1105 North Market Street, Suite 1100
Wilmington, Delaware 19801 Wilmington, Delaware 19801
RE: Qlarant, Inc. v. IP Commercialization Labs, LLC, et al.,
Civil Action No. 2021-0574-MTZ
Dear Counsel:
This case represents one part of a multijurisdictional dispute over a December
2019 asset purchase. The buyer and the target memorialized that transaction through
an asset purchase agreement, signed by two individuals who claimed to be the
target’s only stockholders. While the parties negotiated the transaction, another
entity also claimed to be a target stockholder. The purported stockholder filed suit
in Maryland state court, challenging the transaction and asserting derivative claims
as a target stockholder. In response, the buyer sued here, seeking declaratory
judgments that the purported stockholder is not a stockholder and that the transaction
was validly consummated under the asset purchase agreement.
The defendants in this action, including the purported stockholder, the target,
and the target’s two undisputed stockholders, moved to dismiss the buyer’s
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complaint under Court of Chancery Rule 12(b)(1). I conclude the buyer’s proposed
declaratory judgments would, if granted, give it an adequate remedy at law. And so,
this court of equity lacks subject matter jurisdiction and the buyer must seek those
declaratory judgments in a court of law. For the reasons that follow, the case is
dismissed, and the buyer may transfer the matter to Superior Court under 10 Del. C.
§ 1902 within sixty days. If the buyer elects to transfer, the remaining issues
presented by the fully-briefed motion to dismiss should be transferred as well, so a
court of competent jurisdiction can pass on their merits.
I. BACKGROUND1
On December 31, 2019, plaintiff Qlarant, Inc. (“Qlarant”) purchased assets
from defendant StudioCodeworks, Inc. (“Studio”) and several of its affiliates (the
“Transaction”).2 The Transaction was memorialized in an asset purchase agreement
(the “APA”).3 While the parties were negotiating the Transaction, defendant IP
Commercialization Labs, LLC (“IPCL”) claimed it held an interest in Studio.4 The
APA represented that Studio’s only shareholders were defendants William Mapp
1
Because I conclude that the Court lacks subject matter jurisdiction over this dispute, I
limit my discussion of the facts to only those necessary to resolve that issue.
2
Docket Item (“D.I.”) 1 ¶ 1 [hereinafter “Compl.”].
3
Id. ¶ 1.
4
Id. ¶ 10.
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and Damon Hunt.5 Mapp and Hunt signed the APA, authorizing the Transaction as
Studio’s only stockholders.6
On February 14, 2020, IPCL and its affiliates filed an action challenging the
Transaction against Studio, its affiliates, Mapp, and Hunt in the Circuit Court of
Maryland for Prince George’s County (the “Maryland Action”).7 Qlarant, IPCL,
and Studio are all Maryland entities, and Mapp and Hunt live in Maryland.8 In the
Maryland Action, IPCL alleges breach of fiduciary duty, breach of contract, tort, and
Maryland statutory fraud claims.9 IPCL alleges it owns a twenty percent interest in
Studio, and asserts some claims derivatively on Studio’s behalf.10 IPCL’s most
recent Maryland complaint, dated June 25, 2021, added Qlarant as a defendant.11
On July 2, Qlarant came to this Court and filed its Verified Complaint for
Declaratory Relief (the “Complaint”) against IPCL, Studio, Mapp, and Hunt
5
Id. ¶ 9. I accept Qlarant’s descriptions of the APA as true, though I cannot verify them
because the APA is not an exhibit to its complaint.
6
Id. ¶ 8.
7
Id. ¶ 16; D.I.13, Ex. C [hereinafter “Maryland SAC”].
8
Compl. ¶¶ 2–6.
9
See generally Maryland SAC ¶¶ 175–338.
10
Id. ¶¶ 2, 50–51; see id. Ct. XXIII.
11
See Maryland SAC at 52.
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(together, “Defendants”).12 Qlarant seeks to confirm its view that IPCL is not a
Studio stockholder. Count I seeks a declaration that “IPCL was not a [Studio]
shareholder at the time of the APA’s execution.”13 Count II seeks a declaration that
“the transactions consummated pursuant to the APA were validly consummated.”14
The Complaint also prays for the following relief: “[p]ermanently enjoin IPCL from
asserting it held stock or any other interest in [Studio] at the time the APA was
executed and the transaction contemplated therein was consummated.”15
Defendants moved to dismiss (the “Motion”) on September 2.16 The Motion
asserts several grounds for dismissal, including want of subject matter jurisdiction
under Rule 12(b)(1), want of personal jurisdiction under Rule 12(b)(2), and improper
venue under Rule 12(b)(3).17 I address subject matter jurisdiction first, as I can only
substantively review the pleadings if I have jurisdiction to do so.18 I conclude this
matter must be dismissed for lack of subject matter jurisdiction.
12
See generally Compl.
13
Id. at 8; see also id. ¶¶ 19–24.
14
Id. at 8; see also id. ¶¶ 25–29.
15
Id. at 8.
16
D.I. 9; see also D.I. 13.
17
See D.I. 13 at 10, 19, 22.
18
See K&K Screw Prods., L.L.C. v. Emerick Cap. Invs., Inc., 2011 WL 3505354, at *6
(Del. Ch. Aug. 9, 2011) (“Because the issue of subject matter jurisdiction is a potentially
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II. ANALYSIS
“When considering a motion to dismiss under Court of Chancery Rule
12(b)(1), the Court’s first task, when appropriate, is to assess whether the
fundamental predicates to subject matter jurisdiction exist.”19 “The Court then turns
its focus to the ‘nature of the wrong alleged’ to determine whether Chancery’s
limited jurisdiction has been invoked.”20 “The plaintiff ‘bears the burden of
establishing this Court’s jurisdiction,’ and when determining whether that burden
has been met, the Court may consider the pleadings and matters ‘extrinsic to the
pleadings.’”21
“The Court of Chancery is proudly a court of limited jurisdiction.”22
“Equitable jurisdiction is a predicate issue for every matter in this court of limited
dispositive threshold issue, I consider first whether the Complaint pleads a justiciable case
or controversy.” (footnote omitted) (citing Gen. Elec. Co. v. Star Techs., Inc., 1996 WL
377028, at *1 (Del. Ch. July 1, 1996))).
19
Hall v. Coupe, 2016 WL 3094406, at *2 (Del. Ch. May 25, 2016).
20
Id. (quoting McMahon v. New Castle Assocs., 532 A.2d 601, 603 (Del. Ch. 1987)).
21
Id. (quoting Pitts v. City of Wilm., 2009 WL 1204492, at *5 (Del. Ch. Apr. 27, 2009));
see Zebroski v. Progressive Direct Ins. Co., 2014 WL 2156984, at *3 (Del. Ch.
Apr. 30, 2014) (noting that “when a challenge to subject matter jurisdiction is directed to
the face of a complaint, the court accepts the plaintiff's allegations of fact.” (alterations and
internal quotation marks removed) (quoting Diebold Comput. Leasing, Inc. v. Com. Credit
Corp., 267 A.2d 586, 590 (Del. 1970))).
22
Perlman v. Vox Media, Inc., 2019 WL 2647520, at *4 (Del. Ch. June 27, 2019); see also
Pike Creek Recreational Servs., LLC v. New Castle Cty., 238 A.3d 208, 212 (Del. Super.
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jurisdiction.”23 “The Court of Chancery can exercise subject matter jurisdiction only
when a case falls into one of three buckets.”24 Those buckets contain cases in which
(i) “a plaintiff states an equitable claim,” (ii) “a plaintiff requests equitable relief and
there is no adequate remedy at law,” and (iii) “jurisdiction exists by statute.”25
Qlarant seeks to invoke this Court’s limited jurisdiction through the second bucket,
requesting equitable relief in the form of an order enjoining IPCL from asserting it
owns an interest in Studio.26
2020) (“Delaware proudly guards the historic and important distinction between legal and
equitable jurisdiction.” (internal quotation marks omitted) (quoting Weston Invs., Inc. v.
Domtar Indus., Inc., 2002 WL 31011141, at *1 (Del. Super. Sept. 4, 2002))).
23
Preston Hollow Cap., LLC v. Nuveen, LLC, 2019 WL 3801471, at *4 (Del. Ch.
Aug. 13, 2019) (citing Athene Life & Annuity Co. v. Am. Gen. Life Ins. Co., 2019 WL
3451376 (Del. Ch. July 31, 2019)).
24
Delawareans for Educ. Opportunity v. Carney, 2018 WL 4849935, at *5 (Del. Ch.
Oct. 5, 2018) (citing Candlewood Timber Gp., LLC v. Pan Am. Energy, LLC, 859 A.2d
989, 997 (Del. 2004)).
25
Id.26
See Compl. ¶¶ 1, 7; D.I. 14 at 16–17. Qlarant’s requests for declaratory judgments do
not themselves confer subject matter jurisdiction, as “[i]t is well settled that the Declaratory
Judgment Act does not independently confer jurisdiction on this court.” Reeder v. Wagner,
2007 WL 3301026, at *1 (Del. Ch. Nov. 1, 2007); see also Diebold, 267 A.2d at 591(stating this Court “has jurisdiction in a declaratory judgment action if there is any
underlying basis for equity jurisdiction measured by traditional standards”). Qlarant has
not argued that its dispute over stock ownership in Studio, a Maryland corporation, states
an equitable claim. Nor has it specifically sought an anti-suit injunction regarding the
Maryland Action.
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Equitable relief is unavailable, and so cannot anchor subject matter
jurisdiction, where a “sufficient remedy may be had by common law, or statute,
before any other court or jurisdiction of this State.”27 “The question is whether the
remedy available at law will afford the plaintiff full, fair[,] and complete relief.”28
In evaluating whether an adequate remedy at law exists, the Court looks beyond the
relief stated in the complaint and focuses instead on “what relief is actually
sought.”29 In other words, “[t]his jurisdictional inquiry is a serious one involving a
27
10 Del. C. § 342.
28
Delawareans for Educ. Opportunity, 2018 WL 4849935, at *5 (quoting Hughes Tool Co.
v. Fawcett Publ’ns, Inc., 315 A.2d 577, 579 (Del. 1974) (Hughes II)); see also J.W. Childs
Equity P’rs, L.P. v. Paragon Steakhouse Rests., Inc., 1998 WL 812405, at *4 (Del. Ch.
Nov. 6, 1998) (“[W]here a remedy provided by a law court of the state would be sufficient,
that is, complete, practical and efficient, this Court is without jurisdiction.” (internal
quotation marks omitted) (quoting Int’l Bus. Machs. Corp. v. Comdisco, Inc., 602 A.2d 74,
78 (Del. Ch. 1991)).
29
Rapposelli v. Elder, 1977 WL 23821, at *1 (Del. Ch. Nov. 8, 1977); see also Levinson
v. Cont’l Ins. Servs., Inc., 1991 WL 50145, at *2 (Del. Ch. Apr. 4, 1991) (“This Court must
make a realistic assessment of the nature of an alleged wrong and the relief available to
determine if equity jurisdiction exists.” (citing Hughes Tool Co. v. Fawcett Publ’ns, Inc.
(Hughes I), 297 A.2d 428 (Del. Ch. 1972), rev’d on other grounds, Hughes II, 315 A.2d at
577)); Gladney v. City of Wilm., 2011 WL 6016048, at *4 (Del. Ch. Nov. 30, 2011) (“It is
the practice of this Court in determining its jurisdiction, to go behind the facade of prayers
to determine the true reason for which the plaintiff has brought suit.” (alterations and
internal quotation marks omitted) (quoting Int’l Bus. Machs., 602 A.2d at 78));
Candlewood Timber Grp., LLC v. Pan Am. Energy, LLC, 859 A.2d 989, 997 (Del. 2004)
(“The fact that a complaint contains a prayer for an equitable remedy, without more, does
not conclude the jurisdictional analysis. In deciding whether or not equitable jurisdiction
exists, the Court must look beyond the remedies nominally being sought, and focus upon
the allegations of the complaint in light of what the plaintiff really seeks to gain by bringing
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close examination of the plaintiff’s claims and desired relief, not a perfunctory
verification of the plaintiff’s ‘incantation of magic words’ sounding in equity.”30 As
Chancellor Allen put it:
Neither the artful use nor the wholesale invocation of familiar chancery
terms in a complaint will itself excuse the court . . . from a realistic
assessment of the nature of the wrong alleged and the remedy available
in order to determine whether a legal remedy is available and fully
adequate. If a realistic evaluation leads to the conclusion that an
adequate legal remedy is available this court, in conformity with the
command of [10 Del. C. § 342] will not accept jurisdiction over the
matter.31
This practical assessment is more focused when considering a request for an
injunction to enforce a declaratory judgment, like the one Qlarant seeks. Qlarant
anchors equitable jurisdiction exclusively on its single request for injunctive relief:
an order “[p]ermanently enjoin[ing] IPCL from asserting it held stock or any other
interest in [Studio] at the time the APA was executed and the transaction
his or her claim.” (footnote omitted) (citing Hughes I, 297 A.2d at 428, and Diebold, 267
A.2d at 586)).
30
Savage v. Savage, 920 A.2d 403, 408 (Del. Ch. 2006) (quoting McMahon, 532 A.2d at
603); see Christiana Town Ctr., LLC v. New Castle Ctr., 2003 WL 21314499, at *3 (Del.
Ch. June 6, 2003) (“In this regard, the Court of Chancery will not exercise subject matter
jurisdiction where a complete remedy otherwise exists but where plaintiff has prayed for
some type of traditional equitable relief as a kind of formulaic ‘open sesame’ to the Court
of Chancery.” (internal quotation marks omitted) (quoting Int’l Bus. Machs., 602 A.2d at
78)), aff’d, 841 A.2d 307 (TABLE) (Del. 2004).
31
McMahon, 532 A.2d at 603.
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contemplated therein was consummated.”32 Where a claimant requires equitable
relief alongside her declaratory judgment, this Court has jurisdiction over both
claims. On the other hand, “invoking equity in a conclusory manner to enforce a
declaratory judgment is insufficient to provide jurisdiction; otherwise, any
declaratory action would be endowed with spurious equitable features, which would
render this Court’s limited equity jurisdiction illusory.”33 “An injunction should
never issue . . . unless it is necessary for the protection of the movant’s rights.”34
It appears to me that Qlarant has an adequate remedy at law, and its requested
injunction is not necessary to protect its rights. Qlarant simply seeks an order
requiring IPCL to abide by Qlarant’s proposed declaratory judgment. The
declaratory judgment itself will give Qlarant full, fair, and complete relief. If Qlarant
is correct and IPCL is not a Studio stockholder, a declaration to that effect will give
Qlarant the clarity it seeks and resolve the parties’ dispute.35 Put differently, a
32
Compl. at 8.
33
Athene, 2019 WL 3451376, at *5 (citing Charlotte Broad., LLC v. Davis Broad. of
Atlanta LLC, 2013 WL 1405509, at *6 (Del. Ch. Apr. 2, 2013)).
34
U-H Acq. Co. v. Barbo, 1994 WL 34688, at *6 (Del. Ch. Jan. 31, 1994) (quoting Danby
v. Osteopathic Hosp. Ass’n of Del., 101 A.2d 308, 316 (Del. Ch. 1953), aff’d, 104 A.2d
903 (Del. 1954)).
35
Qlarant has not specifically sought to enjoin the Maryland Action. To the extent
Qlarant’s requested injunction preventing IPCL from asserting its stockholder status is
designed to preclude IPCL from filing derivative claims as a Studio stockholder in the
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favorable outcome on Qlarant’s declaratory judgment claim will provide it
effectively the same relief as its proposed injunction.36 Qlarant offers no reason to
infer that a declaration alone would fall short of complete relief, either in its
Complaint or in its brief.37 Qlarant’s rote, conclusory “incantation of magic words
sounding in equity” does not bring this declaratory judgment action within this
Court’s limited subject matter jurisdiction.38
Maryland Action, it has an adequate remedy there: raising IPCL’s alleged lack of
derivative standing as a defense. Generally, “the ability of a party to obtain the equivalent
of injunctive relief by raising its contentions as a defense in an action at law[] constitutes
an adequate remedy that precludes injunctive relief in equity.” Manor Healthcare Corp.
v. Tolbert, 1986 WL 5476, at *3 (Del. Ch. May 13, 1986). Qlarant may intend to use a
judgment from a Delaware court to buttress that defense. The preclusive effect of a
Delaware declaratory judgment will be the same whether regardless of whether it is
accompanied by an inunction.
36
See Schlosser & Dennis, LLC v. Traders Alley, LLC, 2017 WL 2894845, at *8 (Del.
Super. July 6, 2017).
37
See generally Compl.; D.I. 14.
38
Savage, 920 A.2d at 408 (internal quotation marks omitted) (quoting McMahon, 532
A.2d at 603).
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III. CONCLUSION
For the foregoing reasons, the Motion is GRANTED under Rule 12(b)(1),
subject to Qlarant’s right to transfer the matter to Superior Court under 10 Del. C.
§ 1902. That election must be made within sixty days of this letter. If Qlarant elects
to transfer this matter to Superior Court, the other issues presented by the Motion
should be transferred as well.
Sincerely,
/s/ Morgan T. Zurn
Vice Chancellor
MTZ/ms
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