Monday, February 01, 2021

Delaware cedes to California on deciding plaintiff’s fraud claim

By Jay Fishman, J.D.

The Delaware Court of Chancery denied the defendants’ motion to have Delaware deemed the choice of law for deciding the plaintiff investor’s fraud claim under the California Securities Act. The court determined that even though the parties contract stipulated Delaware as the choice of law for deciding disputes between the plaintiff-buyer and defendant-sellers, California should rule on this claim because: (1) California has a materially greater interest in applying the California Securities Act than Delaware does; (2) California law would, in fact, apply to part of the buyer’s fraud allegations; and (3) any buyer’s waiver of its right to assert a claim under the California Securities Act would be contrary to California’s public policies (Swipe Acquisition Corporation v. Krauss, January 28, 2021, Fioravanti, P.).

Defendants contend that Delaware law should apply. The defendants contended that Delaware law should apply to the plaintiff’s California Securities Act claim because the plaintiff waived its right to assert the claim by contractually agreeing with the contract that Delaware law would apply to all claims arising out of the contract, including statutory claims.

Court determines California law should apply. The court acknowledged that the contract could be reasonably construed to waive the plaintiff’s right to assert any non-Delaware law claims, which would include California statutory law. But, said the court, accepting the above choice of law does not end the inquiry. From precedent, the court gleaned that a choice of law provision is unenforceable if it would be "contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which…would be the state of the applicable law in the absence of an effective choice of law by the parties."

The court determined that in this case, California had a materially greater interest in deciding the plaintiff’s fraud claim in violation of California securities law because: (1) the plaintiff is physically located in California; (2) the injury to the plaintiff is alleged to have occurred in California; and (3) a key meeting between the parties concerning the agreement is alleged to have occurred in California.

Moreover, the record indicated that all of the contract negotiations took place in California, and that the only connection to Delaware is that one of the defendants is incorporated there. Lastly, the court justified its decision from a California Court of Appeals holding in the 1983 Hall v. Superior Court case: "the right of a buyer of securities in California to have California law…apply to any future dispute arising out of the transaction is a ‘provision’ within the meaning of [California Securities Act] section 25701 which cannot be waived or evaded by stipulation of the parties to a securities transaction."

The case is No. 2019-0509-PAF.