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Chancery Dismisses Fiduciary and Unjust Enrichment Claims Based on Terms of Contract

By Francis G. X. Pileggi, Esq.

Nemec v. Shrader, No. 3878-CC, and Wittkemper v. Shrader, No. 3934-CC (consolidated cases)(Del. Ch., April 30, 2009), read opinion here.

The factual basis of this Chancery Court decision involves shareholders who had signed agreements that governed the redemption of their shares. They filed suit when their company had redeemed their shares shortly prior to the corporation being acquired.

The court dismissed claims that directors breached their fiduciary duty in connection with the redemption of shares, as well as dismissing unjust enrichment claims, based on the reasoning that formal contracts controlled the issues and that the directors were entitled by the terms of  the contract to redeem the shares involved. As the court  explained:

"... the relationship between plaintiffs and Directors is governed primarily by contract  under the Stock Plan. According to Delaware law where a dispute 'relate[s] to obligations ‘expressly treated . . .' by contract[, it] will be governed by contract principles.'  If the 'fiduciary claims relate to obligations that are expressly treated' by contract then this Court will review those claims as breach of contract claims and any fiduciary claims will be dismissed."

By contrast, recent Chancery Court decisions summarized on this blog here and here, explain situations where both contract claims and torts claims may proceed (or fiduciary claims and contract claims may proceed),  in the same case, unlike the ruling in this matter.

Moreover, even if the court allowed the fiduciary claim, it would fail based on the court's reasoning that if they directors are acting in the best interests of all shareholders and the company, they are not liable simply because some shareholders fare better than others (citing Gilbert v. El Paso, 1988 WL 124325, at *10 (Del. Ch. Nov. 21, 1988), aff'd, 575 A.2d 1131 (Del. 1990)).

A claim based on the implied covenant of good faith and fair dealing was summarily dismissed based on the familiar reasoning of many Delaware cases that the court will not provide terms that the parties themselves failed to negotiate as part of their agreement.

In addition, the court cited settled Delaware law that rejects claims for unjust enrichment when the claims are covered by the express terms of a controlling agreement between the parties.

Full post as published by Delaware Corporate and Commercial Litigation Blog on April 30, 2009 (boomark / email).