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Otto Candies LLC v. KPMG, LLP

Court of Chancery of Delaware

April 25, 2019

OTTO CANDIES, LLC, et al. Plaintiffs,
v.
KPMG, LLP, et al. Defendants.

          Date Submitted: March 22, 2019

          David E. Ross, ROSS, ARONSTAM & MORITZ LLP, Wilmington, Delaware; Terry L. Wit, A. William Urquhart, Juan P. Morillo, Derek L. Shaffer, Lauren H. Dickie, QUINN EMANUEL URQUHART & SULLIVAN, LLP; San Francisco, California and Washington, D.C.; Attorneys for Plaintiffs

          Kevin R. Shannon, Matthew F. Davis, and Christopher N. Kelly, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Gregory G. Ballard and Jose F. Sanchez, SIDLEY AUSTIN LLP, New York, New York; Attorneys for Defendant KPMG Cárdenas Dosal, S.C.

          Todd Schiltz, DRINKER BIDDLE & REATH LLP, Wilmington, Delaware; Robert A. Scher and Jonathan H. Friedman, FOLEY & LARDNER LLP, New York, New York; Attorneys for Defendant KPMG, LLP

          Timothy Jay Houseal, Jennifer M. Kinkus, William E. Gamgort, YOUNG CONAWAY STARGATT & TAYLOR LLP, Wilmington, Delaware; Ana C. Reyes, WILLIAMS & CONNOLLY, LLP, Washington, D.C.; Attorneys for Defendant KPMG International Cooperative

          MEMORANDUM OPINION

          ZURN, Vice Chancellor

          Peculiar facts can prod the limits of otherwise routine court rules. This case provides one such example: namely, whether this Court's specific rules on amendments apply when parties transfer a fully briefed motion from another Delaware court. Plaintiffs initially filed this action in the Superior Court, where the parties briefed and argued motions to dismiss. The Superior Court held that it lacked subject matter jurisdiction and plaintiffs transferred the case, along with the motions as briefed in the Superior Court, to this Court under 10 Del. C. § 1902. On February 28, 2019, this Court issued a memorandum opinion dismissing plaintiffs' complaint for lack of personal jurisdiction and for failure to state a claim.[1]

         Court of Chancery Rule 15(aaa) requires plaintiffs faced with a motion to dismiss for failure to state a claim to either amend their complaint instead of opposing the motion, or else stand firm and face a dismissal with prejudice if they lose. The Superior Court has no corollary requirement. To inform whether plaintiffs' dismissals are with or without prejudice, this Court's opinion requested supplemental briefing on the applicability of Rule 15(aaa) to fully briefed dispositive motions transferred under Section 1902.

         I conclude that Rule 15(aaa), or the policies that motivate it, apply when a complaint is transferred to this Court subject to a fully briefed motion seeking dismissal under Rules 12(b)(6) or 23.1. Transferring plaintiffs must either seek leave to amend or stand firm on their complaint and risk dismissal with prejudice under Rule 15(aaa). However, because the parties in this action were the first to confront this issue, the interests of justice require a mulligan. Extinguishing plaintiffs' claims with prejudice under Rule 15(aaa) would be unduly penal under the circumstances, and so their claims are dismissed without prejudice under the good cause exception to Rule 15(aaa). Plaintiffs may move to amend.

         I. BACKGROUND

         I refer readers to the background section of the prior opinion in this case for a full recitation of the facts.[2] Here, I provide only a brief overview of the procedural posture relevant to my decision.[3]

         Plaintiffs filed their complaint on February 26, 2016 in the Superior Court.[4]On June 27, 2016, Defendants separately moved to dismiss (the "Motions to Dismiss"). The parties stayed briefing on the Motions to Dismiss for more than a year as they litigated complex personal jurisdictional disputes that culminated in a series of protective orders, a ruling from the appointed Special Master on the scope of personal jurisdiction, and a decision from the Superior Court adopting the Special Master's decision in full.[5] With the personal jurisdiction issues settled and jurisdictional discovery complete, Plaintiffs opposed the Motions to Dismiss on September 13, 2017.[6] Defendants filed reply briefs on November 13 and 14, 2017.[7]

         The parties' briefing on the Motions to Dismiss totaled 271 pages, excluding exhibits and affidavits. Defendants sought dismissal on a number of grounds, including that the Superior Court lacked subject matter jurisdiction to hear Plaintiffs' claims for negligent representation, which are typically heard in the Court of Chancery. On December 4, 2017, the Superior Court heard argument on the Motions to Dismiss. On December 15, 2017, Plaintiffs filed a motion for judicial notice of certain materials that purportedly "would be relevant to a proposed amended complaint should Defendants' motions to dismiss not be denied and Plaintiffs be granted leave to replead."[8] On April 25, 2018, the Superior Court ruled that it lacked subject matter jurisdiction to hear negligent misrepresentation claims, and permitted Plaintiffs the opportunity to transfer venue to this Court under Section 1902.[9]

         On June 13, 2018, Plaintiffs re-filed their complaint in this Court with minor amendments to bring the complaint in line with our procedural rules. In a joint letter accompanying that transfer, the parties stated:

While the Superior Court held that it lacked subject matter jurisdiction over plaintiffs' claims, it did not rule on other issues defendants raised in their pending motions to dismiss . . . . Those issues remain outstanding. . . . The parties respectfully request that Your Honor rule on the motion to dismiss issues that remain outstanding.[10]

         The parties also transferred the motion for judicial notice from the Superior Court, and Plaintiffs filed a second motion for judicial notice of materials that, as in the first motion, purportedly "would be relevant to any proposed amended complaint, should one be occasioned by this Court's ruling on Defendants' motions to dismiss."[11] Defendants' opposition to the second motion for judicial notice raised the question of Rule 15(aaa)'s applicability to any amended complaint for the first time in this action.[12]

         I heard argument on November 7, 2018.[13] At argument, I denied the motions for judicial notice as unripe because they were framed in the context of a yet-unfiled amended complaint. On February 28, 2019, I granted the Motions to Dismiss and dismissed Plaintiffs' claims under Rules 12(b)(2) and 12(b)(6) for lack of personal jurisdiction and failure to state a claim. However, in light of the parties' skirmishes on Rule 15(aaa), I requested supplemental briefing on its application and whether the dismissals should be with or without prejudice. On March 22, the parties filed their submissions.[14]

         II. ANALYSIS

         A.Rule 15(aaa) And Its Policies Apply, But Plaintiffs Have Shown Good Cause To Prevent ...


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