JPMorgan Chase Bank, N.A. v. Ballard, C.A. No. 2018-0274-AGB (Del. Ch. July 11, 2019) (Bouchard, C.)

In this memorandum opinion, the Court of Chancery dismissed plaintiff JPMorgan Chase Bank, N.A.’s (“JPMorgan”) claims to recover under 8 Del. C. §174 (“Section 174”) for allegedly unlawful dividends paid from 2006 to 2010 but allowed Plaintiff to pursue claims alleging that those dividends and other payments to insiders were fraudulent transfers under the Delaware Uniform Fraudulent Transfer Act (“DUFTA”). In reaching that conclusion, the Court addressed three questions of first impression. First, the Court concluded that to have standing as a “creditor” under 8 Del. C. §174, a person only need “have a claim at the time of the allegedly unlawful dividend” and does not need to be a judgment creditor at the time of the dividend. Second, the Court found that Section 174’s six-year limitations period is a statute of repose, not a statute of limitations, and therefore equitable tolling principles are inapplicable. Third, the Court held that the one-year discovery period in Section 1309(1) of DUFTA begins when a person did or reasonably could have discovered the allegedly fraudulent nature of the transfer, not when the existence of the transfer is or reasonably could have been discovered.

Defendant DataTreasury Corporation’s (“DTC”) main business is suing financial entities for infringing two patents it owned related to check-imaging technology. As part of that business, DTC frequently entered into licensing agreements with those entities to settle litigation. In 2005, JPMorgan and DTC settled patent infringement suits by entering into two licensing agreements pursuant to which JPMorgan would pay DTC a total of $70 million (the “Licensing Agreement”). The Licensing Agreement contained a most-favored license provision that would grant JPMorgan the benefit of more favorable terms in any subsequent licensing agreements into which DTC entered. In between 2006 and 2013, DTC entered into a number of licensing agreements with far lower payments than those the Licensing Agreement required. Meanwhile, in between 2006 and 2010, DTC issued $117 million in dividends to its stockholders. In between 2011-2013, DTC transferred an additional $13.7 million to a number of insiders.

In 2012, JPMorgan sued DTC in District Court in Texas for violation of the most-favored license provision. That proceeding resulted in a final judgment of $69 million in damages in 2015, which the Fifth Circuit affirmed in 2016. In February 2018, during post-judgment discovery JPMorgan learned about the $117 million in dividend payments DTC had issued between 2006 and 2010. On April 12, 2018, JPMorgan filed suit in the Court of Chancery seeking to recover the dividends and other transfers to satisfy its judgment from the Texas action. Defendants moved to dismiss the claims.

Defendants argued that the Court should dismiss JPMorgan’s Section 174 claim because Section 174 gives standing to “creditors” of an insolvent corporation, but JPMorgan only obtained a judgment against DTC in 2015, after the issuance of the disputed dividends. Because there is no definition of “creditor” in Section 174, the Court looked to other contexts, including the broad definition of “creditor” in DUFTA. Noting that the purpose of Section 174 and DUFTA were to protect creditors from inappropriate distributions of corporate funds, the Court took an expansive view of the term and found that a “creditor” under Section 174 need only have a claim at the time of the dividends, and that it did not need to be a judgment creditor at that time to have standing. Therefore, because JPMorgan had a claim at the time of the dividends, the Court held it had standing as a “creditor.”

However, the Court dismissed JPMorgan’s Section 174 claims as untimely because JPMorgan did not file its Section 174 claims within the limitations period, which provides that directors may be liable “at any time within 6 years after paying such unlawful dividend.” JPMorgan argued that the limitations period was a statute of limitations and equitable principles regarding tolling should apply. The Court found that the plain language of Section 174 indicated the limitations period was a statute of repose because it based the limitations period on an act of the defendant, not when the injury occurred. The Court also held that the legislative history supported a finding that the limitations period was a statute of repose because the legislature added the six-year limitations period while clarifying that an action under the unlawful dividend provision could be enforced through an action on the case. At the time, an action on the case had a three-year statute of limitations, and the Court believed it would be “illogical” for the legislature to add another statute of limitations that conflicted with the already-extant one.

The Court then turned to JPMorgan’s DUFTA claims. Section 1309(1) of DUFTA requires a plaintiff to bring a fraudulent transfer claim “within 4 years after the transfer was made or the obligation was incurred or, if later, within 1 year after the transfer or obligation was or could reasonably been discovered by the claimant.” The parties disputed whether the one-year discovery period began when the claimant could have discovered the transfer or obligation or when it could have discovered the fraudulent nature of the transfer or obligation. The Court noted the lack of clear Delaware authority but after considering related Delaware authority and authority from other jurisdictions, the Court determined that the discovery period began when the claimant could reasonably have discovered the fraudulent nature of transfer. In particular, the Court noted authority that indicated beginning the one-year period when the claimant could reasonably discover the transfer would not fit with the purpose of fraudulent transfer acts, which is to prevent fraud and give creditors means to recover assets. The Court then rejected Defendants’ arguments that JPMorgan could have discovered the fraudulent nature of the transfers in the course of previous litigation before February 2018. Therefore, the Court found the DUFTA claims were timely.

The Court then found that JPMorgan had sufficiently alleged that the transfers were fraudulent. The Court held that by identifying the amount of the transfers, the names of the insiders who received the transfers, and the year in which they occurred, JPMorgan satisfied Rule 9(b)’s particularity requirement. The Court also noted that the defendants prevented JPMorgan from obtaining information about the dividends. The Court found JPMorgan had alleged sufficient “badges of fraud” showing fraudulent intent, including: that the transfers at issue were to DTC insiders, that it was reasonably conceivable that DTC and its directors knew DTC would be liable to JPMorgan when the transfers and dividends occurred, that DTC had a substantial deficit and net income that was less than the refund owed to JPMorgan, that DTC concealed the terms of more favorable license agreements from JPMorgan, and that DTC engaged in “obstructionist conduct” in discovery in the Texas litigation.

The Court also rejected an argument that JPMorgan, as a judgment creditor of DTC, could not recover from another defendant an amount that defendant owed DTC for a loan repayment. Defendants argued that JPMorgan was conflicted because it was suing DTC while attempting to act on DTC’s behalf by pursuing the claim for the loan repayment. The Court found no conflict because JPMorgan was merely acting in DTC’s name only.

Finally, the Court rejected two arguments relating to the dismissal of a specific defendant, Celestial Partners. First, the Court denied an argument that claims against Celestial Partners, which JPMorgan claimed was the alter ego of the founder and former chairman of DTC, were subject to dismissal because the founder died and proving that Celestial Partners was his alter ego would be difficult or impossible. Second, the Court rejected an argument that, because Celestial Partners’ charter was forfeited in May 2015, Celestial Partners should be dismissed from the case. The Court asked the parties to confer and report back on potential actions relating to the ability to revive Celestial Partners’ charter.

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