Delaware Supreme Court Clarifies Law Regarding Sealed Instruments

December 2010Newsletters In the Zone

In Whittington v. Dragon Group, L.L.C., et al., No. 392, 2009 (Del. Dec. 18, 2009), the Delaware Supreme Court resolved a split of authority in the trial courts regarding what constitutes a sealed contract under Delaware law. In a majority decision, the Delaware Supreme Court ruled that in the case of an individual, the presence of the word “seal” next to an individual’s signature is all that is necessary to create a sealed instrument under Delaware law, irrespective of whether there is any indication in the body of the obligation itself that such obligation was intended to be a sealed instrument.

In this case, the plaintiff-appellant, Frank C. Whittington, II, filed a complaint in 2006 in the Court of Chancery seeking various declaratory and injunctive relief against defendants-appellees Dragon Group, L.L.C. and certain family members who were members of Dragon Group, seeking to enforce his rights as an alleged member of Dragon Group. Whittington based his claims of membership in Dragon Group and entitlement to a proportionate share of Dragon Group profits upon a 2001 Agreement in Principle (the AIP) entered into by Whittington and various sibling defendants. The AIP constituted a global settlement of previous litigation in the Court of Chancery wherein Whittington sought recognition of his proportionate ownership in various business entities owned by the sibling defendants. The AIP was a single page document containing 11 numbered paragraphs that in relevant part detailed certain payments and actions that Whittington needed to take in order to carry out his obligations under the settlement and be entitled to membership in Dragon Group.

Claiming that Whittington had failed to perform under the AIP by the required time period, the sibling defendants filed a motion with the Court of Chancery seeking to enforce the AIP. In October 2001, the Court of Chancery held that the AIP should be enforced as a contract, expressly holding that the parties’ inability up to that time to agree upon the form of certain documents contemplated in the AIP did not make the AIP unenforceable. Despite this ruling, owing to the continuing inability of the parties to work together cooperatively, significant time passed and the parties were not able to complete certain documentation required by the AIP. Thereafter in 2002, Whittington filed a motion seeking various relief, including court assistance in resolving the differences among the parties as to the form of various ancillary Dragon Group documentation. This motion was denied in March 2003, with the defendants thereafter never taking any action to include Whittington as a member of Dragon Group.

In the litigation below, the Court of Chancery denied Whittington’s requests for relief, dismissing the action on the grounds of laches. As such, the court did not address the merits of Whittington’s claims, but it did note that Whittington had stated a plausible claim that he was to be a member of Dragon Group pursuant to the AIP with an ownership interest as high as 23.65 percent and that the defendants had breached the AIP. For purposes of its opinion, the Court of Chancery assumed, without deciding, that but for the laches defense, Whittington would prevail on those aspects of his claims.

In its opinion, the Delaware Supreme Court discussed how both the doctrine of laches and statutes of limitation function as time bars to lawsuits, but that unlike a statute of limitations, the equitable doctrine of laches does not prescribe a specific time period as unreasonable. Noting that a statute of limitations always operates as a time bar to actions at law, statutes of limitations are not controlling in equity due to the application of the doctrine of laches. However, where a plaintiff seeks equitable relief, the Court of Chancery will apply the statute of limitations by analogy. Absent a tolling of the limitations period, a party’s failure to file within the analogous period of limitations will be given great weight in deciding whether the claims are barred by laches. The Delaware Supreme Court noted that a statute of limitations will be applied by analogy to a suit in equity where it is determined that a claim at law is analogous to the equitable claim at issue.

The Court of Chancery had concluded that Whittington’s claims were predicated upon the AIP and therefore his action was “based upon a promise” within the meaning of 10 Del.C. §8106, which provides for a three-year statute of limitations. Accordingly, the Court of Chancery held that the three-year statute of limitations was the analogous statute of limitations for purposes of its laches analysis. However, the Court of Chancery noted that one exception to the three-year statute of limitations for contract actions specified in 10 Del.C. §8106 is for contracts under seal, for which the common law 20-year limitations period would apply. In its opinion, the Court of Chancery, relying upon the case of American Telephone & Telegraph Co. v. Harris Corp., 1993 WL 401864 (Del. Super. Sept. 9, 1993), ruled that while documents of debt such as mortgages or promissory notes escape the three-year limitations period if they contain the most minimal reference to a seal, actions arising from other types of contracts must show a clearer intent to enter into a contract under seal. Noting the AIP is neither a mortgage nor a promissory note and contains no reference to a seal other than the printed word “seal” next to each signature, the Court of Chancery held the evidence was insufficient to demonstrate an intent of the parties to the AIP to enter into a sealed contract.

Calling it a matter of first impression and acknowledging the conflicting prior Delaware cases, the Delaware Supreme Court set forth to clear up what evidence is necessary to establish a sealed instrument (that is not a mortgage or deed) under Delaware law as distinguished from an ordinary, unsealed instrument or contract. In its opinion, the Delaware Supreme Court, declaring it “a bright line standard that is easily applied,” decided to follow the common law holding set forth in In re Beyea’s Estate, 15 A.2d 177 (Orphan’s Ct. 1940). In Beyea’s Estate, it was found that a promissory note with the word “Seal” printed immediately to the right of the signature line on the note was an instrument under seal, notwithstanding that such note did not contain a testimonium clause nor any reference or indication of the parties’ intention to render the note a sealed instrument. While reaching its decision, the Delaware Supreme Court noted many states have enacted statutes to address the issue of what constitutes a sealed instrument, but Delaware has not to date chosen to modify the common law by statute or otherwise provided legislative guidance on the issue. This opinion provides clarification as to what constitutes a sealed instrument under Delaware law and highlights the potential significant legal consequences in connection with such a determination.

For more information, please contact J. Breck Smith at 302.622.4208 or [email protected].