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noting that the McWane analysis "applies equally to actions involving issues, which, while similar, are not identical to the pending action, provided that the actions arise out of the same set of operative fact."
Summary of this case from Davis International v. New Start Group Corp.Opinion
Civil Action No. 17472.
Date Submitted: December 10, 1999.
Date Decided: January 31, 2000.
Brian A. Sullivan and Duane D. Werb, of WERB, TIGANI, HOOD SULLIVAN, Wilmington, Delaware, Attorneys for Plaintiff Visual Edge Systems, Inc.
Martin P. Tully, Thomas R. Hunt, Jr., and David Teklits, of MORRIS, NICHOLS, ARSHT TUNNELL, Wilmington, Delaware, Attorneys for Defendants Earl T. Takefman and Richard Parker.
MEMORANDUM OPINION
Defendants Earl Takefman and Richard Parker ("Takefman" and "Parker," collectively "defendants") are former officers and directors of plaintiff Visual Edge Systems Inc. ("Visual Edge" or the "Company"). In August and September 1999, during the course of a heated battle for corporate control of Visual Edge, two shareholders whose combined holdings constituted a majority of the Company's outstanding voting stock removed defendants from the Company's Board and caused the newly constituted Board to terminate defendants' employment agreements. On October 12, 1999, Visual Edge filed this lawsuit (the "Delaware Action") seeking damages for breach of fiduciary duty (Count I), breach of the employment agreements entered into between defendants and the Company (Count II), invalidation of certain purportedly fraudulent and unauthorized amendments to those same employment agreements (Count III) and, finally, damages for tortious interference with contract (Count IV).
Approximately three weeks before plaintiff commenced the Delaware Action, Messrs. Takefman and Parker filed a lawsuit in the Circuit Court of the Fifteenth Judicial Circuit, Palm Beach County, Florida, alleging that Visual Edge breached their employment agreements by refusing to pay them the agreed upon severance of $275,000 each (the "Florida Action").
Infinity Investors Limited ("Infinity"), the stockholder who engineered Takefman and Parker's removal and termination, and the directors aligned with it, are also named as defendants in the Florida Action.
Defendants ask that I dismiss or stay this suit in light of the prior-filed Florida Action because this suit involves similar parties and issues and the Florida suit is capable of rendering prompt and complete justice in this matter. Defendants' motion also urges me to dismiss plaintiff's tortious interference with contract claim for lack of personal jurisdiction.
See McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng'g Corp., Del. Supr., 263 A.2d 281, 283 (1970).
For the reasons set forth below, I conclude that the issues Visual Edge raises in this Delaware Action will substantially be resolved in the earlier-filed Florida Action which is moving towards a prompt resolution on the merits. All of the claims plaintiff raises here will be considered as counterclaims or affirmative defenses in the Florida Action. In staying this matter, the Court avoids simultaneous litigation of substantially similar issues among the same parties in different courts. In addition, the stay of this Delaware Action facilitates comity between sister states, efficient use of judicial resources and eliminates the possibility of inconsistent and conflicting rulings and judgments. Because this entire action will be stayed in deference to the prior-filed action pending in Florida State Court, I do not reach defendants' personal jurisdiction challenge.
Id. at 283.
I. BACKGROUND
The bulk of this matter's factual background is set forth in the companion case of Infinity Investors Limited v. Takefman, a § 225 action where plaintiff Infinity sought a judicial declaration it validly removed defendants Takefman and Parker from the Visual Edge Board and filled the newly-created vacancies with its designees. This Court dismissed the § 225 action on mootness grounds as Takefman and Parker no longer contest their removal.
Del. Ch., C.A. No. 17347, mem. op., Chandler, C. (Jan. 28, 2000).
Id.
Appended to Infinity's § 225 action were common law claims of breach of fiduciary duty and tortious interference with contract. The Court dismissed most of the breach of fiduciary duty claims because they were improperly brought as direct actions by Infinity when such claims rightfully belonged to the Company. Two of Infinity's breach of fiduciary duty allegations and the tortious interference claim survived defendants' motion to dismiss. Infinity's surviving claims are unrelated to any of the claims in this lawsuit. This opinion presupposes familiarity with some of the facts discussed in the Infinity opinion.
The dismissed fiduciary duty claims in Infinity Investors Limited v. Takefman are essentially the same as Count I of this action.
Takefman and Parker served on the Company's Board of Directors and were employed respectively as Chief Executive Officer and Chief Operating Officer pursuant to employment agreements dated January 1, 1996. On August 13, 1999, Infinity and a second Visual Edge shareholder, whose combined holdings constituted a majority, executed written consents removing defendants from Visual Edge's Board. Defendants were soon thereafter terminated as officers by unanimous written consent of the new Board of Directors.
On September 23, 1999, before commencement of this Delaware Action, defendants filed the Florida Action. By Order dated December 15, 1999, the Florida Court denied Visual Edge's motion to dismiss. Visual Edge filed an answer on January 3, 2000, setting forth a host of affirmative defenses. As noted, the Florida Action is proceeding to the merits.
II. CONTENTIONS OF THE PARTIES
In support of their motion to dismiss or stay this action, defendants argue that all the claims asserted by Visual Edge are affirmative defenses and/or mandatory counterclaims in the prior-filed Florida Action. Next, and presumably regardless of whether such claims are mandatory counterclaims under Florida law, defendants argue that Visual Edge's lawsuit should be dismissed or stayed pending resolution of the first-filed Florida Action because the two cases involve all of the same parties and raise substantially the same issues.
Visual Edge asks me to deny defendants' motion on grounds that its complaint raises additional issues, unique of the Florida Action. Consequently, plaintiff argues the Florida court cannot completely adjudicate all the issues in this case.
III. ANALYSIS
While a stay is not granted as a matter of right solely by virtue of a prior-filed action pending in another jurisdiction involving the same parties and the same issues, Delaware courts are free to exercise discretion in granting a stay under such circumstances when the first-filed action is capable of doing prompt and complete justice between the parties. This rule applies equally to actions involving issues which, while similar, are not identical to the pending actions, provided that the actions arise out of the same set of operative facts.
McWane at 283.
See In re Application of Advanced Drivers Education Products and Training, Inc., Del. Ch., C.A. No. 14905, let. op. at 4, Chandler, V.C. (Aug. 16, 1996); Harbor Fin. Partners v. Sunshine Mining and Reg. Co., Del. Ch., C.A. No. 14159, mem. op. at 5, Steele, V.C. (Feb. 16, 1996).
A. II and III
I will first discuss Counts II and III of plaintiff's complaint — alleging fraudulent alteration and material breach of the employment agreements entered into between defendants and Visual Edge. These claims are clearly affirmative defenses to Takefman's and Parker's breach of contract claims in the Florida litigation. Indeed, in its answer to the Florida complaint, Visual Edge asserts as affirmative defenses that Takefman's and Parker's breach of contract claims are barred by the "doctrine of prior breach," by the "doctrine of offset and counterclaim," and because the purported modifications and amendments to the employment agreements "were executed without authority." Essentially, the litigants currently before this court have cross-sued one another in Florida over the same contract.
I am intrigued by Visual Edge's decision to invoke the "doctrine of prior breach" as an affirmative defense in the Florida Action. This seems unnecessarily tortured. Surely it is more logical to cast the "doctrine of prior breach" as what it truly is: a counterclaim affirmatively alleging breach of contract, i.e., the plaintiff-counterclaim defendant breached the contract first. (I also note that this "doctrine of prior breach" bears no relation to the concept of anticipatory breach. In the case of an anticipatory breach, no breach in fact has occurred whereas in the Florida Action, where Visual Edge asserts the `doctrine of prior breach,' a breach has obviously been alleged to have already occurred. To put it simply, the words "prior" and "anticipatory" carry totally different meanings.)
I remain unclear whether Visual Edge's "prior breach" affirmative defense is a coordinated attempt between the Company's Florida and Delaware counsels to enable it to argue that the scope of this Delaware Action is broader and more all-encompassing than the Florida Action or, whether the "doctrine of prior breach" is a substantive litigation strategy. As I explain below, the answer to such musing is of no great import as no matter how Visual Edge casts its arguments in the respective forums, its affirmative defense in Florida and its contract claims in Delaware are mirror images. I finally note that searches of electronic databases covering all state and federal court cases, Am. Jur.2d, and the Restatement of Contracts, did not yield a single instance of the phrase "doctrine of prior breach." Though such a doctrine may indeed exist, at least theoretically, it seems that it is not often raised for the eminently sensible reason noted above — it simply makes more sense to assert forthrightly a breach of contract action as a counterclaim.
Visual Edge's affirmative defenses in the Florida Action are mirror images of its claims in Counts II and III the Delaware Action. That is, Visual Edge will establish its affirmative defenses in the Florida Action upon the same facts that it predicates its causes of action in Delaware.
In Florida, Visual Edge challenges the severance pay-out ( i.e., the relief requested in Takefman's and Parker's breach of contract suit) by arguing that: (1) Takefman and Parker fraudulently amended their employment agreements when they removed a "for cause" termination clause (Count III of the Delaware Action); and (2) Visual Edge terminated Takefman's and Parker's employment agreements "for cause," The "for cause" termination Visual Edge seeks to demonstrate in the Florida Action is based on the series of acts of nonfeasance, misfeasance, waste, disloyalty, etc., that are the basis for its breach of contract claim (Count II) and its breach of fiduciary duty claim (Count I, see part B, infra) in this Delaware Action. Accordingly, Counts II and III should be resolved in the earlier-filed Florida Action.
To litigate claims made pursuant to the same contract where the same underlying facts give rise to all such claims, and the defenses thereto, in different courts is improper and wasteful of judicial resources. During the course of a teleconference with the litigants in early October (held in the companion lawsuit of Infinity Investors Limited v. Takefman), before plaintiffs had commenced this suit, Takefman informed the Court that he and Parker filed suit in Florida primarily because the employment agreements were entered into in Florida and because such agreements specifically designate Florida in a choice of law clause. Additionally, Takefman observed that Visual Edge headquarters and most of its operations are located in Florida and that he and Parker are part-year residents of that State. The contract dispute is properly in Florida. Moreover, the Florida Action should effectively and completely resolve all claims with respect to the contract.
See fn. 4, supra.
B. Count I
In Count I of the complaint, Visual Edge alleges that defendants breached fiduciary duties by, among other things: (1) enriching themselves at the expense of the Company; (2) engaging in acts of misfeasance and nonfeasance constituting gross negligence; (3) deliberately wasting and depleting, and declaring their intention to waste and deplete, the cash and other assets of the Company; (4) misappropriating Company property; and (5) failing to abide by all applicable corporate governance requirements.
These very same particularized allegations and the facts supporting them, which give rise to the Company's breach of fiduciary duty claim, are also the particularized allegations and factual predicates for the Company's breach of employment agreement claim ( i.e., Count II). As stated before, Visual Edge will seek to rebut Takefman's and Parker's breach of contract claim in Florida, thus avoiding the severance pay-out, by demonstrating that the Company terminated Takefman and Parker "for cause." The "for cause" termination Visual Edge seeks to establish in the Florida Action is based on Takefman and Parker's acts of nonfeasance, misfeasance and general disloyalty to the corporation (in their capacity as both officers and directors). In other words, the specific allegations upon which Visual Edge bases its breach of fiduciary duty claims arise out of the "same set of operative facts" as the allegations in its breach of employment agreement claim, and as such, are appropriately adjudicated in a single lawsuit.
Harbor Fin. Partners v. Sunshine Mining and Reg. Co., at 5.
In this instance, the appropriate forum for these claims is the first-filed Florida Action. This case does not require application of abstruse principles of Delaware law and will not implicate competing, policy-laden corporate governance issues. Indeed, Florida law applies to both contract-based claims and also likely applies to the tort claim.
Visual Edge simply alleges that defendants Takefman and Parker were generally absentee officers and directors, and only showed up long enough to misuse and misappropriate Company assets. There is little doubt in my mind that the Florida Court can resolve these issues as effectively as this Court. I am equally confident that the Florida Court can do "complete justice" with respect to all claims brought by the parties in both lawsuits.
Finally, I reject Visual Edge's oblique suggestion that the true Supreme Court of Delaware first-filed action in this controversy was Infinity Investors Limited v. Takefman, filed in this Court August 2, 1999 and decided January 28, 2000. That case was a § 225 action with several breach of fiduciary duty allegations and a tortious interference with contract claim appended to it. The lion's share of Infinity's breach of fiduciary duty allegations, however, did not rightfully belong to Infinity but rather to Visual Edge. They were dismissed accordingly.
See fn. 4, supra.
Three weeks before Visual Edge took up those dismissed claims improperly brought by Infinity in Infinity Investors Limited v. Takefman, defendants conceded their termination from Visual Edge and sought to obtain the severance payments they believe are owing to them through a breach of contract action in Florida. Visual Edge later commenced this litigation which involves substantially the same issues as the Florida Action. Its suggestion that this Court should press forward with this litigation because it is familiar with the participants and issues as a result of the dismissed § 225 litigation and improperly asserted breach of fiduciary duty allegations in Infinity Investors Limited v. Takefman has no foundation in law.
I also note that Visual Edge made no effort to stay the Florida Action and is now proceeding to the merits there.
C. Count IV
Plaintiff's fourth claim — tortious interference with contract — concerns threats allegedly made by Takefman against the Company's principal licensors, pro golfer Greg Norman and Great White Shark Enterprises, Inc. Takefman contends that 10 Del. C. § 3114 is an improper basis for personal jurisdiction over him with respect to this claim because, by plaintiff's own admission, the alleged threats Takefman made occurred after he was removed from the Board. Visual Edge contends that Takefman's argument is without force because once personal jurisdiction attaches over a defendant for one claim, the Court can proceed to do complete justice between the parties. As indicated initially, I need not reach the merits of this argument as this entire matter is stayed in favor of the earlier-filed Florida Action. Moreover, I note that the underlying tortious interference claim can certainly be resolved in the Florida Action — where personal jurisdiction over Takefman is obviously proper with respect to all of Visual Edge's claims.
Before concluding, I also note that I take a jaundiced view of Visual Edge's apparently tactical decision to forego certain counterclaims against Takefman and/or Parker in Florida so that it can argue here that the Florida Action will not "completely" resolve the litigation between the parties. I cannot fathom the reasons behind Visual Edge's seemingly burning desire to litigate this matter in Delaware. Whatever they may be, they should not spoil the legitimate forum choice made by Takefman and Parker. If Takefman's and Parker's claims are wholly without merit, and Visual Edge's grievances are indeed meritorious, the Florida Court can certainly arrive at this result and award relief accordingly.
IV. CONCLUSION
For all of the foregoing reasons, defendants' motion is granted and this matter is stayed until further Order of the Court.
IT IS SO ORDERED.