United Servs. Auto. Ass'n v. The Lions Share Tr.

UNITED SERVICES AUTOMOBILE ASSOCIATION, and USAA LIFE INSURANCE COMPANY, Plaintiffs, v. THE LIONS SHARE TRUST and KAREN A. ROULETTE, Defendants.

C. A. No. 2021-0296-NAC

Court of Chancery of Delaware

February 21, 2023

ORDER DISMISSING COMPLAINT WITH LEAVE TO TRANSFER

Nathan A. Cook Vice Chancellor

WHEREAS:

1. In 2017, Defendants filed a Uniform Commercial Code Financing Statement with the Delaware Secretary of State (the "UCC-1"). Plaintiffs allege that the UCC-1 is fraudulent and violates positive law because it records a fictitious security interest in their assets. See Dkt. 1 ¶¶ 10-16, 25-41 ("Compl.").

2. Plaintiffs have identified statutory tools for correcting or terminating the UCC-1. See id. ¶¶ 19, 22. And they seem to accept that a court could declare the UCC-1 "invalid," "void," or "fraudulent." See id. ¶ A. Nevertheless, Plaintiffs also request (i) a mandatory injunction compelling the Secretary of State to "expunge" the UCC-1; and (ii) a prohibitive injunction preventing Defendants "from filing additional fraudulent documents" in the future. Id. ¶¶ B-C 3. I ordered briefing on the question of whether this Court has subject matter jurisdiction over this action. See Dkt. 23.^[1] Plaintiffs argue that their requests for injunctive relief are sufficient to invoke this Court's jurisdiction.

NOW THEREFORE, the Court having carefully considered Plaintiffs' complaint, supporting exhibits, and oral and written arguments, IT IS HEREBY ORDERED, this 21st day of February 2023, as follows:

1. "The Court of Chancery is proudly a court of limited jurisdiction." Perlman v. Vox Media, Inc., 2019 WL 2647520, at *4 (Del. Ch. June 27, 2019). Where, as here, a plaintiff seeks to ground jurisdiction solely on a request for injunctive relief, the plaintiff bears the burden to demonstrate "the absence of an adequate remedy at law." In re COVID-Related Restrictions on Religious Servs., 285 A.3d 1205, 1230 (Del. Ch. 2022). A legal remedy is adequate if it would afford the plaintiff "full, fair, and complete relief." El Paso Nat Gas Co. v. TransAmerican Nat. Gas Corp., 669 A.2d 36, 39 (Del. 1995). In determining whether an adequate legal remedy exists, the Court "focus[es] upon the allegations of the complaint in light of what the plaintiff really seeks to gain by bringing [its] claim." Candlewood Timber Gp., LLC v. Pan Am. Energy, LLC, 859 A.2d 989, 997 (Del. 2004). Through this exercise, the Court looks

behind the "facade of prayers" to determine the "true reason" for which the plaintiff has brought suit . . . . [A] judge in equity will . . . not permit a suit to be brought in Chancery where a complete legal remedy otherwise exists but where the plaintiff has prayed for some type of traditional equitable relief as a kind of formulaic "open sesame" to the Court of Chancery.

Int'l Bus. Machs. Corp. v. Comdisco, Inc., 602 A.2d 74, 78 (Del. Ch. 1991) (citations omitted). "If a realistic evaluation [of the complaint] leads to the conclusion that an adequate legal remedy is available[,] this court . . . will not accept jurisdiction over the matter." McMahon v. New Castle Assocs., 532 A.2d 601, 603 (Del. Ch. 1987).

2. Based on a realistic evaluation of their complaint Plaintiffs truly seek to correct or invalidate the UCC-1. At least three legal remedies would adequately achieve that objective.

3. First, Plaintiffs may file an "information statement." See 6 Del. C. § 9518. Under Article 9 of the Delaware Uniform Commercial Code, a person may file an information statement if the person "believes that the existing record is inaccurate or has been wrongly filed." Off. Comm. of Unsecured Creditors of Motors Liquid. Co. v. JPMorgan Chase Bank, 103 A.3d 1010, 1016 n.25 (Del. 2014). Once filed, an information statement effectively "give[s] public notice that the erroneously filed record is unreliable." Id. Accepting Plaintiffs' allegations as true, as I must at this stage,^[2] an information statement would adequately provide third parties with notice that the UCC-1 records a non-existent security interest.

4. Second, Plaintiffs may seek monetary relief. Under Article 9, a putative secured party must file a "termination statement" if, among other things, "the debtor did not authorize the filing of the [challenged] financing statement." 6 Del. C. § 9-513(c)(4).^[3] Failure to file a required termination statement may give rise to statutory damages. Id. § 9-625(e)(4). Here, Plaintiffs did not authorize Defendants to file the UCC-1. So Plaintiffs demanded that Defendants file a termination statement. See Compl. ¶¶ 19-21. Defendants did not respond. Accepting Plaintiffs' allegations as true, damages are available to compensate them for resulting losses. Indeed, Plaintiffs have requested damages here. See id. ¶ D.

5. Finally, Plaintiffs may seek a declaratory judgment. Under the Declaratory Judgment Act, a court may "declare rights, status and other legal relations[.]" 10 Del. C. § 6501. A court of law^[4] thus may declare the UCC-1 invalid.

6. Plaintiffs have pleaded these legal remedies. Even so, Plaintiffs try to portray them as inadequate. In their view, only an injunction would afford them complete relief because an injunction would force the Secretary of State to "expunge" the UCC-1 and prevent Defendants from filing another one. I disagree.

7. To begin, Plaintiffs' expungement argument assumes that, without an injunction, the Secretary of State would not remove a financing statement that has been declared invalid by a court of law. But this theory imagines a "lawless society." Mennella v. Albence, 2023 WL 309042, at *2 (Del. Ch. Jan. 19, 2023). This Court presumes that government actors will obey declaratory judgments.^[5] As a result, "injunctive relief is generally unavailable where the plaintiff's proposed injunction merely seeks to prospectively compel a government to conform with the interpretation of the law reflected in [a] declaratory judgment." Crown Castle Fiber LLC v. City of Wilm., 2021 WL 2838425, at *5 (Del. Ch. July 8, 2021). Put differently, injunctive relief is generally not necessary to compel government compliance with a declaratory judgment until the government actor "actually refuses to comply with the judicial declaration." Christiana Town Ctr., LLC v. New Castle Cnty., 2003 WL 21314499, at *4 n.19 (Del. Ch. June 6, 2003) (emphasis in original).

8. Here, Plaintiffs offer no reasonably conceivable basis for me to conclude that, without an injunction, the Secretary of State would ignore a declaration from a Delaware court of law deeming the UCC-1 invalid. In fact, the opposite seems true. Understanding why involves some statutory perambulation.

9. To be legally "sufficient," a financing statement must provide the name of a "debtor" and "secured party" and indicate the "collateral." 6 Del. C. § 9-502(a). Section 9-102 of Article 9 defines these terms. See id. § 9-102(a)(12), (28), (73). So a financing statement is not sufficient unless the financing statement identifies parties and security interests that fit Section 9-102's definitions.

10. Moreover, a "sufficient" financing statement is not necessarily an "effective" one. Article 9 provides that the filing of a financing statement is "effective only to the extent it was filed by a person that may file it under Section 9509." Id. § 9-510(a). Under Section 9-509, a person may file a financing statement "only if the debtor authorizes the filing in an authenticated record[.]" Id. § 9-509(a)(1). Read as a whole, a financing statement is not "effective" under Section 9-509 unless properly authorized by a "debtor" defined under Section 9-102.^[6]

11. Against this background, the "filing office," which is defined to include the Secretary of State,^[7] is "not expected to make legal judgments" about the "content" of a financing statement. Id. § 9-520 cmt. 2. Instead, the Secretary of State generally will accept a financing statement that superficially appears valid. See id. § 9-516(a). That means the Secretary of State may sometimes accept a financing statement that names persons who are not actually "debtors" or "secured parties" under Section 9-102 or that was not "authorized by a debtor" under Section 9-509.

12. This is where the law may step in. Article 9 "cannot provide a . . . complete solution to problems caused by . . . 'bogus' filings." Id. § 9-518 cmt. 3. So it created "nonjudicial means" for addressing inaccurate filings (e.g., information and termination statements). Id. § 9-518 cmt. 2. And those nonjudicial means do not "displace" judicial remedies. Id. To the contrary, Article 9 envisions "judicial proceedings" for "correcting the public record" as well. Id. § 9-518 cmt. 3.

13. All this leads back to the adequacy of a declaratory judgment. Accepting Plaintiffs' allegations as true, it is possible that Plaintiffs are not "debtors" and that Defendants are not "secured parties." A court of law thus could possibly declare that the UCC-1 is void ab initio due to infirmities in its contents. Such a ruling would seem to require the Secretary of State to retroactively reject the UCC-1 as "insufficient" or "ineffective."^[8] That maneuver would "expunge" the UCC-1. Accordingly, Plaintiffs do not need an injunction too.

14. Nor does Plaintiffs' prospective injunction invoke jurisdiction. "An injunction against future wrongdoing is generally not available." Organovo Hldgs., Inc. v. Dimitrov, 162 A.3d 102, 114 (Del. Ch. 2017). So, to invoke equitable jurisdiction on a prospective basis, the plaintiff must allege facts that "create a reasonable apprehension of a future wrong." McMahon, 532 A.2d at 606; accord COVID-Related Restrictions, 285 A.3d at 1233. Here, Plaintiffs seek to enjoin Defendants from filing "fraudulent documents" in the future. Compl. at ¶ C.^[9]...