Delaware Corporate Law Update

Updates on Delaware Corporate Law by Evan O. Williford, Esq., Delaware Corporate Litigation Attorney.

Enforcing The Court of Chancery – Bench Warrants

“Court of Chancery” and “bench warrants” are two phrases you don’t often see together.  Perhaps that is a testament to how often they are usually obeyed.  But as a recent case, Deutsch v ZST Digital Networks, Inc., demonstrates, the Court does have the power to issue them in appropriate cases.

Plaintiff brought a books and records case against a Delaware corporation that, through holding companies, did business in China.  The company defaulted, and the Court entered judgment against it.

Directors and senior officers of the corporation, Chinese nationals Bo Zhong and his son Lin Zhong, had a long history of defying and frustrating the Court’s orders.  Plaintiff sought to enforce the default judgment, and the company did not comply.  The Court appointed a receiver who spent years and significant resources attempting to cause the company to comply but was continually frustrated.

Finally, the receiver moved to issue bench warrants to arrest the Zhongs.  They appeared before the Court and raised objections, resulting in this opinion.

The Court first rejected the argument that the Zhongs as non-parties could not be held in contempt.  It noted that an order binds not only the named parties but also those “identified with them in interest, in ‘privity’ with them, represented by them or subject to their control.”  Thus, the order extended to “directors, officers, and employees” of the company, such as the Zhongs.

The Court noted that personal jurisdiction was satisfied under 10 Del. C. § 3114, providing personal jurisdiction over directors of a Delaware corporation.

The Zhongs then made due process arguments against the bench warrants.  The Court ruled that the contempt ruling sought would be civil and not criminal, since the requested arrest would only last until the contemptuous conduct ceased, which meant less process was due.  Even with the lesser requirements for civil contempt, the Court did in part accept the Zhongs’ due process arguments, noting that the receiver sought to hold the Zhongs in contempt of orders which did not identify the Zhongs by name and imposed broad mandates (such as giving the receiver authority over books and records and requiring cooperation) rather than specific demands.

Thus, the Court decided to enter a more specific order directing the Zhongs to take actions that the receiver had identified as being necessary to comply with the Court’s orders.  This would give the Zhongs a final opportunity to comply with the Court’s order and another hearing should noncompliance cause the receiver to move again for the issuance of a bench warrant.

Key Takeaways:

  • The Court of Chancery does have the power to enforce its rulings through bench warrants;
  • The Court can issue warrants as to persons not a party to the lawsuit, even persons not named specifically in the Court order allegedly disobeyed; but
  • Such circumstances may provide fertile grounds for arguments from arrestees including personal jurisdiction and due process.
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Disclaimer

Delaware Corporate Law Update solely reflect the views of Evan Williford of The Williford Firm, LLP. Its purpose is to provide general information concerning Delaware law; no representation is made about the accuracy of any information contained herein, and it may or may not be updated to reflect subsequent relevant events. This website is not intended to provide legal advice. It does not form any attorney-client relationship and it is not a substitute for one.