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From Securities Regulation Daily, September 11, 2015

Collateral estoppel and ‘conceivable’ contract breaches save fund’s claims

By Amy Leisinger, J.D.

The Delaware Court of Chancery refused to dismiss a complaint alleging breaches of various contracts containing releases and forum selection clauses and declined to strike various portions of the complaint in light of their potential relevance. According to the court, in light of a Third Circuit decision in a related matter, collateral estoppel prevents the defendants from arguing that portions of the agreements do not apply to them. In addition, the court stated, the complaint pleaded facts sufficient to support the plaintiffs’ claims at the pleading stage. The court did, however, grant dismissal of the claims regarding breach of the forum selection clauses, finding the contentions moot in light of the appellate court’s determination (Carlyle Investment Management, L.L.C. v. Moonmouth Company S.A., September 10, 2015, Parsons, D.).

Background. Carlyle Capital Corporation Ltd. was an investment fund designed to invest in residential mortgage-backed securities, and Moonmouth Company S.A. purchased shares of the fund under a subscription agreement signed by an affiliate, Plaza Management Overseas S.A., on Moonmouth’s behalf. The agreement contained a forum selection clause stating that the Delaware state court would have exclusive jurisdiction over any action with respect to the agreement.

In March 2008, the fund entered liquidation, and affiliates of Moonmouth sought and obtained permission to sell to various investments in other Carlyle-affiliated funds held by other investment entities. The sales were accomplished through several transfer agreements, which contained releases of claims against Carlyle and its affiliates; one of the transfer agreements noted that claims could be brought in one of four places, including Delaware state court.

After receiving a letter noting that Moonmouth, Plaza, and other affiliates would hold them liable for losses sustained in connection with the fund, the plaintiffs filed an action in the Delaware Court of Chancery seeking money damages and an injunction due to alleged breaches of the contracts containing releases and forum selection clauses. Plaza removed the case to federal court, and the Delaware District Court remanded the matter to state court. A Third Circuit panel decision (covered in the Securities Regulation Daily Wrap Up for February 27, 2015) affirmed the district court’s determination that the forum selection clause could be enforced, finding that a non-signatory to an agreement may be bound by a valid forum selection clause if the person is “closely related” to the agreement. In addition, the panel found, the forum selection clause contained in one of the transfer agreements provides an alternative ground supporting remand.

The defendants moved to dismiss the complaint on the grounds of lack of personal jurisdiction, lack of subject matter jurisdiction, and failure to state a claim.

Collateral estoppel. The court first determined that the Third Circuit decision is entitled to collateral estoppel effect in this action. Although the federal proceedings were essentially separate, the parties cannot now litigate the same underlying issues, the court explained. The Third Circuit concluded that jurisdiction in the chancery court is proper, and the defendants are estopped from arguing that the subscription agreement forum selection clause does not apply to them to thwart personal jurisdiction, the court concluded.

Breach allegations sufficient. The defendants argued that they are not bound by the releases and that, even if they were, the plaintiffs failed to plead a breach of them. However, the court found, in an alternative ruling, the Third Circuit held that they arguably could be bound and that the plaintiffs have standing to enforce the transfer agreements. The defendants’ additional argument that their interpretation of the text of the releases is the only reasonable interpretation must also fail, according to the court. At a minimum, the court found, the language is ambiguous, and the plaintiffs’ interpretation more closely aligns with precedent. The opposing interpretations each suffer from “various shortcomings,” the court noted, but the plaintiffs’ allegations show that the releases conceivably could bind the defendants, and the defendants have not shown that alleged funding of a related piece of litigation is not a breach of them. The defendants’ claims cannot be resolved on a motion to dismiss, the court concluded.

Declaratory judgment claims dismissed. The court did, however, dismiss as moot the plaintiffs’ claim for a declaratory judgment that the forum selection clauses are valid and enforceable. In addition, the court found that the complaint does not allege that a lawsuit was actually filed in another jurisdiction to support the supplementary counts and that, as such, no actual controversy underlies it. The court also refused to grant injunctive relief, finding that plaintiffs did not allege sufficient facts to support a finding of a reasonable apprehension of misconduct.

The case is No. 7841-VCP.

Attorneys: R. Judson Scaggs, Jr. (Morris, Nichols, Arsht & Tunnell LLP) and Robert A. Van Kirk (Williams & Connolly LLP) for the Plaintiffs. Michael F. Bonkowski (Cole Schotz P.C.) and Alan Kolod, (Moses & Singer LLP) for Plaza Management Overseas S.A. and Louis J.K.J. Reijtenbagh. David L. Finger (Finger & Slanina, LLC) for Liquidators of Carlyle Capital Corporation Ltd.

Companies: Plaza Management Overseas S.A.; Liquidators of Carlyle Capital Corporation Ltd.

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