Elavon, Inc. v. Electronic Transaction Systems Corporation ( 2022 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
ELAVON, INC.,
Plaintiff,
v. C.A. No. 2021-0440-SG
ELECTRONIC TRANSACTION
SYSTEMS CORPORATION,
EDWARD VAUGHAN, and HADI
AKKAD,
Defendants.
MEMORANDUM OPINION
Date Submitted: January 31, 2022
Date Decided: March 7, 2022
Rolin P. Bissell, James M. Yoch, Jr., and Peter J. Artese, of YOUNG CONAWAY
STARGATT & TAYLOR, LLP, Wilmington, Delaware; OF COUNSEL: Michael C.
Holmes and Jared D. Wilkinson, of VINSON & ELKINS LLP, Dallas, Texas;
Michael S. Dry, of VINSON & ELKINS LLP, Washington, D.C., Attorneys for
Plaintiff Elavon, Inc.
Michael C. Dalton and Bartholomew J. Dalton, of DALTON & ASSOCIATES, P.A.,
Wilmington, Delaware; OF COUNSEL: Ryan Scarborough, Graham W. Safty, and
Trisha Jhunjhnuwala, of WILLIAMS & CONNOLLY LLP, Washington, D.C.,
Attorneys for Defendants Electronic Transaction Systems Corporation and Edward
Vaughan.
Adam L. Balick and Melony R. Anderson, of BALICK & BALICK, LLC,
Wilmington, Delaware, Attorneys for Defendant Hadi Akkad.
GLASSCOCK, Vice Chancellor
In this Memorandum Opinion I consider whether jurisdiction exists to hear
this matter in the Court of Chancery. In our divided system in Delaware, the
Superior Court is the court of general legal jurisdiction. Chancery, by contrast, is a
court of limited jurisdiction. Its jurisdiction is that of the English Court of Chancery
as of 1776. Other than a grant of statutory jurisdiction by the Legislature—not
applicable here 1—Chancery’s jurisdiction is limited to those cases where adequate
relief at law is unobtainable. Such cases come in two flavors. The first is equitable
causes of action; that is, causes of action that depend on equitable and fiduciary
relationships. The instant matter is not of that kind. The other flavor of equitable
jurisdiction exists in those cases where the cause of action itself is legal, but where
equity is required to act in order to provide complete relief. According to the
Plaintiff, this matter is of that particular savor. I decline to find that the Court of
Chancery has subject matter jurisdiction over this matter.
My reasoning follows.
1
The General Assembly, in Section 111 of the DGCL, has extended jurisdiction to Chancery over
certain asset sales requiring approval by stockholders. See 8 Del. C. § 111(a)(2)(iii). The
complaint filed in this action originally cited to Section 111 as a basis for subject matter
jurisdiction, but because the corporations at issue are not Delaware corporations, I noted at oral
argument that Section 111 does not apply. See Verified Compl., ¶¶ 12, 8, 9, Dkt. No. 1 [hereinafter
“Compl.”]; Tr. of 11-22-2021 Oral Arg. Re Equitable Jurisdiction, 10:22–11:3, Dkt. No. 55
[hereinafter “Oral Arg.”]. The parties have not made further argument with respect to Section 111
in their supplemental briefing.
1
I. BACKGROUND
A. Factual Background
The instant matter involves a contractual agreement, the Asset Purchase
Agreement (the “APA”) entered by the Plaintiff, Elavon, Inc. (“Elavon”) and certain
of the Defendants, Electronic Transaction Systems Corporation (“ETS”) and Edward
Vaughan. 2 In that transaction, Elavon purchased the assets of ETS, an electronic
payment processing company.3 The purchase price of around $180 million was
subject to post-closing adjustments.4 The APA contemplated use of an escrow
account (the “Escrow Fund”) holding $10 million to satisfy indemnification claims
under the APA.5
According to Elavon, Defendant Vaughan, together with Defendant Akkad,
defrauded Elavon via the APA. 6 Elavon seeks tort and contractual damages,7
including rescissory, consequential, and expectation damages.8
B. Procedural History
The complaint (the “Complaint”) in this action was filed on May 18, 2021.9
Defendant Akkad filed a motion to dismiss pursuant to Court of Chancery Rules
2
Compl. ¶ 2; see also id. at Ex. A. Defendant Akkad is a former owner of ETS. See Compl. ¶ 11.
3
Id. ¶ 2.
4
Id.
5
Id. ¶ 33.
6
Id. ¶¶ 1, 3, 6.
7
See generally Compl.
8
Id. ¶ 212.
9
See generally Compl.
2
12(b)(1) and 12(b)(2) on July 8, 2021.10 Defendants ETS and Vaughan filed their
answer and counterclaims on that same day; 11 Plaintiff Elavon filed its reply on July
28.12 Briefing on Defendant Akkad’s motion commenced in July 2021.13 I heard
oral argument on November 22, 2021, but directed the parties at that time to discuss
whether this Court had equitable jurisdiction over the matter, rather than hearing the
full arguments pertaining to the motion to dismiss.14 Supplemental briefing
followed.15 The Defendants now submit that “the Court should not exercise
equitable jurisdiction” here.16
II. ANALYSIS
Tort and contract, of course, are legal causes of action and the damages the
Plaintiff seeks are available in the Superior Court. 17 Elavon (and ETS via
10
Def. Hadi Akkad’s Mot. to Dismiss Pl. Elavon, Inc.’s Verified Compl. Pursuant to Court of
Chancery Rules 12(b)(1) and 12(b)(2), Dkt. No. 16. I note that Akkad’s motion includes moving
under Rule 12(b)(1), on the basis that Akkad is entitled to a trial by jury. See generally Opening
Br. of Def. Hadi Akkad Supp. His Mot. to Dismiss, Dkt. No. 30 [hereinafter “Akkad OB”]. I do
not consider that argument here.
11
Defs. Electronic Transaction Systems Corp. and Edward Vaughan’s Answer, Affirmative
Defenses, and Countercls. to Pl.’s Verified Compl., Dkt. No. 17.
12
Pl. and Countercl. Def.’s Reply to Countercls. and Affirmative Defenses, Dkt. No. 29.
13
Akkad OB.
14
See Oral Arg.
15
See, e.g., Pl. Elavon, Inc.’s Suppl. Br. Regarding the Court’s Subject Matter Jurisdiction, Dkt.
No. 56 [hereinafter “Pl.’s Supp. Br.”]; Defs. ETS and Vaughan’s Suppl. Answering Br. Regarding
Subject Matter Jurisdiction, Dkt. No. 59 [“hereinafter “Defs. Ans. Br.”]; Def. Hadi Akkad’s
Joinder in Answering Submission Regarding Subject Matter Jurisdiction, Dkt. No. 60; Pl. Elavon,
Inc.’s Suppl. Reply Br. Supp. Subject Matter Jurisdiction, Dkt. No. 64 [hereinafter “Pl.’s Reply
Br.”]
16
Defs. Ans. Br. 15.
17
IBM Corp. v. Comdisco, Inc., 602 A.2d 74, 85 (Del. Ch. 1991) (“Damage remedies exist to
compensate for loss engendered by torts or contract breaches which have already occurred.”).
3
counterclaim) seek release of the funds in escrow, including “corresponding orders
to the escrow agent to release the full amount of the Escrow Fund.” 18 This latter—
an order embodying the directive to the escrow agent—is the sole equitable harpoon
by which the Plaintiff seeks to attach itself to Chancery’s flank.
When examining its own jurisdiction, this Court must honor the first
obligation of a limited-jurisdiction court: modesty. The Court must examine what
the parties to the litigation are actually seeking, and go beyond the allegations of the
pertinent complaint to ensure that Chancery jurisdiction is a necessity to adequate
justice, and not, in then-Vice Chancellor Chandler’s words, a “formulaic ‘open
sesame’” by which artful pleaders may achieve equity jurisdiction.19 I have closely
examined the pleadings here, together with the caselaw supporting jurisdiction on
which the Plaintiff relies.20 Here, an escrow agent is bound by contractual and
fiduciary duties to these parties to release funds under certain contractual conditions.
This release will follow either a joint directive of the parties, or a final unappealable
order. 21 There is nothing in the record to suggest that such a directive by the parties
in compliance with a Superior Court decision would not be forthcoming, or that a
18
Pl.’s Supp. Br. 1.
19
IBM, 602 A.2d at 78.
20
See generally E. Balt LLC v. E. Balt US, LLC, 2015 WL 3473384 (Del. Ch. May 28, 2015).
21
Pl.’s Supp. Br. 4.
4
declaratory judgment order by the Superior Court would be insufficient for the
escrow agent to act.
Of course, as the Plaintiff points out, “only the Court of Chancery can issue
an [injunction] directing the Escrow Agent to release the fund if it fails to do so.”22
That is the substance of the Plaintiff’s jurisdictional argument; it may be that this
Court’s equitable powers will be invoked, and this contingent exercise of equity
conveys jurisdiction. The remainder of the action—involving tort and contract
causes of action far beyond what is in escrow—should (per the Plaintiff) be
addressed by the Court under the “cleanup doctrine.”23
But this is the reverse of the cleanup doctrine. Cleanup jurisdiction, generally,
involves the Court addressing a legal cause of action after the equitable matter has
been resolved, in the aid of judicial efficiency. 24 Here, by contrast, a resolution of
the legal issues will necessarily determine the conditions for release of the escrow
funds, in what amounts and to whom, as required by the contract. There is nothing
in the pleadings that makes it likely that the escrow agent, post-decision in the
Superior Court, would defy that Court’s determination of contract rights and breach
its duties to the parties by refusing a consistent directive by the parties to release the
22
Pl.’s Reply Br. 3 (emphasis added).
23
Pl.’s Supp. Br. 15.
24
See, e.g., Getty Ref. & Mktg. Co. v. Park Oil, Inc., 385 A.2d 147, 149–50 (Del. Ch. 1978)
(citations omitted) (discussing the clean-up doctrine as “permissive” and noting the proposition
that “‘once equity obtains jurisdiction, it may go on to decide the whole controversy’”).
5
funds. In other words, a complete and efficient remedy is available at law. The fact
that an unexpected subsequent breach by the escrow agent might give rise to a need
for equity to act does not make this matter one that requires Chancery jurisdiction.
This would not be the tail wagging the dog; it would be an unanticipated second dog
biting that tail—the possibility of such a speculative cause of action does not, to my
mind, open the kennel of equity.
The Plaintiff, nonetheless, points to three written cases 25 where the Court has
followed a similar rationale. Those cases are Xlete, Inc. v. Willey,26 East Balt27
(following Xlete), and a Superior Court case following East Balt, Haney v.
Blackhawk Network Holdings, Inc.28 Like this case, both Xlete and East Balt pinned
Chancery jurisdiction on a potential need for an order to release funds in escrow—
in both cases, the request for relief was limited to a release of the escrow fund (and
did not seek damages in excess of the existing fund). 29 The reasoning of the East
25
The other matters relied on by the Plaintiff are either transcript rulings, or distinguishable. See
SecNet Holding, LLC v. Potash, C.A. No. 7781-VCP (Del. Ch. Apr. 2, 2013) (TRANSCRIPT);
see also Athene Life & Annuity Co. v. Am. Gen. Life Ins. Co., 2019 WL 3451376 (Del. Ch. July
31, 2019) (finding equitable jurisdiction lacking); United BioSource LLC v. Bracket Holding
Corp., 2017 WL 2256618 (Del. Ch. May 23, 2017) (finding equitable jurisdiction over payment
from a monetary fund where factual scenario at hand contemplated a merger, thus demonstrating
a greater need for completeness and efficiency); IBM, 602 A.2d 74 (denying equitable
jurisdiction); CTF Dev., Inc. v. BML Props. Ltd., 2022 WL 42041 (Del. Ch. Jan. 5, 2022) (finding
equitable jurisdiction over requests for specific performance and injunctive relief, and
distinguishing Athene as dealing with a breach of contract action remediable by monetary
damages).
26
Xlete, Inc. v. Willey, 1977 WL 5188 (Del. Ch. June 6, 1977).
27
E. Balt, 2015 WL 3473384.
28
2017 WL 543347 (Del. Super. Feb. 8, 2017).
29
E. Balt, 2015 WL 3473384, at *2; Xlete, 1977 WL 5188, at *1.
6
Balt court was that legal relief there was insufficient, because it would not be
adequately convenient to the plaintiff if it should prevail at law, but thereafter be
required to come to Chancery to enjoin release of the funds. 30 Similarly, the Xlete
court found that the plaintiff’s legal remedy at law was not “as certain, prompt,
complete, or efficient” as the equitable remedy sought.31
In addressing the sufficiency of legal jurisdiction, East Balt and Xlete
necessarily assessed the particular relief sought, limited there to funds held by a third
party. The facts in this case are somewhat different, particularly in that the damages
sought exceed the value of the Escrow Fund. 32
Here, examining the Complaint and its incorporated documents, 33 which seek
broad legal relief, set forth the duty of the escrow agent to release the funds on a
joint request or upon a final judicial order, and fail to plead facts indicating that
injunctive relief will ultimately be required, it appears to me that adequate relief at
30
E. Balt, 2015 WL 3473384, at *4 (“Because a damages award, or the potential enforcement of
declaratory relief through a law court’s contempt powers, would not be as ‘certain, prompt,
complete, or efficient’ as the equitable remedies that Plaintiffs seek, this Court has subject matter
jurisdiction over the Complaint.”).
31
Xlete, 1977 WL 5188, at *1.
32
See, e.g., Compl. ¶ 130 (identifying a September 2020 indemnification request in excess of
$12 million).
33
Exhibit A to the Complaint is the APA; the APA incorporates by reference its own schedules
and exhibits; the Escrow Agreement is Exhibit D to the APA. The Escrow Agreement is thus an
incorporated document with respect to the Complaint. See Compl.; id. at Ex. A, at 73; id. at Ex.
A, at Ex. D.
7
law is available, divesting me of jurisdiction.34 A recent Court of Chancery case,
Alliance Compressors LLC v. Lennox Industries Inc., supports this result, finding
that “[a]ny future breach following a court’s ruling would be hypothetical, such that
instructing [a party] to ‘go, and breach no more’ would be ‘entirely unnecessary’
and thus inappropriate.” 35 To the extent East Balt and Xlete indicate otherwise, I
decline to follow their rationale here. 36
A legal action cannot be transformed into an equitable one merely by
suggesting that contingent relief, such as an escrow agent gone rogue, may
necessitate an injunction. 37 Because I lack jurisdiction here, the matter is dismissed
subject to transfer to Superior Court pursuant to statute.
III. CONCLUSION
This matter is dismissed for lack of subject matter jurisdiction, subject to
transfer to Superior Court pursuant to 10 Del. C. § 1902.
34
E. Balt, 2015 WL 3473384, at *3 (citing IBM, 602 A.2d at 78) (“The Court takes a realistic view
of the complaint and will not hear a case where a complete legal remedy exists despite a plaintiff’s
prayers for traditional equitable relief.”).
35
2020 WL 57897, at *5 (Del. Ch. Jan. 6, 2020) (citing Athene, 2019 WL 3451376, at *7).
36
The other written decisions of this Court cited by the Plaintiff are distinguishable. See supra
note 25.
37
Many contingencies, I assume, may involve invoking equity in way of a remedy. If raising the
possibility of such is sufficient to trigger Chancery jurisdiction, the distinction between law and
equity would be eroded. See generally Athene, 2019 WL 3451376. If in fact an injunction is
ultimately required here, there would be little burden, I note, on Elavon, after having succeeded at
law, applying for such relief in this Court.
8