Third Circuit Holds That Statutes Of Limitation May Be Tolled By Books-And-Records Demands Under Delaware Law Despite Inquiry Notice To Plaintiff Of Wrongdoing
On June 13, 2017, Chief Judge Smith of the United States Court of Appeals for the Third Circuit reversed in part the District Court’s dismissal of claims for breach of contract as untimely. Norman v. Elkin, No. 16-1924 (3d Cir. June 13, 2017). The Third Circuit found that plaintiff’s argument that his books-and-records demand tolled the relevant statute of limitations was not categorically barred by a finding that plaintiff had “inquiry notice” of defendant’s wrongdoing at the time he filed the demand. The Court vacated dismissal of the contract claims and remanded them to the District Court with instructions to determine whether plaintiff’s books-and-records demand tolled the statute of limitations and, if so, whether the claims were timely.
The dispute arose from a corporate relationship between the parties, who were the only two shareholders of a company they founded together in the early 1990s to acquire and sell rights to radio frequencies. Plaintiff alleged that defendant breached an oral contract by excluding him from distributions of the company’s earnings, improperly characterized his capital contributions to the company as loans under a Shareholder Loan Agreement defendant caused the company to enter, and breached the Shareholder Loan Agreement by causing the company to repay the purported loans. Plaintiff also alleged that defendant fraudulently misled him about the repayments. Although a jury found for plaintiff on some of these issues and awarded damages, the District Court entered judgment for defendant as a matter of law, ruling that these claims were time-barred, duplicative, or based on insufficient evidence.
On appeal, the Court considered whether plaintiff’s books-and-records demand, filed under Section 220 of the Delaware General Corporation Law, could have tolled the statute of limitations, notwithstanding that known facts would have put a reasonable person “on notice that he should undertake further inquiry, in order to determine if a wrong had been committed against him.” The Third Circuit noted that “Delaware case law does not support a categorical rule forbidding tolling when a § 220 action is filed after a plaintiff has inquiry notice.” The Court also observed that categorical denial of tolling tended to cut against the purpose of Section 220—to encourage full investigation of potential stockholder actions before commencing a suit—because in many cases, a stockholder with “enough suspicion of wrongdoing to file a successful § 220 action” is also on inquiry notice and that stockholders who exercise such diligence should not be penalized. Though the Court voiced caution about using a Section 220 demand as a delay tactic, the Court suggested that tolling would be appropriate “to ascertain the facts involved in the later suit.”