out of the fire? the delaware court of chancery dismisses an action for lack of personal jurisdiction

By: Scott E. Waxman and Chris Fry

In Extell DV LLC v. Van A. Hemeyer and Blue Ledge Resort LLC, No. 2019-0683-SG (Del. Ch. 2020), Extell DV LLC, as majority equity-holder on behalf of three subsidiaries (respectively, the “Plaintiff” and the “Subsidiaries” and together, the “Plaintiffs”), brought suit alleging that the minority equity-holder in the Subsidiaries, Blue Ledge Resort LLC, and its principal, Van Hemeyer (respectively, “Blue Ledge” and “Hemeyer” and together, the “Defendants”) usurped a business opportunity of the Subsidiaries by seeking to purchase real property (the “Property”) in violation of the Subsidiaries’ limited liability company agreements (collectively, the “LLC Agreements”).

The Defendants, domiciled in Utah, challenged personal jurisdiction in Delaware and filed suit in Utah seeking to quiet title to the Property.  Before reaching the merits, the Delaware Court of Chancery (the “Court”) needed to determine the threshold question of whether the Defendants were subject to personal jurisdiction in Delaware under its Long Arm Statute (the “Statute”).

Delaware’s Statute is a “’single act’ statute” whereby one business transaction may provide the basis for personal jurisdiction.  This act must set “in motion a series of events which form the basis for the cause of action before the court.” Delaware courts have previously held that forming a Delaware entity or filing a corporate instrument in Delaware constitutes a transaction of business in Delaware and thereby provides Delaware courts personal jurisdiction under the Statute. 

The Plaintiff argued that the negotiation and execution of the LLC Agreements constituted a transaction in Delaware sufficient to confer personal jurisdiction to the Court. The Plaintiff and the Defendants exchanged several drafts of the LLC Agreements, with a final exchange of signature pages and execution copies. 

The Defendants contended that negotiation and exchange of the executed LLC Agreements was the extent of their transaction and that they had no personal authorization or knowledge of any filings or other business related to the LLC Agreements conducted within Delaware.  The Defendants stated that they “were not even aware of [the Plaintiff’s] decision to take advantage of Delaware as a locus of entity creation.” The Defendants argued that negotiation and even execution of a limited liability company agreement from another state without knowledge of the location of the creation of the entity did not rise to the level of a transaction subject to the Statute. The Court, relying on the facts and circumstances as pleaded and as construed most favorably to the Plaintiff, agreed with the Defendants that negotiation and execution of the LLC Agreements, without more connection or knowledge of jurisdictional choice, does not rise to the level of transaction for purposes of the Statute.  The Court expressed some skepticism at the Defendants’ position, however, basically urging the Plaintiff to make a motion for jurisdictional discovery to supplement the record.