September 23, 2019

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Chancery Court Holds Third Party is Likely Subject to Delaware Service of Process Under the State's Long-Arm Statute and Therefore the Court Need Not Determine if Addition as Involuntary Counterclaim Plaintiff is Proper

In Lilly Lea Perry v. Dieter Walter Neupert and Cote d’Azur Estate Corporation, C.A. No. 2017-0290-VCL (Del. Ch. Dec. 6, 2017), the Court of Chancery held that the BGO Foundation (the “Foundation”) was a party that should be joined for just resolution of the underlying dispute between Lilly Lea Perry (“Ms. Perry”), the plaintiff, and Dieter Walter Neupert (“Mr. Neupert”) and Cote d’Azur Estate (the “Company”), the defendants. The Court of Chancery also held that because it appeared that the Foundation could be served under the Delaware Long-Arm Statute, it was not necessary for the court to consider adding the Foundation as an involuntary counterclaim plaintiff.

The parties’ underlying dispute related to who was the rightful owner of the Company’s equity. The parties also disputed whether Mr. Neupert had authority to convert the Company from a limited liability company to a corporation under Delaware law. Ms. Perry contended that her deceased husband, Israel Igo Perry (“Mr. Perry”), owned all of the Company’s equity when he passed away in 2015. She further argued that she was the rightful owner of her former husband’s equity in the Company as his sole heir. However, the Company and Mr. Neupert contended that before Mr. Perry died he passed all of his equity in the Company to the Foundation, which they argued is the rightful owner of the equity. Further, Mr. Neupert and the Company argued that the Foundation executed an unlimited power of attorney from the Company to Mr. Neupert, which gave Mr. Neupert the necessary authority to convert the Company into a corporation.

Mr. Neupert and the Company filed a counterclaim against Ms. Perry seeking a declaration that Ms. Perry was neither a member of the Company prior to conversion nor a stockholder post-conversion. In support of their counterclaim, Mr. Neupert and the Company offered a Deed of Assignment, which the court found to be suspicious at best due to conflicting evidence. Ms. Perry filed an answer to the counterclaim and denied the validity of the Deed of Assignment. Ms. Perry also filed a motion to dismiss the counterclaim for failure to join a necessary party, the Foundation.

The court’s analysis began with an examination of rule relating to necessary parties. The relevant language of that rule only allows the court to add an absent party as an involuntary counterclaim plaintiff “in a proper case,” a term of art under the rule. Determining that a proceeding is “a proper case” carries significance, because it is generally agreed that the involuntary plaintiff provision of the rule permits involuntary joinder as a plaintiff of a party over whom there is otherwise no personal jurisdiction, and further means that the party so joined will be bound by res judicata. However, the Court of Chancery held that it did not need to decide the question of whether to add the Foundation as an involuntary counterclaim plaintiff under the last sentence of rule , because the Foundation should be added as a party through standard service of process under the Delaware Long Arm Statute.

The Court of Chancery held that under the rule an absent party should be joined if, in the party’s absence, complete relief could not be accorded among the current parties. The Court of Chancery held that an absent party should be joined if the party claimed an interest relating to the subject of the action, and the disposition of the action could “(i) as a practical matter, impair or impede the person’s ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of the claimed interest.” The Foundation’s assertion that it owned all of the Company’s equity as a result of the Deed of Assignment satisfied both criteria, and because those tests under rule were met, the Court or Chancery held that the Foundation was a party that should be joined, if feasible.

Further, the Court of Chancery held that the Foundation is subject to service of process under the Delaware Long-Arm Statute, which makes availability of service co-extensive with the question of personal jurisdiction. The Court of Chancery held that the five elements of the adopted conspiracy test functionally encompass the jurisdictional requirements of the Delaware Long-Arm Statute and subsequently the Due Process Clause of the Constitution. The Court of Chancery then held that the Foundation’s alleged actions of attempting to deprive Mr. Perry of ownership satisfied the five elements of the conspiracy test, and the Foundation should therefore be joined as a party. Because the Foundation should be joined as a party, the Court of Chancery did not need to decide if the Foundation should be joined as an involuntary counterclaim plaintiff, under a separate and independent basis for jurisdiction only available in “proper” cases.

However, if after being served, the Foundation refused to appear and successfully contested jurisdiction then the question of adding the Foundation under the rule as an involuntary counterclaim plaintiff would be ripe. The Court of Chancery also stated in a footnote that the decision expressed no opinion about whether the “now atrophied process” of sequestration under Delaware law might be available in this case.

Copyright 2019 K & L Gates

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About this Author

Scott Waxman, Limited Liability Companies, Corporate, Attorney, KL Gates Law FIrm
Administrative Partner

Scott Waxman is a founding partner in the firm’s Wilmington, Delaware office and a member of the firm’s global Management Committee. His practice focuses on organizational and operational issues related to limited liability companies, limited and general partnerships, statutory trusts, and special purpose corporations, as well as general commercial and financial transactions, including structured financings, securitizations, mergers and acquisitions, joint ventures, private equity and hedge funds, preferred securities transactions, insurance premium financing transactions, life settlement...

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Douglas A. Logan, KL Gates, Chancery Arbitration Lawyer, Corporate Litigation Attorney
Associate

Douglas Logan is an associate in the firm’s Seattle office.

Mr. Logan was previously a judicial extern to the Honorable Ricardo S. Martinez of the United States District Court for the Western District of Washington. He was also a K&L Gates summer associate in 2014. Prior to law school, Mr. Logan worked for the Department of Justice Antitrust Division as a paralegal specialist in Washington, D.C.

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