COURT OF CHANCERY
OF THE
STATE OF DELAWARE
D ONALD F. PARSONS, JR. New Castle County Courthouse VICE CHANCELLOR 500 N. King Street, Suite 11400 Wilmington, Delaware 19801-3734
Date Submitted: April 6, 2015 Date Decided: April 27, 2015
Diane J. Bartels, Esq. Norman M. Monhait, Esq. Brandywine Village Rosenthal, Monhait & Goddess, P.A. 1807 North Market Street 919 Market Street, Suite 1401 Wilmington, DE 19802-4810 Wilmington, DE 19801
Kevin A. Guerke, Esq. Christopher Viceconte, Esq. Seitz Van Ogtrop & Green P.A. Gibbons P.C. 222 Delaware Avenue, Suite 1500 1000 N. West Street, Suite 1200 Wilmington, DE 19801 Wilmington, DE 19801
Malcolm C. Cochran, Esq. John D. McLaughlin, Jr., Esq. Chad M. Shandler, Esq. Ciardi Ciardi & Astin Christine Haynes, Esq. 919 North Market Street, Suite 700 Blake Rohrbacher, Esq. Wilmington, DE 19801 Richards, Layton & Finger, P.A. 920 North King Street Wilmington, DE 19801
RE: The Honorable Karen Weldin Stewart, CIR-ML, Insurance Commissioner v. Wilmington Trust SP Services, Inc., et al. Civil Action No. 9306-VCP
Dear Counsel:
In an opinion dated March 26, 2015, I granted in part and denied in part motions to
dismiss filed by certain Defendants in this action (the “Opinion”).1 Specifically, I ruled
1 Stewart v. Wilm. Trust SP Servs., Inc., 2015 WL 1396382, at *1 (Del. Ch. Mar. 26, 2015) [hereinafter “Op.”].
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that: (1) Delaware law governed all of the claims at issue in the Opinion; 2 (2) the
Receiver‟s3 claims were not barred by laches;4 (3) the Receiver failed to state claims for
breach of fiduciary duty against Wilmington Trust and the Auditor Defendants;5 (4) the
Receiver stated a claim for breach of fiduciary duty against Defendant Kantner; 6 (5) the
in pari delicto defense applied to bar the Receiver‟s breach of contract and negligence
claims against Wilmington Trust and the Auditor Defendants;7 and (6) the Receiver
stated claims against Wilmington Trust and Johnson Lambert, but not Kantner or
McSoley McCoy, for aiding and abetting a breach of fiduciary duty. 8
On April 6, 2015, the Receiver timely applied for certification of an interlocutory
appeal from the Opinion and associated order pursuant to Court of Chancery Rule 72 and
2 Op. at *11-12.
3 Plaintiff in this action is the Honorable Karen Weldin Stewart, Insurance Commissioner of the State of Delaware, who has asserted claims in her capacity as Receiver in liquidation of four Delaware-domiciled captive insurance companies. Unless otherwise noted capitalized terms in this letter opinion, such as “Auditor Defendants,” are defined as stated in the Opinion.
4 Op. at *13-15.
5 Id. at *16-17.
6 Id. at *18-19.
7 Id. at *24-33.
8 Id. at *34-35.
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Supreme Court Rules 41 and 42 (the “Application”). The Receiver contends that, in
addition to determining a substantial issue and establishing a legal right, the Opinion
decided a question of law of first instance in Delaware. In particular, she asserts that an
issue decided in the Opinion, i.e., whether “in pari delicto [should] apply to the
Receiver‟s claims against Wilmington Trust and the Auditor Defendants,”9 never before
had been addressed under Delaware law in the “unique context of insurance insolvency
proceedings.”10 The Receiver further contends that the Opinion implicates an unsettled
question of law because it construes or applies a Delaware statute—the Delaware
Uniform Insurers Liquidation Act11—in a way that has not been settled by the Delaware
Supreme Court.
Defendant Johnson Lambert timely filed an opposition to the Receiver‟s
Application (the “Opposition”).12 It argues that the Opinion did not determine a
substantial issue or establish a legal right. The Opposition further contends that the
Opinion did not decide an original question of law, but rather applied established legal
doctrine to a particular set of facts. Finally, according to the Opposition, the Opinion
9 Id. at *24.
10 Appl. 8.
11 18 Del. C. §§ 5901 to 5944 [hereinafter the “DUILA”].
12 Defendant McSoley McCoy joined in the Opposition.
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does not involve an unsettled application of the DUILA, but merely embodies a narrow
ruling that certain of the Receiver‟s claims were subject to the recognized doctrine of in
pari delicto. Defendants Wilmington Trust and Kantner (together with Johnson Lambert
and McSoley McCoy, “Respondents”) also joined in the Opposition. In their submission,
Wilmington Trust and Kantner advanced the additional argument that interlocutory
review is inappropriate here because the Opinion was not case dispositive, and as a result,
certifying the proposed appeal would undermine the efficient administration of justice.
For the reasons set forth below, I find that the Opinion did determine a substantial
issue, establish a legal right, and address a legal question of first impression in Delaware.
Thus, I conclude that it would be appropriate to grant the Receiver leave to file an
interlocutory appeal.
I. STANDARD
Under Supreme Court Rule 42, “No interlocutory appeal will be certified by the
trial court or accepted by [the Supreme] Court unless the order of the trial court
determines a substantial issue, establishes a legal right,” and meets one or more of five
additional criteria enumerated in Rule 42(b)(i)-(v).13 As relevant here, one of those
additional criteria is that the interlocutory appeal would satisfy “[a]ny of the criteria
13 Del. Supr. Ct. R. 42(b).
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applicable to proceedings for certification of questions of law set forth in Rule 41.” 14 In
this regard, Rule 41 provides, in pertinent part, that certification of questions of law will
be accepted in the Supreme Court‟s discretion “only where there exist important and
urgent reasons for an immediate determination by [the Supreme] Court of the questions
certified.”15 Among the illustrative reasons for which the Court might exercise its
discretion to accept certification are that the appeal presents an original question of law,
or a question of law relating to the constitutionality, construction, or application of a
statute of this State which has not been, but should be, settled by the Supreme Court.16
II. ANALYSIS
A. Substantial Issue
“An order satisfies the substantial issue requirement when it decides a main
question of law relating to the merits of the case, as opposed to some collateral matter,
such as a discovery dispute.”17 The Opinion at issue here did decide issues relating to the
merits of this case. The Receiver‟s Complaint contains twelve counts; each charges a
14 Id. R. 42(b)(i).
15 Id. R. 41(b).
16 Id.
17 Pontone v. Milso Indus. Corp., 2014 WL 4967228, at *2 (Del. Ch. Oct. 6, 2014) (citing Castaldo v. Pittsburgh-Des Moines Steel Co., 301 A.2d 87, 87 (Del. 1973)).
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Defendant or multiple Defendants with liability under a particular legal theory (i.e.,
breach of fiduciary duty, breach of contract, negligence, or aiding and abetting a breach
of fiduciary duty). Although not every Defendant moved for dismissal, the Opinion
ruled, at least partially, on the legal sufficiency of all twelve counts as to anywhere from
one to four Defendants on each count.18 The particular issue the Receiver most clearly
seeks to appeal—whether, under Delaware law, in pari delicto bars her claims, acting
under the DUILA, against Wilmington Trust and the Auditor Defendants—was for those
Defendants determinative as to eight of the Complaint‟s twelve counts.19 Thus, the
Opinion “address[ed] and resolve[d] one or more substantive legal issues between the
parties,”20 and cannot be said to have been concerned with “collateral issues” like
discovery matters.
In arguing for a contrary conclusion, Respondents contend that an interlocutory
appeal will result in piecemeal litigation. Specifically, they assert that some issues not
decided by the Opinion may be subject to later appeal by Respondents, and that,
regardless of the Supreme Court‟s decision to affirm or reverse the challenged portions of
18 Op. at *35.
19 Id.
20 DONALD J. WOLFE, JR. & MICHAEL A. PITTENGER, CORPORATE AND COMMERCIAL PRACTICE IN THE DELAWARE COURT OF CHANCERY § 14-04[a], at 14-7 (2014) [hereinafter WOLFE & PITTENGER].
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the Opinion and resulting order, this litigation will continue as to at least some claims
against some Defendants. This contention elides the proper inquiry. The “substantial
issue” requirement is oriented toward the “efficient operation of our system,”21 but the
primary consideration is whether the decision from which a party seeks to appeal is a
decision relating to the merits of the case, or to second-order litigation issues like
discovery disputes. The Opinion ruled on the legal merits of several—indeed, most of—
the claims at issue in this action as to the four Respondents.22 Whether or not the
21 Castaldo, 301 A.2d at 87. In that regard, I question Respondents‟ contention that the requested interlocutory appeal would be inefficient. In my view, the efficient disposition of this action could be furthered by interlocutory review. The majority of the Receiver‟s claims were dismissed based on the decisions in the Opinion, some of which, as I discuss below, arguably involve issues of first impression under Delaware law. As to the Moving Defendants, McSoley McCoy is no longer in the case, as each claim against it was dismissed. Johnson Lambert and Wilmington Trust now are subject only to claims for aiding and abetting breaches of fiduciary duty, because the claims against them for breach of contract, negligence, and breach of fiduciary duty were dismissed. If the Receiver‟s remaining claims were reduced to a final judgment, and the Supreme Court were to reverse the Opinion‟s ruling as to in pari delicto in a post-trial appeal, new discovery probably would be required and a new trial would have to be held to adjudicate substantially different claims (for breach of contract and negligence against Wilmington Trust and the Auditor Defendants) that I held were precluded by in pari delicto. See Op. at *32 n.225.
22 The Receiver voluntarily dismissed claims against one Defendant, and in a previous oral ruling and order, which is not subject to the pending Application, I dismissed the claims as to two other Defendants. In addition to those former Defendants and the Respondents here, the Complaint asserts claims against three additional Defendants, all of which remain pending.
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efficient administration of justice would be served by accepting this interlocutory appeal
ultimately is for the Supreme Court to decide. I am convinced, however, that the
substantial issue requirement of Rule 42 has been met.
B. Legal Right
For purposes of appealability under Rule 42, “A legal right is established when a
court determines an issue essential to the positions of the parties regarding the merits of
the case, i.e., „where one of the parties‟ rights has been enhanced or diminished as a result
of the order.‟”23 Thus, a decision at the pleadings stage, which merely allows the case to
proceed to trial, generally does not “establish a legal right” between the parties.24
Nevertheless, the Supreme Court has recognized that some such decisions “so
substantively affect the merits of a case or change the status of the parties that they will
be appealable.”25
I consider the Opinion to be such a decision. The Opinion dismissed Counts 1
through 10 of the Complaint entirely, and dismissed Counts 11 and 12 in part as they
23 Sprint Nextel Corp. v. iPCS, Inc., 2008 WL 2861717, at *1 (Del. Ch. July 22, 2008) (quoting WOLFE & PITTENGER § 14-4(b) (2008)).
24 Levinson v. Conlon, 385 A.2d 717, 720 (Del. 1978).
25 Id.
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related to certain of the Moving Defendants.26 The challenged decision as to in pari
delicto, specifically, barred the Receiver from collecting damages on her claims for
breach of contract and negligence against Johnson Lambert, McSoley McCoy, and
Wilmington Trust. The diminished position of the Receiver in terms of potentially
prevailing on the merits of those aspects of her case inversely corresponds with an
enhanced position of the Moving Defendants, as those Defendants no longer face a risk
of liability as to those claims, other than the risk that the Receiver might prevail on
appeal. Thus, I conclude that the portions of the Opinion the Receiver seeks to appeal so
substantively affected the merits of the case that her Application satisfies the “legal right”
element of Rule 42.
C. Additional Rule 42(b) Criteria
In addition to determining a substantial issue and establishing a legal right, an
order also must meet one of five criteria enumerated in Supreme Court Rule 42(b)(i)-(v)
to be certified for interlocutory appeal. The Receiver contends that here she meets the
requirement of Rule 42(b)(i), which incorporates Rule 41‟s guidance on certified
questions of law. I agree. The Receiver frames the question she seeks to appeal as
follows: “whether „in pari delicto [should] apply to the Receiver‟s claims against
26 Op. at *35.
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Wilmington Trust and the Auditor Defendants?‟”27 This question arguably implicates the
considerations referred to in Supreme Court Rule 41 in two ways.
First, the aspects of the Opinion that the Receiver seeks to appeal do implicate an
“original question of law” insofar as, among the decisions in Delaware that have applied
the doctrine of in pari delicto, no previous decision had applied that doctrine to
defendants such as Wilmington Trust and the Auditor Defendants 28 in the context of an
insurer insolvency proceeding under the DUILA. As discussed in the Opinion, the
Insurance Commissioner‟s responsibility for regulating Delaware‟s insurance market and
facilitating the orderly disposition of insolvent insurers touches on important public
policy goals, and her statutory authority in this regard is correspondingly broad. Thus,
the Receiver arguably is sufficiently different from other plaintiffs against whom the in
pari delicto defense might be raised, such as a stockholder pursuing a derivative claim,
27 Appl. 8 (quoting Op. at *24).
28 The Receiver‟s Application does not emphasize the “auditor exception” aspect of the Opinion‟s in pari delicto ruling, but appears broad enough to encompass it. Rather, the Application focuses on the fact that the Opinion applied that doctrine in the particular context of insurer insolvency proceedings. As I discussed in the Opinion, the question of whether to recognize an “auditor exception” to in pari delicto is one that other states have considered and answered in different ways, and arguably presents an original question of Delaware law. See Op. at *21-23, *29-33; see also, e.g., Arg. Tr. 34-37 (Counsel for McSoley McCoy: “Delaware has not, to this point, ruled on the existence under Delaware law of an auditor exception [to in pari delicto].”).
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that the question here is one of first impression in Delaware. Thus, I find that
certification of the Application is proper on that basis.
Second, the Receiver‟s proposed appeal could be viewed as involving an unsettled
question of the application or construction of a Delaware statute under Rule 42(b)(iii).
As the Receiver notes in her Application, “insurance insolvency proceedings are
creatures of state law.”29 The question of whether the policies embodied in the DUILA
and the Insurance Code generally should trump the public policies underlying the
doctrine of in pari delicto implicates the insurance statutes in important ways. The
Supreme Court has not addressed whether in pari delicto can be raised against the
Commissioner when she is acting as receiver for Delaware-domiciled insurance
companies liquidated pursuant to the DUILA, and, as of now, neither has the General
Assembly.30 Thus, I consider this an unsettled issue of statutory construction or
29 Appl. 10; see also id. at 10-12.
30 But see S.B. 48, 148th Gen. Assemb., Reg. Sess. (Del. 2015) (proposing, inter alia, to add as a new section 18 Del. C. § 5935, which provides in part that, “Subject to Subsection (2)(b) of this section, a prior wrongful or negligent action of any present or former officer, manager, director, trustee, owner, employee, or agent of the insurer may not be asserted as a defense to a claim by the receiver: (i) under a theory of: (A) estoppel; (B) comparative fault; (C) intervening cause; (D) proximate cause; (E) reliance; (F) unclean hands; (G) in pari delicto; or (F) mitigation of damages; or (ii) otherwise.”). I express no opinion on the merits of Senate Bill 48, but cite it as further evidence of the unsettled nature of this particular aspect of the DUILA.
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application, and conclude that certification of the Application would be proper on that
basis as well.
III. CONCLUSION
For the foregoing reasons, I find that the Receiver‟s Application satisfies Court of
Chancery Rule 72 and Supreme Court Rules 41 and 42. The Receiver has demonstrated
that this Court‟s Opinion determined a substantial issue, established a legal right, and met
at least one of the requisite criteria in Rule 42(b). I therefore certify the interlocutory
appeal requested in the Application. An appropriate form of order is being entered with
this letter opinion.
Sincerely,
/s/ Donald F. Parsons, Jr.
Donald F. Parsons, Jr. Vice Chancellor
DFP/ptp