Buescher v. Landsea Homes Corp. ( 2023 )

COURT OF CHANCERY
OF THE
SAM GLASSCOCK III STATE OF DELAWARE COURT OF CHANCERY COURTHOUSE
VICE CHANCELLOR 34 THE CIRCLE
GEORGETOWN, DELAWARE 19947
Date Submitted: August 10, 2023
Date Decided: September 15, 2023
Ryan D. Stottmann Raymond J. DiCamillo
Stephanie Rudolph Alexander M. Krischik
Morris, Nichols, Arsht & Tunnell LLP Richards, Layton & Finger
1201 North Market Street 920 North King Street
Wilmington, Delaware 19801 Wilmington, Delaware 19801
Re: Buescher v. Landsea Homes Corp., C.A. No. 2022-0815-SG
Dear Counsel:
This matter is a contract action, “aris[ing] out of the purchase by Defendants
. . . of the Plaintiffs’ interests”1 in a Florida LLC. Plaintiffs seek a Declaratory
Judgment that they are entitled to roughly $5 million held by the parties in escrow,
purportedly for indemnification for losses that Defendants wrongly (per Plaintiffs)
maintain they are due contractually. Plaintiffs also seek “specific performance” of
a contractual duty on the part of Defendants to direct an escrow agent to release the
funds at issue. It is the latter equitable relief, presumably, that caused the Plaintiffs
to believe that subject matter jurisdiction exists in this court. Of course, the Court
of Chancery is a court of limited jurisdiction; absent statutory jurisdiction not alleged
1
Verified Compl. ¶ 1, Dkt. No. 1. (“Compl”).
here, a matter must state an equitable claim or require equitable relief in order to
invoke the jurisdiction of the court.2 Our recent case law has suggested that
jurisdiction based solely on a request for the aid of equity to recover funds in escrow
is inadequate to invoke subject matter jurisdiction, where the availability of a
declaratory judgment at law makes the need for injunctive relief unlikely.3
Accordingly, I asked the parties to brief whether subject matter jurisdiction was
present here.
The parties filed a joint brief on August 10, arguing that equitable jurisdiction
is invoked.4 They do not rely on the Plaintiffs’ request for specific performance,
however.5 They contend that the Defendants’ counterclaim provides a basis for
jurisdiction because it states a cause of action for negligent misrepresentation—
equitable fraud—in the inducement of the contracts at issue.6 The counterclaims
also seek to recover damages for breach of contract, “intentional misrepresentation,”
and fraud, all of which are claims for which relief is available at law. 7 The parties
2
See 10 Del. C. §§ 341, 342.
3
See, e.g., ISS Facility Servs., Inc v. JanCo. FS 2, LLC, 2023 WL 4096014 (Del. Ch. June 20,
2023). Of course, if special equities are present indicating a reasonable probability that declaratory
judgment will be inadequate, or otherwise that equity should act, Chancery jurisdiction may be
invoked. The parties, however, have not argued that such circumstances exist here.
4
Parties’ Joint Suppl. Submission on Subject Matter Jurisdiction, Dkt. No. 30.
5
Id. see n.3, supra.
6
Id. ¶ 3.
7
Answer to Verified Compl. and Verified Countercl. (“Countercl.”) ¶¶ 97–103, 111–126, Dkt.
No. 11. The counterclaim also seeks a declaratory judgment.
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contend that it is the equitable fraud claim that confers subject matter jurisdiction on
the court.
Equitable fraud is similar to common law fraud, but dispenses with one
element, knowing falsehood/reckless indifference to truth: mere negligence is
sufficient to sustain a judgment.8 The cause of action also imposes an element not
required for legal fraud, however; a special equitable relationship between fraudster
and the defrauded party.9 This equitable-relationship element is at the heart of
equitable fraud—it is the reason all fraud claims are not simply recast as easier-to-
prove negligent misrepresentation claims. And it is the requirement that special
equities be present that vests sole jurisdiction over such claims in this court of
equity.10
The parties are thus correct that equitable jurisdiction is invoked by
Defendants’ counterclaims, but only if the negligent misrepresentation claim, as
pled, is viable. If it is merely pretextual, I am without jurisdiction.
Count II of the counterclaims avers that Plaintiffs/sellers induced the
Defendants/buyers to “execute the Purchase Agreement and close on the
8
See, e.g., Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126, 143–44 (Del. Ch. 2009)
(discussing differences between equitable and legal fraud).
9
Id. at 144 (citing U.S. West, Inc. v. Time Warner, Inc., 1996 WL 307445, at *24 (Del. Ch. June
6, 1996)); Envo, Inc. v. Walters, 2009 WL 5173807 (Del. Ch. Dec. 30, 2009).
10
See Narrowstep, Inc. v. Onstream Media Corp., 2010 WL 5422405, at *14 (Del. Ch. Dec. 22,
2010) (finding a special type of relationship necessary to state a claim for equitable fraud).
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[t]ransaction”11 by making representations that sellers knew were false or made with
reckless indifference to the truth, or that they “failed to exercise reasonable care” in
making the representations, causing the buyers to suffer damages.12 In other words,
the Defendants allege that the representations fraudulently induced the contracts
and/or breached them via misrepresentation, as alleged in other counts of the
Counterclaim. Count II differs from the legal counts in alleging, in the alternative,
negligent misrepresentation. Count II is entirely bare, however, of any pleading
concerning a special relationship between buyers and sellers, who were contractual
counterparties, and are not alleged to have been in an equitable relationship.
Accordingly, Count II, to the extent it is intended to allege equitable, rather than
legal, fraud, cannot sustain a claim. Since the parties, in their joint submission, rely
solely on the negligent misrepresentation claim in Count II to invoke subject matter
jurisdiction, this Chancery action must be dismissed.13
Two brief issues remain. The parties argue that litigation efficiencies support
keeping this matter in Chancery, because they have progressed via discovery toward
readying this matter for trial. I am dubious of this argument, because the litigation
effort described, I assume, will prove as useful in Superior Court as here; in any
11
Countercl. ¶ 108.
12
Id. ¶¶ 107–110.
13
See Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (holding arguments not briefed
are deemed waived).
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event, since I am without jurisdiction, I have no discretion to exercise in favor of
efficient litigation. Second, I have called reliance on equitable fraud to invoke
Chancery jurisdiction here “pretextual.” I consider that a term of art, referencing the
pleading of a non-viable equitable claim as conferring jurisdiction; I in no way mean
to convey that the specific performance claim or the negligent misrepresentation
claim, or the arguments in the joint brief, were raised or argued in a bad-faith or
disingenuous attempt to establish jurisdiction. I find the pleadings here a good-faith,
if unsuccessful, attempt to maintain jurisdiction in this court. To the extent the term
“pretextual” can be read as pejorative, such an understanding is unwarranted and
unintended here.
For the foregoing reasons, this matter must be Dismissed, unless the parties
apply for a transfer to Superior Court under 10 Del. C. § 1902.
IT IS SO ORDERED.
Sincerely,
/s/ Sam Glasscock III
Vice Chancellor
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