Delaware Corporate Law Decision – Whittington v. Dragon Group, L.L.C.

January 28, 2010

Publication| Corporate Transactions| Corporate & Chancery Litigation

In Whittington v. Dragon Group, L.L.C., No. 392, 2009 (Del. Dec. 18, 2009), the Delaware Supreme Court addressed, as a matter of first impression, the question of what evidence is necessary to establish a “specialty contract” –– a contract under seal –– under Delaware law.  A majority of a divided Supreme Court held that in the case of an individual, the presence of the word “seal” next to his or her signature is all that is required to create a sealed instrument, irrespective of whether there is any indication in the body of the obligation itself that it was intended to be a sealed instrument.

In 2001, Frank C. Whittington, II and certain of the defendants entered into an Agreement in Principle (the “AIP”), which constituted a global settlement of various legal disputes between the parties including a suit whereby Whittington had sought recognition of his proportionate ownership interest in various business entities owned and operated by the defendants.  Pursuant to the AIP, Whittington was entitled to have his proportionate interest carried forward into a new entity, Dragon Group L.L.C. (“Dragon Group”).  In July 2006, following further disputes between the parties as to whether or not Whittington had properly executed an offering memorandum in connection with Dragon Group and thus had an interest in the entity, Whittington filed suit seeking to enforce his rights as an alleged member of Dragon Group under the terms of the AIP.  In addition to disputing the merits of the claims, the defendants contended that Whittington was precluded from obtaining relief because he failed to bring his claims within the applicable statute of limitations, and accordingly was also barred by the doctrine of laches. 

The Court of Chancery dismissed the action on the ground of laches.  In so holding, the court concluded that because Whittington’s claims were predicated upon the AIP and the action was “based on a promise” within the meaning of Title 10, Section 8106 of the Delaware Code (“Section 8106”), the three-year statute of limitations provided in Section 8106 was the analogous statute of limitations to apply.  The Court noted that one exception to the three-year statute of limitations under Section 8106 is for contracts under seal, for which the common law twenty-year period applies.  However, even though the word “seal” appeared in typed letters beside the signature line for each signatory to the AIP, the Court held that actions arising from contracts other than documents of debt, such as mortgages or promissory notes, must show a clearer intent to enter into a contract under seal than was evidenced by the AIP.

On appeal, the Delaware Supreme Court noted that Delaware law is not clear as to what exactly constitutes a sealed instrument, that is not a mortgage or deed, and thereby subject to a twenty-year statute of limitations.  This lack of clarity, the Court explained, was a result of a conflict in the trial courts’ decisions on the issue, namely between In re Beyea’s Estate, 15 A.2d 177 (Del. Orphans’ Ct. 1940), and American Telephone & Telegraph Co. v. Harris Corp., 1993 WL 401864 (Del. Super. Ct. Sept. 9, 1993).  In Beyea’s Estate, the court had held that the presence of the word “seal” next to an individual’s signature to be all that is necessary to create a sealed instrument, whereas the court in Harris Corp. held that for an instrument other than a mortgage to be under seal, it must contain language in the body of the contract as well as extrinsic evidence showing the parties’ intent that it be a sealed contract.  The Delaware Supreme Court ultimately adopted the rule articulated in Beyea’s Estate.  Relevant to the Court’s decision were a number of facts, including that (i) New York law governed the “sealed” document at issue in Harris Corp. and (ii) although the Harris Corp. court attempted to distinguish Beyea’s Estate, it had inadvertently referred to the document in Beyea’s Estate as a mortgage when in fact it was a promissory note.  Accordingly, the Court held that in the case of an individual, in contrast to a corporation, the presence of the word “seal” next to an individual’s signature is all that is necessary under Delaware law to create a sealed instrument, “irrespective of whether there is any indication in the body of the obligation itself that it was intended to be a sealed instrument.” 

The Delaware Supreme Court remanded the matter to the Court of Chancery and instructed the trial court to reconsider its laches holding by applying a twenty-year statute of limitations to the AIP.1  

 1Justice Jacobs dissented, explaining his belief that the majority rule represented an inadvisable policy choice that would frustrate the reasonable expectations of parties to many commercial contracts.
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