The Plaintiff in Camacho v. McCallum, 2016 NCBC 79 has to head to Delaware to litigate her claims for inspection of the records of the LLC of which she is a member, and also to seek dissolution of the LLC.
Why, even though Plaintiff is a North Carolina resident and the Defendant LLC has business operations in North Carolina? Because the LLC in question was a Delaware LLC. Judge Robinson ruled that:
The Delaware Code grants exclusive jurisdiction over inspection claims to the Delaware Court of Chancery. Op. ¶24. (It says that in Section 18-305 of the Delaware Code).
The Delaware Court of Chancery also has exclusive subject matter jurisdiction over claims to dissolve a Delaware corporation. Op. ¶29.
The Delaware Legislature has tried to stake out exclusive jurisdiction for its Court of Chancery in other areas. Here’s an example: Section 145(k) of the Delaware General Corporation Law says, regarding which court may hear actions for indemnification or advancement of expenses, that:
The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this section or under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. The Court of Chancery may summarily determine a corporation’s obligation to advance expenses (including attorneys’ fees).
Can Delaware Really Claim Exclusive Jurisdiction For Its Chancery Court?
Can Delaware oust other courts from deciding matters of Delaware corporate law? And did the Delaware Legislature even really mean to do so? My guess is probably not. Remember that Delaware has a Court of Chancery because it divided its court system into its Superior Court, which “has statewide original jurisdiction over criminal and civil cases, except equity cases,” and the Court of Chancery, which has exclusive jurisdiction over “equity cases.” So the Delaware Legislature probably meant only to make clear that inspection and dissolution actions filed in Delaware should be brought in the Court of Chancery as opposed to the Delaware Superior Court.
Delaware certainly couldn’t prohibit federal courts from ruling on this type of issue per its statutory declaration of “exclusivity.” Judge Easterbrook of the Seventh Circuit addressed this issue in Truck Components v. Beatrice Co., 143 F.3d 1057, (7th Cir. 1998) with respect to another corporate issue: the right of an officer or director of a corporation to receive advancement for legal expenses in cases making claims regarding their service to the corporation. He said:
No state may prevent a federal court from exercising jurisdiction created by Congress. . . . Nor do we suppose for one second that Delaware set out to contract the scope of federal jurisdiction. Section 145(k) allocates jurisdiction among Delaware courts. Delaware maintains separate systems of courts in law and equity. Claims based on corporate arrangements go to the Court of Chancery rather than to the law courts, where other contracts are litigated. Such an intra-state allocation has no effect on federal litigation, which merged law and equity long ago.
Id. at 1061-1062 (emphasis added).
The NC Business Court isn’t alone in deferring to Delaware’s self-proclaimed “exclusive jurisdiction.” So have courts in Florida, Synchron, Inc. v. Kogan, 757 So..2d 564 (Fla. App. 2nd Dist.. 2000); New York: In re Raharney Capital, LLC v. Capital Stack LLC, 25 N.Y.S.3d 217, 217−18 (N.Y. App. Div., 1st Dept. 2016)(New York court did not have jurisdiction to order dissolution of a Delaware corporation); Pennsylvania: Intertrust GCN, LP v. Interstate Gen. Media,LLC, No. 99, 2014 Phila. Ct. Com. Pl. LEXIS 434, at *7 (Phil Ct. Comm. Pl. 2014)(no jurisdiction to order dissolution of a Delaware corporation); and Vermont: Casella Waste Sys., Inc. v. GR Tech., Inc., No. 409-6-07, 2009 Vt. Super. LEXIS 14, at *7−8 (Vt. Super. Ct. 2009)(same).
California has applied its own statute regarding inspection of corporate records to a Delaware corporation. Havlicek v. Coast-to-Coast Analytical Services, 39 Cal. App. 4th 1844 (Cal App., 2nd Dist. 1995). And notwithstanding the Raharney case cited above, New York has done the same, in Sachs v. Adeli, 26 AD 3d 52, 55 (N.Y. App. Div., 1st Dept. 2005).
How Can North Carolina Members Of A Delaware LLC Avoid Having To Bring Claims In A Delaware Court?
It’s a good juncture to point out that the persons forming a Delaware corporation can specify in its bylaws that certain claims (those involving the internal affairs of the corporation) must be resolved exclusively in the North Carolina Business Court. The Court of Chancery so ruled in September 2014.
So, in the absence of such a provision, claims for inspection of books and records and for dissolution (being the internal affairs types of claims that the Chancery Court said could be the subject of a forum selection clause) have to be brought in Delaware.
If you are a North Carolina lawyer creating a Delaware LLC or Delaware corporation for a North Carolina client, you may want to include a North Carolina forum selection provision in the Bylaws or Operating Agreement. That way you won’t have to explain down the line to the client why she has to pursue her claim to inspect corporate or LLC records (or dissolution) in Delaware.
You’ll remember that North Carolina (like probably every state, has its own statute permitting LLC members the right to inspect the LLC’s records. That statute applies “only to members of an LLC formed under the North Carolina [Limited Liability] Act.” Op. ¶22. So a member of a Delaware LLC has no inspection rights under the North Carolina statute.