Case background
The plaintiffs in Edward Deane, et al. v. Robert A. Maginn, Jr. and New Media Investors II-C, LLC, C.A. No. 2017-0346-LWW, (Del. Ch. Mar. 2, 2022) were investors in non-party New Media Investors II-B LLC (New Media II-B). The plaintiffs brought suit against defendant Maginn, New Media II-B’s managing member. New Media II-B was a vehicle formed for the purpose of investing in non-party Jenzabar, Inc., which was founded by Maginn.
The lawsuit arose from a decade-long dispute between the plaintiffs and Maginn, and the procedural history of the litigation spanned many years (having been presided over by three different members of the Court of Chancery ‒ two of whom have since retired).
A books and records action was filed in July 2014. That action lingered for seventeen months before a trial took place in October 2015. A plenary lawsuit was then filed in the Delaware Superior Court in December 2016, nearly a year after the books and records action concluded. The lawsuit was transferred to the Court of Chancery five months later. After a motion for summary judgment in that case was denied, the litigation sat largely idle for over two years. In June 2020, the Court of Chancery requested a status report on why the matter should not be dismissed for failure to prosecute. The Court of Chancery entered a scheduling order in August 2020 and scheduled a September 2021 trial to ensure that the matter moved forward, emphasizing that no further extensions would be given.
In May 2021, after deposing defendant Maginn, the plaintiffs said that they had learned of new information in discovery that required amendments to their pleading. An amended complaint was filed in June 2021 ‒ almost seven years after the first books and records action was brought. The plaintiffs’ original theory was that Maginn breached his fiduciary duties by allowing unexercised warrants to expire. In their amended complaint, the plaintiffs alleged new theories, including that Maginn usurped a New Media II-B investment opportunity and orchestrated a series of transactions that caused certain New Media II-B investments to disappear.
Maginn moved to dismiss the amended complaint, which was converted to a motion for summary judgment, arguing in relevant part that the plaintiffs’ claims were time-barred. The plaintiffs opposed the motion, arguing that the limitation period was tolled during the books and records action and that they could not have known of their claims.
The Court of Chancery’s decision
The court granted the motion for summary judgment in part and denied it in part. The court found two of the plaintiffs’ claims ‒ that Maginn caused certain warrants to go unexercised and caused certain investments to disappear ‒ were time-barred. Questions of fact precluded summary judgment on the plaintiffs’ other claims.
With respect to the warrant claim, the court found that the alleged wrongful act at issue transpired in October 2011, when Maginn allowed the warrants to expire. An analogous three-year statute of limitations applied, creating a “strong presumption of laches” if fiduciary duty claims were not filed by October 2014. The plaintiffs waited to file their warrant claim until December 6, 2016.
The plaintiffs argued that their books and records action tolled the limitations period. The court acknowledged that generally, where there is strong evidence that a plaintiff was aggressively asserting its claims, a books and records action may toll the limitations period (to allow for documents to be produced and the plaintiff to prepare a complaint after reviewing them). However, the court concluded it would be unreasonable to toll the limitations period for the full period requested for several reasons: (i) the books and records action resulted in the production of only 123 pages of records that admittedly “shed no light on” the claims at issue; (ii) the plaintiffs appeared to prosecute their summary books and records action with “little zeal”; and (iii) 293 days separated the last substantive docket item in the books and records action and the filing of the initial complaint.
In the court’s view, “generous tolling” would have begun upon the filing of the books and records action on July 31, 2014, paused during the seven-month period of inactivity in that case, and ended 30 days after the defendant’s production on February 17, 2016. That 351-day time frame would have given the plaintiffs adequate time after production to file a complaint but would still have meant the plaintiffs’ warrant claim was time-barred.
With respect to the claim that Maginn caused investments to disappear, the plaintiffs were put on inquiry notice by December 19, 2013, when they received a letter announcing the termination of their investment. The disappearing investment claim was not pled until seven years later, when the amended complaint was filed on June 15, 2021. The court held that the disappearing investment claim was time-barred because the plaintiffs brought their claims after an unreasonable delay, causing the defendant prejudice. In finding an unreasonable delay, the court noted that even after the plaintiffs had actual knowledge of the claims, they waited nearly three years, until three and a half months before trial, to request leave to amend their pleading.
The court found that the plaintiffs’ delay caused “obvious prejudice” to the defendant, including because the passage of time between the events and the claim would make it challenging to mount a defense. Among other things, the passage of time would mean contemporaneous documents may be non-existent: “[i]t is difficult to imagine that the defendant has access to documents from [ten or more years ago] that might be necessary to his case and that he has not since taken any action in reliance of the validity of these transactions.” The court also noted that the record supported a finding of prejudice, since “certain deponents could not respond to numerous relevant questions because of fading memories.”
Key takeaways
- In addition to tolling doctrines based on discoverability and concealment of facts that would put an injured party on notice of its claims, the filing of an action seeking inspection of books and records may toll the limitations period for causes of action based on matters investigated or learned through inspection.
- Failure to prosecute a summary books and records action expeditiously may preclude tolling of limitations periods during its pendency, particularly where there are significant periods of inactivity in that action.
- Delaware courts will take into account several factors in determining whether laches bars certain claims, including whether an unreasonable delay has resulted in prejudice to the defendant.
Client Alert 2022-104
