Delaware Court of Chancery Calls into Question Equitable Jurisdiction over Certain Claims for Release of Escrowed Funds
Those who practice in or are familiar with the Delaware Court of Chancery are likely aware that it is a court of limited jurisdiction. Unlike most jurisdictions, Delaware never merged its courts of law and equity. “As Delaware’s Constitutional court of equity, the Court of Chancery can acquire subject matter jurisdiction over a cause in only three ways, namely, if: (1) one or more of the plaintiff’s claims for relief is equitable in character, (2) the plaintiff requests relief that is equitable in nature, or (3) subject matter jurisdiction is conferred by statute.” Candlewood Timber Grp., LLC v. Pan Am. Energy, LLC, 859 A.2d 989, 997 (Del. 2004). If the Court of Chancery lacks jurisdiction by statute, it “has only that limited jurisdiction that the Court of Chancery in England possessed at the time of the American Revolution.” El Paso Nat. Gas Co. v. TransAmerican Nat. Gas Corp., 669 A.2d 36, 39 (Del. 1995). Accordingly, parties seeking to take advantage of the Court of Chancery’s expertise in business disputes frequently endeavor to style their claims brought or the relief sought as equitable in nature.
In the past, the Court of Chancery has recognized equitable jurisdiction over claims for the release of money held in escrow. Beginning in Xlete, Inc. v. Willey, 1977 WL 5188 (Del. Ch. June 6, 1977), the Court held that such claims were sufficient to invoke equitable jurisdiction because, even if a party successfully won a judgment in the Delaware Superior Court for the sum held in escrow, the Superior Court (Delaware’s law court) would not have legal authority to actually compel delivery of the money to that party. This holding remained undisturbed for nearly fifty years, and indeed has been relied upon in decisions within the past decade. See, e.g., United BioSource LLC v. Bracket Holding Corp., 2017 WL 2256618, at *4 (Del. Ch. May 23, 2017); East Balt LLC v. East Balt US, LLC, 2015 WL 3473384 (Del. Ch. May 28, 2015); see also Haney v. Blackhawk Network Holdings, Inc., 2017 WL 543347 (Del. Super. Ct. Feb. 8, 2017) (transferring case to Court of Chancery to hear all claims, including claim for the disbursement of disputed funds in escrow).
However, recent decisions from the Court of Chancery have called into question the continued application of Xlete and the equitable jurisdiction over claims for the release of escrowed funds. Cases involving a request for release of escrowed funds create a tension between two different concepts raised in determining equity jurisdiction. On the one hand, equity jurisdiction only exists where there is no adequate remedy at law, and a dispute over the release of escrowed funds is fundamentally a fight over money the plaintiff contends it is owed, usually pursuant to a contract. On the other hand, while the underlying dispute may be one sounding in contract over money owed, the Superior Court lacks the authority to order a party holding particular funds in escrow to actually release them, raising the question of whether equitable relief is necessary. As discussed below, the ruling in Xlete has been construed narrowly in recent months, with the Court of Chancery resolving the tension by finding the cases are really ones for money damages. Consequently, parties and their counsel should be wary of continued reliance on Xlete in cases seeking the release of escrowed funds.
ELAVON V. ELECTRONIC TRANSACTION SYSTEMS CORP.
In Elavon v. Electronic Transaction Systems Corp., 2022 WL 667075 (Del. Ch. Mar. 7, 2022), plaintiff Elavon brought several claims against Electronic Transaction Systems and its former owners, including for release of funds that had been placed in escrow to satisfy potential indemnification claims. After one of the individual defendants moved to dismiss the action, Vice Chancellor Sam Glasscock III raised, sua sponte, the issue of whether the Court had subject matter jurisdiction over Elavon’s claims for release of escrowed funds. Elavon, 2022 WL 667075, at *1.
In arguing in favor of equitable subject matter jurisdiction, Elavon relied upon Xlete, East Balt, and Haney, pointing out that “only the Court of Chancery can issue an [injunction] directing the Escrow Agent to release the funds if it fails to do so.” Id. at *2 (internal quotation marks omitted) (emphasis in original). In response, Vice Chancellor Glasscock distinguished the cases cited by Elavon on their facts and stated that, to the extent Xlete and East Balt indicate that equitable jurisdiction should be had under the circumstances, the Court declined to follow their rationale. Id. at *3.
In particular, the Elavon Court took issue with what it described as the “speculative” nature of the argument in favor of equitable jurisdiction, explaining:
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