The Dangers of Filing Legal Claims in a Court of Equity

ParsonsOn October 30, 2015, Vice Chancellor Parsons dismissed a Plaintiff’s claims on the grounds that: 1) three of the claims failed to state a cause of action for which relief could be granted under 12(b)(6); and 2) the remaining three claims were not claims seeking equitable relief and as such, the Court of Chancery did not have subject matter jurisdiction.

The Court dismissed claims for piercing the corporate veil (I), equitable fraud (IV), and unjust enrichment (VI) on the grounds that there were insufficient facts pled upon which the Plaintiff could reasonably, conceivably prevail.  The Court succinctly described the standard of proof necessary to pierce the corporate veil, summarizing:  “To state a veil-piercing claim, the plaintiff must plead facts supporting an inference that the corporation, through its alter-ego, has created a sham entity designed to defraud investors and creditors.”  Upon review of the Complaint, the court concluded:

“It is not enough to allege, as Doberstein does, that Greenplate made fraudulent statements about his progress toward completing his contractual obligations. Those types of allegations may or may not support a claim for fraud, but Greenplate’s wrongful acts must be tied to the manipulation of the corporate form in order to make veil-piercing justifiable on grounds of equity. No such nexus is alleged here.”

As for the claim of equitable fraud, the Court held that “Sophisticated contractual parties who bargain at arm’s length generally do not qualify for the kind of equitable protection that the negligent misrepresentation doctrine envisions…”

As for the final equitable claim of unjust enrichment, the Court stated that:

“In her brief, Doberstein states that she has lost on the deal given that she paid the full amount due under the [Agreement], $494,498.00, only to be left with an [un]inhabitable home.  Thus, by her own assertions, the unjust enrichment claim relies on the same damages as the breach of contract claim. In those circumstances, I conclude that Count V cannot be maintained, because the Agreement provides the measure of Doberstein’s rights here.”

Because the Court found no basis for the equitable claims brought by the Plaintiff, it had no choice but to dismiss the remaining legal claims that could be remedied by money damages due to lack of subject matter jurisdiction stating:

“If any of Doberstein’s equitable claims were well-pled, I would have had discretion to resolve these legal claims under the so-called “cleanup doctrine.  Because I do not see a colorable equitable hook in any of the equitable claims Doberstein advanced in Counts I, IV, and VI, however, I do not consider it appropriate for this Court to retain jurisdiction over this action.”

Interesting fact pattern and full opinion can be found here.

Chris Lee

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