Enhanced Scrutiny Blog Sometimes the Best Defense Is Just … a Defense
On June 16, 2021, the Delaware Court of Chancery dismissed the plaintiffs’ motion for partial judgment on pleadings relating to parts of their request for declaratory judgment filed in Dr Thomas Markusic, Dr Maxym Polyakov, et al. vs. Michael Blum, Patrick Joseph King, et al. The plaintiffs have filed the action for declaratory judgment in an effort to anticipate their opponent’s potential claims, and Chancellor McCormick’s rejection of the requested declaratory judgment offers a key lesson for litigants considering similar preventive action.
This litigation involves Firefly Space Systems, Inc. (Original Firefly), an aerospace company founded by plaintiff Markusic and defendants Blum and King. Markusic was the sole director of Original Firefly and ultimately approved the sale of the company’s debt to another entity (EOS). Original Firefly then filed for Chapter 7 bankruptcy and went out of business. EOS then changed its name to Firefly Aerospace, Inc. (New Firefly) and named Markusic as CEO.
In September 2019, the plaintiffs (including New Firefly and Markusic) filed a declaratory judgment action against the defendants, the shareholders of Original Firefly, seeking statements on seven different issues. The defendants filed a lawsuit in the state court of California over the “alleged usurpation of the assets of Original Firefly to circumvent the economic interests of the defendants in Original Firefly” and also filed binding counterclaims in the Delaware action (Vice Chancellor McCormick subsequently granted to dismiss these counterclaims in August 2020).
The plaintiffs subsequently sought judgment on the pleadings relating to four of the seven matters which are the subject of their declaratory judgment action. As explained in more detail below, these requests were aimed at determining generally that the defendants lacked standing to bring proceedings, that there had been no breach of fiduciary duty for aiding and abetting, that the defendants could not divide the claims between multiple jurisdictions and that the defendants could not prevail over any of the various claims against the plaintiffs.
The court’s decision
Chancellor McCormick dismissed the plaintiffs ‘motion for judgment on the pleadings in its entirety, determining that each request was excessive, inappropriate or involved circumstances on the plaintiffs’ own initiative:
- Refusal to declare that defendants generally lacked standing to bring proceedings: Chancellor McCormick dismissed the plaintiffs’ claim on the grounds that it was too broad and “would force the court to assess all possible claims” that the defendants could potentially bring against Mankusic. Chancellor McCormick also said the plaintiffs’ request was “too ripe”, arguing that since affirmative requests were pending in California, deciding on declaratory versions in Delaware “would risk unnecessarily straining the court’s resources and the possibility of inconsistent factual and legal findings between courts. “
- Refusal to declare that the defendants could not pursue the complicity claims: Chancellor McCormick was quick to dismiss the request for a declaration that the plaintiffs had failed to aid and abet alleged breaches of fiduciary duty, arguing that the only fiduciary duty claims raised had already been dismissed in the decision of the Court of August 2020, and that there was therefore controversy ”for the Court to decide.
- Refused to declare defendants unable to divide their claims between California and Delaware: The plaintiffs argued that Delaware should be the exclusive forum for all defendants’ claims, but Chancellor McCormick concluded that it was the plaintiffs “who chose this court defensively in order to deprive the defendants, who are natural complainants, the ability to decide on the appropriate forum to assert their claims. The Court held that “the legal prohibition against splitting claims is not intended to reward this type of behavior by plaintiffs”, and therefore the rule against splitting of claims was inapplicable to the action in California. The Chancellor concluded with a final reproach: “[B]Because the plaintiffs have filed here as a preventive measure – if the plaintiffs now suffer prejudice as a result of the proceedings in two jurisdictions, it is on their own initiative.
- Refusal to declare that the defendants could not succeed on various claims: The court also dismissed the plaintiffs ‘claims regarding the defendants’ claims in the California action. Chancellor McCormick ruled that this declaration had failed for the same reasons as the first and second declarations: the claims relating to the breach of fiduciary duty had already been dismissed, and the California court was best placed to rule on the well- founded non-declaratory claims before it.
While the best defense is often a good offense, this is not always the case. Parties contemplating defensive declaratory judgment actions must carefully tailor the remedy sought and take into account the inefficiencies that may result.