CHC Investments, LLC v. FirstSun Capital Bancorp, et. al., No. 2018-0353-KSJM, 2020 WL 1480857 (Del. Ch. Mar. 23, 2020) (McCormick, V.C.)

In this memorandum opinion, the Delaware Court of Chancery granted a motion to dismiss fraud claims, holding that the claims were time-barred by Delaware’s three-year statute of limitations period.  In so ruling, the Court applied Delaware’s “borrowing statute” and expounded upon its application and exceptions. 

Plaintiff CHC Investments, LLC (“CHC”) invested $25 million in the predecessor entity of Strategic Growth Bancorp, Inc. (“SG Bancorp”), and the terms of the investment were memorialized in a Subscription Agreement, dated March 13, 2014.  The investment was to be used to execute SG Bancorp’s new business plan in the residential mortgage market.  In December 2014, SG Bancorp issued an Exchange Offer Memorandum, disclosing its concerns about the impact of new federal banking regulations on its new plan and disclosing pending lawsuits against it.  Ultimately, SG Bancorp’s business plan failed, and CHC lost its investment. 

CHC commenced litigation in the Court of Chancery on May 17, 2018, bringing two claims for fraud under Texas law.  CHC alleged that SG Bancorp mispresented the validity of its business model in the new regulatory environment and that SG Bancorp misrepresented the existence of litigation against two members of its management team.  SG Bancorp moved to dismiss, arguing, amongst other things, that Delaware’s three-year statute of limitations period barred CHC’s fraud claims.  CHC argued that its claims were not time barred because Texas’s four-year statute of limitations period applied.

The Court applied Delaware’s “borrowing statute,” 10 Del. C. § 8121, which was created to prevent forum shopping, and determined that the Delaware statute of limitations period applied and therefore barred CHC’s claims. Under the Delaware borrowing statute, the Court compares the limitations period of the foreign jurisdiction and that of the forum (Delaware), and applies “whichever” limitations period “is shorter.”  

The Court also clarified the application of the Delaware Supreme Court’s holding in Saudi Basic Indus. Corp. v Mobil Yanbu Petrochemical Co., 866 A.2d 1 (Del. 2005).  In Saudi Basic, the Supreme Court declined to apply the plain language of the borrowing statute because the plaintiff in that case used the borrowing statute as a sword when it brought suit in Delaware (which has a three-year limitation period) as opposed to Saudi Arabia (which has an eternal limitations period) to ensure the defendant’s compulsory counterclaims would be time barred.  The Court of Chancery explained that some courts have interpreted the Saudi Basic holding as rendering the borrowing statute inapplicable when the Delaware limitations period is shorter than the limitations period of the foreign jurisdiction.  The Court further explained that such a broad interpretation of Saudi Basic was misguided given the statutory language and because such an interpretation means that a court would never apply the forum’s limitations period.  Instead, the Court determined that the plain language of the borrowing statute, which requires a court to apply the shorter of the two limitations periods, governs “unless the party asserting the underlying claim was forced into a Delaware forum.”  Such an exception, the Court explained, can be reconciled with the straightforward statutory language of the borrowing statute by operation of the “absurd results” principle.

Applying the borrowing statute, the Court ultimately held that the shorter Delaware limitations period applied and that the “forced to file” exception did not apply because CHC brought its claims in Delaware pursuant to a valid forum selection clause.  The Court also held that the doctrine of fraudulent concealment did not toll the statute of limitations period, as CHC argued, because CHC had both inquiry and actual notice of the facts pertaining to the alleged misrepresentation as of December 2014 when SG Bancorp made its disclosures in the Exchange Offer Memorandum. 

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