213 A.3d 1211
Del. Ch.2019Background
- In 2005 J.P. Morgan paid $70 million to DataTreasury Corporation (DTC) for a patent license that included a most-favored license (MFL) clause entitling J.P. Morgan to a refund if DTC later licensed the same patents on more favorable terms.
- Beginning in 2006 DTC entered into numerous lower-priced licenses without notifying J.P. Morgan and paid large dividends ($117M+ from 2006–2010) to insiders and affiliates.
- J.P. Morgan sued DTC in Texas (the Texas Action), obtained a $69M judgment in 2015 (affirmed on appeal), and pursued post-judgment discovery that revealed additional transfers and alleged discovery obstruction by DTC.
- J.P. Morgan filed this Delaware Chancery action in 2018 seeking (1) director liability under 8 Del. C. § 174 for unlawful dividends (2006–2010), and (2) recovery of certain insider/affiliate transfers (2011–2013) as fraudulent transfers under DUFTA.
- Defendants moved to dismiss, raising: judicial estoppel, standing under § 174, timeliness of § 174’s six-year period (statute of limitations v. repose), DUFTA discovery-rule timing, and pleading particularity under Rule 9(b).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing under 8 Del. C. § 174 | J.P. Morgan was a "creditor" (had a claim) as soon as DTC entered more-favorable licenses due to the MFL clause; thus it can sue on behalf of creditors for dividends paid 2006–2010 | A § 174 "creditor" must be a judgment creditor at the time of the challenged payment; J.P. Morgan only became a judgment creditor in 2015 | Plaintiff has standing: “creditor” under § 174 includes one who has a claim (not necessarily a reduced-to-judgment claim) at the time of the challenged dividend. |
| § 174 six-year time bar: limitations or repose? | The six-year period is a statute of limitations (tolled by doctrines like fraudulent concealment) because unlawful-dividend claims trace back to common-law trust-fund rights | The six-year provision is a statute of repose tied to the payment event; repose is not subject to equitable tolling | § 174’s six-year period is a statute of repose; J.P. Morgan’s § 174 claim (dividends 2006–2010) is time-barred and dismissed. |
| DUFTA § 1309(1) discovery rule: when does the 1-year discovery window start? | The one-year period begins when the claimant discovered or reasonably could have discovered the fraudulent nature of the transfer (not merely the transfer’s existence) | The one-year period runs from discovery (or reasonable discovery) of the transfer itself | Court adopts plaintiff’s view: the one-year discovery period runs from discovery of the transfer’s fraudulent nature; J.P. Morgan’s DUFTA claims are timely. |
| Rule 9(b)/sufficiency of pleading for DUFTA actual intent | J.P. Morgan pleads transfers (who, when, amounts) and badges of fraud (insider recipients, concealment, insolvency indicators, post-notice transfers) sufficient under Rule 9(b) and § 1304(b) | Defendants claim inadequate particularity and insufficient allegations of actual intent | Complaint adequately pleads fraudulent transfers (dividends alleged alternatively and 2011–2013 insider transfers); Rule 9(b) satisfied given concealment and facts within defendants’ control. |
Key Cases Cited
- Johnston v. Wolf, 487 A.2d 1132 (Del. 1985) (interpreting § 174 standing and timing—creditor must exist at time of challenged payment)
- ANZ Securities, Inc. v. Queensland Investment Corp., 137 S. Ct. 2042 (2017) (distinguishing statutes of limitations and statutes of repose)
- Cheswold Volunteer Fire Co. v. Lambertson Construction Co., 489 A.2d 413 (Del. 1984) (statute of repose extinguishes right and is a substantive qualification on the cause of action)
- EBS Litigation LLC v. Barclays Global Investors, N.A., 304 F.3d 302 (3d Cir. 2002) (addressing related Delaware law issues though not resolving § 174 timing question)
- JP Morgan Chase Bank, N.A. v. DataTreasury Corp., 79 F. Supp. 3d 643 (E.D. Tex. 2015) (district court holding MFL clause is self-executing)
- JP Morgan Chase Bank, N.A. v. DataTreasury Corp., 823 F.3d 1006 (5th Cir. 2016) (affirming judgment and noting earlier breaches)
- In re Fair Finance Co., 834 F.3d 651 (6th Cir. 2016) (interpreting UFTA discovery rule to require discovery of fraudulent nature to start one-year period)
- Schmidt v. HSC, Inc., 319 P.3d 416 (Haw. 2014) (concluding one-year period begins when plaintiff discovers or reasonably could discover fraudulent nature of transfer)
- John A. Roebling’s Sons Co. v. Mode, 43 A. 480 (Del. Super. Ct. 1899) (historical decision shaping Delaware unlawful-dividend enforcement and legislative response)