Blurred Precedent & an April Fool’s Resolution: Hazout v. Ting

By: Betty McNeil

In Hazout v. Ting, C.A. No. N14C-12-067 at *1-34 (Del. Feb. 26, 2016), the Supreme Court of Delaware held that §3114 of the Delaware Code provided a statutory basis for personal jurisdiction contrary to other precedent.[1]

In 2014, Tsang Mun Ting brought an action on behalf of himself and a Hong Kong Investor group.[2]  The complaint alleged that Marc Hazout, and Silver Dragon “committed fraud, were unjustly enriched, and fraudulently transferred payments in violation of Delaware’s Fraudulent Transfer Act.”[3]  Hazout, the President, CEO, and Principal Financial Accounting Officer of Silver Dragon, a Delaware Corporation whose principal place of business is in Toronto, moved to dismiss the claim, suggesting Delaware did not have personal jurisdiction.[4]

Ting’s claim alleged that Silver Dragon, by and through Hazout, entered into a series of agreements with the Hong Kong Investor Group.[5]  Upon approval and consent of the Silver Dragon directors, the memorialized agreements would have required the directors to resign in exchange for $3,417,265, a security interest, and the opportunity for Silver Dragon to move forward with its business plans.[6]  Prior to receiving all signatures of the resigning directors, the Investor Group paid $1,014,140 to Silver Dragon; but, one of the directors refused to sign the resignation agreement.[7]  Director Chan’s refusal to sign the agreement caused the deal to fail and on April Fool’s day of 2014, Ting and the Hong Kong Investor group were told that a substantial portion of the distributed funds had already been used to pay the debts of Silver Dragon.[8]

In Delaware, the services of process on nonresident directors is outlined in 10 Del.C. §3114.[9]  Specifically, the statute gives Delaware courts personal jurisdiction over nonresident directors in “(1) all civil actions or proceedings brought in this State, by or on behalf of, or against such corporation, in which such officer is a necessary or a proper party, or (2) any action or proceeding against such officer for violation of a duty in such capacity.”[10]  Facially, the statute seems to suggest that Delaware court’s have jurisdiction over Hazout.[11]  However, Hazout argued that precedent set by the Chancery Court in Hana Ranch, Inv., v. Lent, read out the “necessary or proper party” provision of the statute; which in turn “limit[ed] the application” of the statue.[12]  With this argument noted, the Court indicates that it has never answered the question of whether Hana’s decision was correct.[13]  Likewise, Ting’s argument was premised on the suggestion that Hana was an erroneous interpretation of § 3114 because the Chancery court’s determination was “beyond the proper judicial role.”[14]

Ultimately, the Court’s conclusion follow’s Ting’s argument.[15]  Firstly, the Court’s analysis looked at the statute and the intent of the legislature.[16] It found that the Delaware statute is unambiguous and judicial decisions must be construed by the plain meaning of the statute.[17] The Court goes on to state that “courts are not authorized to strike provisions of a statute” and therefore, the decision in Hana cannot stand.[18]  Further the court suggests that the statute itself carries certain safe harbors.[19]  Specifically, the safe harbors will assure jurisdiction over parties will be consistent with constitutional principles of due process by applying the holdings in the line of cases following International Shoe and by following the doctrine of forum non conveniens.[20]

The case holding that nonresident directors will be subjected to personal jurisdiction in cases where there are clear signs of consent is not new, however, there are likely other Ting followers that would disagree with the Court’s holding.   For instance, there is an underlying policy implication that if Congress has not attempted to correct a Court’s interpretation of a statute, then the judicial holding stands – at least until Congress corrects the court. Unfortunately, there is also the counter argument, as noted by the Court, that courts should not have the authority to read out clearly unambiguous statutory language.  Regardless of one’s personal opinion, however, litigators that represent nonresident directors, and the very nonresidents who opt to be on a domestic corporation’s board should be weary when determining whether personal jurisdiction exist.  Therefore, future board directors must cautiously scrutinize not only the agreements that bind them to employer-corporations but also judicial precedent that may conflict with legislation.  Likewise, assuming those already on board are nonresidents, he or she must look for other protection mechanisms if they wish to avoid being subjected to jurisdiction as this case reflects the Courts decision to overrule Hanna’s interpretation of the Delaware statute.

[1] Hazout v. Ting, C.A. No. N14C-12-067 at *1, 34 (Del. Feb. 26, 2016).

[2] Id. at *13.

[3] Id.

[4] Id. at *8; Id. at 15.

[5] Id. at *9 – 10.

[6] Id. at *10.

[7] Id. at *12.

[8] Id. at *13.

[9] 10 Del.C. §3114.

[10] Id.

[11] Hazout, C.A. No. N14C-12-067 at *1, 34; 10 Del.C. §3114 (emphasis added).

[12] Id. at *15.

[13] Id. at *18, 24-25.

[14] Id. at *19.

[15] Id. at *20.

[16] Id. at *21.

[17] Id. at *20.

[18] Id. at *21-22.

[19] Id. at *26.

[20] Id. at *29; Blacks Law Dictionary (10th ed. 2014) (defining forum non conveniens as the doctrine that an appropriate forum — even though competent under the law — may divest itself of jurisdiction if, for the convenience of the litigants and the witnesses . . .).

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