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Delaware Chancery Court Balks at Artful Pleading: Court Lacked Subject Matter Jurisdiction to Hear Action for Collection of Debt

In Yu v. GSM Nation, LLC, C.A. No. 12293-VCMR (Del. Ch. July 7, 2017), the Court of Chancery dismissed the complaint for lack of subject matter jurisdiction.  Looking at the complaint holistically, the Court found plaintiff’s nominal pleading of equitable claims and relief insufficient to create jurisdiction where the alleged non-repayment of debt could be adequately remedied at law.

Defendant GSM Nation, LLC is a Delaware limited liability company doing business in the mobile phone retail and wholesale markets.  According to the complaint, GSM sought to expand its business further by developing a mobile virtual network operator (“MVNO”), which would allow it to provide cellular service plans to its customers. In mid-2012, GSM purportedly approached plaintiff, David Warren Yu, to solicit loans for this purpose. Yu proceeded to loan GSM $3,500,000 with the understanding that such funds would be used to develop an MVNO division within GSM.

Despite repeated representations that the MVNO would be a part of GSM, Yu alleged that GSM CEO, Ahmed Khattak, caused US Mobile LLC—a separate entity controlled by Khattak—to become the FCC licensed MVNO instead. Subsequently, in February 2016, GSM informed Yu that it could no longer pay or service the outstanding loan.  Yu brought this action seeking, among other things, “equitable rescission” of the loan agreements, “reformation,” a “constructive trust” voiding the transfers from GSM to US Mobile LLC, and an “equitable accounting.”

Defendants moved to dismiss the complaint for lack of subject matter jurisdiction, arguing that Yu’s claims—which sought to collect a debt—have an adequate remedy at law. Yu countered, noting that his claims of equitable fraud and unjust enrichment were equitable in nature, and that he was further seeking equitable remedies to his fraudulent transfer and inducement claims.

The Court agreed with Defendants.  Because the Court of Chancery is a court of limited jurisdiction, it may only hear a matter if the plaintiff invokes an equitable right or if the plaintiff requests equitable relief without an adequate remedy at law.  As the Court noted, mere inclusion of traditionally equitable claims or prayers for relief is, by itself, insufficient to confer jurisdiction.  Rather, in determining whether it has jurisdiction, the Court of Chancery must look at the complaint as a whole and realistically assess the nature of the wrong and availability of legal remedies.

Here, Yu failed sufficiently to plead an equitable claim.  First, the Court rejected Yu’s attempt to hold Khattak personally liable under an alter ego theory.  While such a claim is equitable in nature, Yu failed to plead facts indicating GSM or US Mobile were sham companies formed for a fraudulent purpose.  Second, the Court found the claim of “equitable fraud” to be baseless, as Yu failed to plead any facts suggesting GSM or Khattak owed Yu a fiduciary duty—an essential element of the equitable claim.  Third, the Court observed that, under settled Delaware law, an unjust enrichment claim is insufficient to create subject matter jurisdiction where, as here, it accompanies or is derivative of a breach of contract claim.

Further, Yu failed to offer any reason monetary damages would not provide a full, fair, and complete remedy.  This case concerned GSM’s failure to repay a cash loan.  While Yu articulated doubts about GSM’s solvency, he could seek full damages from US Mobile as the transferee of a fraudulent transfer.  Thus, despite Yu’s nominal request for equitable relief, such prayers were held to be insufficient to invoke the Court of Chancery’s jurisdiction.

Yu v. GSM Nation, LLC, C.A. No. 12293-VCMR (Del. Ch. July 7, 2017)

Copyright 2017 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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Max Kaplan, KL Gates Law Firm, Complex Litigation Attorney
Associate

Max Kaplan is an associate in the firm’s New York office practicing in the Commercial Disputes practice group. Mr. Kaplan has represented both individuals and corporate clients in an array of matters, including contract disputes, securities fraud actions, environmental regulations enforcement proceedings, and various pro bono matters. His experience includes civil jury trials, international arbitration, securities class-actions, landlord-tenant litigation, attorneys’ fees mediation, civil rights litigation, and appellate practice.

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