Beals v. Washington Intern., Inc.

• Decision Date: 10 May 1978
• Parties: Vaughn BEALS et al., Plaintiffs, v. WASHINGTON INTERNATIONAL, INC., et al., Defendants.
• Court: Court of Chancery of Delaware

Page 1156

386 A.2d 1156

Vaughn BEALS et al., Plaintiffs, v. WASHINGTON INTERNATIONAL, INC., et al., Defendants.

Court of Chancery of Delaware,New Castle County.

Submitted Feb. 16, 1978.

Decided May 10, 1978.

Rodman Ward, Jr. and Edward P. Welch, of Prickett, Ward, Burt & Sanders, Wilmington, for plaintiffs.

Edmund N. Carpenter, II, R. Franklin Balotti, and James McC. Geddes, of Richards, Layton & Finger, Wilmington, for defendants.

HARTNETT, Vice Chancellor.

In this action plaintiffs are former stockholders of defendant-Formac, Inc. (Formac). They were eliminated from equity participation in Formac as a result of a merger whereby defendant-MLZ, Inc. (MLZ) was merged into Formac. Plaintiffs seek to rescind the merger alleging misstatement of fact in the Proxy Statement in connection with the merger, and that the merger was approved only because of an illegal conspiracy among certain individual defendants who have not been served in this action.

At the time of the merger MLZ was a wholly owned subsidiary of defendant-Washington International, Inc. (Washington) which also owned a majority of the outstanding voting shares of Formac. As a result of the merger Washington became the owner of all the stock of Formac. Plaintiffs, in their Complaint, seek both compensatory and punitive damages.

Washington and Formac moved to strike plaintiffs' demand for punitive damages, alleging that this Court does not have jurisdiction to award them.

Formac also moved to quash the service of process on MLZ since it is claimed that MLZ was not in existence when the service of process on MLZ was made.

The two motions will be discussed separately.

THE MOTION TO STRIKE THE CLAIM FOR PUNITIVE DAMAGES

I

This Court's jurisdiction is primarily based on Article IV, § 10 ¹ of the Delaware Constitution. Article IV, § 17 ² of the Delaware Constitution gives the General Assembly authority to confer additional jurisdiction upon this Court but no statute has been enacted conferring upon this Court jurisdiction to impose punitive damages.

It is the law of this State that the jurisdiction vested in this Court by Del.Const. art. IV, § 10 is the same as that which was possessed by the high court of chancery in England at the time of the separation of the colonies. duPont v. duPont, Del.Supr., 85 A.2d 724 (1951); First Nat. Bank of Frankford v. Andrews, Del.Ch., 28 A.2d 676 (1942); Glanding v. Industrial Trust Co., Del.Supr., 45 A.2d 553 (1945); Theisen v. Hoey, Del.Ch., 51 A.2d 61 (1947) and Delaware Trust Co. v. McCune, Del.Ch., 80 A.2d 507 (1951).

II

In order to determine whether this Court has jurisdiction to award punitive damages, therefore, it is first necessary to ascertain whether the high court of chancery in England had such jurisdiction in 1776.

Defendants rely heavily on Colburn v. Simms, 2 Hare 543, 67 Eng.Rep. 224 (1843) where the Court held that the high court of chancery in England did not have jurisdiction to order penalties or forfeitures.

In that case, decided in 1843, the Vice Chancellor decided that he did not have the authority to order a delivery up of certain books published in violation of a copyright since delivery up or seizure of the offending books would amount to a forfeiture.

The Court held:

The general rule undoubtedly is that, where a party seeking equitable relief is incidentally entitled to the benefit of a penalty or forfeiture, the Court requires him, as a condition of its assistance, to waive the penalty or forfeiture.

This holding has been quoted with approval in many decisions in this country. See, for example, Stevens v. Gladding, 58 U.S. 447, 15 L.Ed. 155 (1854) and Superior Construction Co. v. Elmo, 204 Md. 1, 104 A.2d 581 (1954).

Plaintiffs in fact candidly concede that the rule of law that Chancery Court does not have jurisdiction to award punitive damages is the majority rule in this country.

III

The question of whether this Court has jurisdiction to assess punitive damages has apparently never been considered by this Court in any reported decision.

The question has however been answered in the negative by the U.S. District Court for the District of Delaware. Judge Rodney said in William Whitman Co. v. Universal Oil Products Co., U.S.D.C.Del., 125 F.Supp. 137 at 162 (1954):

This, then, being an equitable action for rescission, I believe the law to be uniform that in the absence of express statutory provisions, a court of equity is without authority to assess exemplary or punitive damages.

Citing Coca-Cola Co. v. Dixie-Cola Laboratories, 4th Cir., 155 F.2d 59 (1946), cert. den. 329 U.S. 773, 67 S.Ct. 192, 91 L.Ed. 665; Taylor v. Ford Motor Co., D.C.Ill., 2 F.2d 473 (1924); U. S. v. Bernard, 9 Cir., 202 F. 728 (1913).

While a ruling of the U.S. District Court is not stare decisis to this Court a ruling by the eminent jurist and historian, Judge Richard Rodney, is always entitled to great weight.

This rule was also followed by the District Court of Delaware in Brady v. Trans World Airlines, Inc., U.S.D.C.Del., 196 F.Supp. 504 (1961) aff'd, 3rd Cir., 401 F.2d 87 (1968).

IV

The rationale of these cases denying Chancery's power to award punitive damages is clear. Traditionally and historically the Court of Chancery as the Equity Court is a court of conscience and will permit only what is just and right with no element of vengeance and therefore will not enforce penalties or forfeitures.

In an exhaustive and well reasoned opinion the Maryland Court of Appeals in 1954 reviewed the law in England and America and concluded that a Court of Chancery has never had jurisdiction to impose punitive or exemplary damages in the absence of specific statutory authority. Superior Const. Co. v. Elmo, supra, 48 A.L.R.2d 932 (annotation).

I therefore hold that Chancery historically and traditionally did not enforce forfeitures or penalties and that this was the rule of law in the high court of chancery in England in 1776 and is therefore the rule in this Court today.

V

The Delaware cases holding that the Court of Chancery, once having acquired jurisdiction over a controversy may, in appropriate cases, go on to grant complete relief although the relief granted is in the nature of a legal remedy ³, are not inconsistent with this holding. To say that Chancery may award compensatory damages in certain instances is not to say that Chancery may also award punitive damages. U.S. v. Hart, Dist.Ct.E.D.Va., 86 F.Supp. 787 (1949); Superior Const. Co. v. Elmo, supra.

VI

Plaintiffs, while conceding that the majority rule of law in this country precludes this Court from awarding punitive damages, cites several minority rule cases which hold that a Court of Chancery may award punitive damages in stockholder derivative suits and urges this Court to follow that minority rule.

The plaintiffs' argument is consistent with the position taken by the author of the annotation in 67 A.L.R.3rd 350 who argues that punitive damages should be awarded in an appropriate instance in stockholder derivative actions because to do so would be in conformity with modern concepts of what is equitable. The author of that note, however, concedes that the majority of cases hold that Equity does not award punitive damages. He states that "there seems to be a clear trend towards allowing such damages in equity, especially where the same court administers both legal and equitable relief " (emphasis added). The consolidation of law and equity does not exist in Delaware, however, where their separation is still vigorously maintained.

The author of the note cites only two cases which have held that punitive damages may be recovered in stockholder derivative actions. The two cases, Charles v. Epperson & Co., 258 Iowa 409, 137 N.W.2d 605 (1965) and Holden v. Construction Machinery Co., Iowa Supr., 202 N.W.2d 348 (1972), both arose in Iowa, a state which has combined its law and equity courts.

Neither case discussed the philosophical reasons why Chancery, traditionally, has not awarded punitive damages.

VII

For this Court to ignore the rule of law in Colburn v. Simms, supra, and the rule announced by the clear majority of cases decided in this country (see 48 A.L.R.2d 932 and 67 A.L.R.2d 350) would be for this Court to take it upon itself to assume new jurisdiction. While this Court may sometimes find it necessary to broaden its jurisdiction in order to fulfill its historical role of granting relief where no adequate relief is available at law, especially if constitutional rights are involved or an injustice would otherwise result, it should not on its own volition assume new jurisdiction to impose penalties it could not formerly impose.

The purpose of awarding punitive or exemplary damages is to impose a penalty or deterrent to prevent conduct which is deemed to be bad or harmful. Northwestern Nat. Cas. Co. v. McNulty, C.A.Fla., 307 F.2d 432 (1962). See Reynolds v. Willis, Del.Supr., 209 A.2d 760 (1965); Riegel v. Aastad, Del.Supr., 272 A.2d 715 (1970); and Walczak v. Healy, Del.Super., 280 A.2d 728 (1971). This is clearly a policy decision. See Dession: Sanctions, Law and Public Order, 1 Vand.L.R. 8 (1947); Toeusch: Sanctions in a Democratic Society, 2 J.Soc.Phil. 195 (1937).

There are three separate but equal branches of government. One branch of government should not encroach on the other. Del.Const. art. III, § 1; Opinion of the Justices, Del.Supr., 380 A.2d 109 (1977); and cases cited therein; duPont v. duPont, supra. It is the Legislative Branch which should make the policy decision that a certain course of conduct, not previously cause for the imposition of punitive damages, should now be penalized beyond the awarding of compensatory damages. This Court, in the absence of such Legislative finding and action should not take it upon itself to change a centuries-old limitation on its jurisdiction and undertake to assess damages in excess of what is necessary to make an injured party whole.

If this Court is to impose penalties in...