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Judge Wallace Confirms that Negligent Misrepresentation Claims May Only Be Brought in the Court of Chancery

July 24, 2018

In Otto Candies, LLC v. KPMG LLP, 2018 WL 1960344 (Del. Super. Ct.), Judge Wallace held that the Delaware Superior Court lacked jurisdiction to hear the dispute because the claims, as pled, sounded in negligent misrepresentation. The action stemmed from alleged fraud carried out by Oceanografia S.A. de C.V, an offshore oil services company; Citigroup, Inc.; and certain of Citigroup’s foreign subsidiaries. The plaintiffs alleged that if the defendant auditing firms consisting of KPMG International Cooperative, KPMG LLP, and KPMG Càrdenes Dosal, S.C., had “disclosed the systemic internal control deficiencies and failures at Oceanografia, [Citigroup, and its subsidiaries], which allowed the fraud to fester and grow, Plaintiffs’ damages would have been prevented or substantially reduced.” Id. at *1 (citation omitted). The defendants moved to dismiss on a variety of grounds, one of which was lack of subject matter jurisdiction.

In asserting lack of subject matter jurisdiction, the defendants argued that only the Court of Chancery could hear claims based on negligent misrepresentation. In response, the plaintiffs argued that the Superior Court had exercised jurisdiction over negligent misrepresentation claims where “plaintiffs alleged negligence of an accounting firm to a third party ‘with whom there was no privity of contract’ and where ‘the only suffered harm was economic in nature.’” Id. at *3 (citation omitted). In support of their argument, the plaintiffs cited Carello v. PricewaterhouseCoopers LLP, 2002 WL 1454111 (Del. Super. Ct.).

Judge Wallace, however, found the Carello decision inapposite. Judge Wallace noted that the plaintiffs ignored “that Carello never addresses the issue of subject matter jurisdiction. A careful reading of Carello reveals that no party raised the jurisdiction issue and the Court was simply never called upon to address it.” Otto Candies, 2018 WL 1960344, at *3. Accordingly, Judge Wallace looked to other authorities to address the question of subject matter jurisdiction. These authorities established that the Court of Chancery “has exclusive jurisdiction over claims of equitable fraud, which is also known as negligent or innocent misrepresentation. To the extent that Plaintiffs’ claims do not have any foundation of Defendants’ knowledge of falsity, they cannot be heard in [the Superior Court].” Johnson v. Preferred Pro’l Ins. Co., 91 A.3d 994, 1017 (Del. Super. Ct. 2014); Mark Fox Grp., Inc. v. E.I. duPont de Nemours & Co., 2003 WL 21524886 (Del. Ch.). Accordingly, Judge Wallace found that the Superior Court lacked subject matter jurisdiction and gave the plaintiffs leave to transfer the case to the Court of Chancery under 10 Del. C. § 1902.

Analysis: Judge Wallace’s decision highlights the interrelationship between the Superior Court and the Court of Chancery. In Delaware, the split between law courts and the court of equity and the distinction between a claim of fraud and negligent misrepresentation may be dispositive to the issue of subject matter jurisdiction.

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