"Hello [res judicata], my old friend. I've come to talk with you again."—Paul Simon's "The Sound of Silence"

One can only wonder if Vice Chancellor Lori W. Will had thoughts similar to Paul Simon's lyrics, or flashbacks to early days of law school, as she penned her recent decision in the saga of Chai v. Maginn, C.A. 2024-0393-LWW (Del. Ch. Oct. 1, 2024), wherein she invoked the doctrine of res judicata to award a defendant summary judgment in Chai's third-filed action within 12 months.

As a refresher for those not fresh out of civil procedure, res judicata, which means "a matter judged," is a legal doctrine that supports the foundation of the judicial system by promoting finality and efficiency in legal proceedings. In Delaware, as in many jurisdictions, the doctrine prevents the same parties from relitigating issues that have already been decided, or could have been decided, in a previous matter before a court of competent jurisdiction. This article delves into the Delaware Court of Chancery's recent use of res judicata to remind readers of the doctrine's applications and implications.

In the matter of Chai, the plaintiff filed three expediated actions against her now ex-husband and co-founder of Jenzabar, Inc. (the company) regarding the validity of her written consents purporting to remove the ex-husband and other directors from the company's board. It was the plaintiff's "piecemeal litigation" strategy more so than her corporate governance efforts that derailed her various litigation goals.

It started back in 1998, when the plaintiff Ling Chai (Chai) and defendant Robert A. Maginn Jr. (Maginn) co-founded the company and served on its board along with other various directors over the years. Chai and Maginn were at some point married and, by January 2019, Chai initiated divorce proceedings in Massachusetts. A dispute over the company's stock—the primary marital asset—became the star of the divorce proceeding. The divorce proceeding ultimately required the appointment of a Special Master, and it was not until 2023 that the Special Master concluded the company's "common stock owned and controlled by Chai and Maginn should be evenly divided." The Special Master further ruled on how common stock of the company held by entities owned or controlled by Chai and Maginn should be allocated as a result of the pending divorce. These rulings are herein referred to as the "Entity Stock Decisions."

The First Bite of the Apple

In August 2023, after the Special Master's report was issued, Chai issued the first of what would be many purported written consents of the company's board seeking to, among other things, remove a certain director from the board (the first written consent). Days later, Chai filed the first of three expediated actions in the Court of Chancery pursuant to 8 Del. C. Section 225 seeking, among other things, a declaration that the first written consent was valid and that a certain director was no longer on the board." The court, despite its busy schedule, issued an opinion a few weeks later on Oct. 16, 2023, "holding that the first written consent was invalid because Chai lacked the authority to execute it." The primary basis for the court's decision in the first litigation stemmed from Maginn's remaining control over an entity controlling a portion of company stock per the Special Master's entity stock decisions.

The Second Bite of the Apple

Chai went back to the drawing table and on Oct. 23, 2023, litigation in Nevada was filed to, among other things, resolve control issues related to the Special Master's entity stock decisions that had tripped her up in the first litigation. A few days later, Chai went on to issue what purported to be a "second written consent" and a "third written consent" that, together, sought to remove a director from the company's board, appoint a replacement director, and purported to undertake a transfer of the company's shares from one of the underlying entities at issue in the underlying divorce to Chai's control.

Then, on Nov. 8, 2023—notably a mere three weeks after the court's decision in the first litigation—Chai filed her second expediated action in the Delaware Court of Chancery pursuant to 8 Del. C. Section 225 along with other statutory and contractual claims. The parties briefed and argued cross-summary judgment motions by Jan. 2, 2024. Less than two weeks later, the still busy court issued a bench ruling granting, in part, summary judgment on the Section 225 claim in favor of the defendants because "Chai could not unilaterally direct the underlying entity related to the divorce to act and because Chai did not own or control a majority of [the company's voting stock, thus rendering the second and third written consents were unauthorized and invalid." The court resolved the remaining claims in the second litigation by March 11, 2024.

The Third Bite of the Apple

In between the court's two decisions resolving the second litigation, on March 8, 2023, the Massachusetts divorce proceeding resulted in the issuance of a third supplemental judgment of divorce resolving various matters related to the Special Master's entity stock decisions and resolving the need for the parallel Nevada action. Thereafter, on April 12, 2024, Chai executed a fourth, fifth, and sixth written consent, the collective of which sought to change the composition of the board for various reasons.

That same day in April, Chai filed her third expediated litigation action in the Delaware Court of Chancery pursuant to 8 Del. C. Section 225 and alleging variations of her former contractual claims. Chai fared the same in her third litigation as she did in her first and second litigations, but this time the defeat came at the hands of the doctrine of res judicata.

Res Judicata Is Alive and Well in Delaware

In her decision resolving the third expediated litigation, Vice Chancellor Will expressed that the claims pending before the court this time around were of the type and nature that could have been raised in the second, if not the first, expediated litigation, explaining that the classic legal doctrine exists to "prevent a plaintiff from undertaking the sort of fragmented litigation strategy Chai has employed." In the words of the court:

Interim developments in the underlying divorce proceeding prompted impulsive attempts to reconstitute the company's board and file expedited litigation to confirm the validity of her acts. At each step, Chai told the Court of Chancery that she controlled a majority of the company's voting stock and that she was entitled to remove directors under Section 4.2(b) of the stockholders agreement. After twice losing on summary judgment, Chai returned to the Court of Chancery to try her hand at a modified yet unoriginal contractual argument.

It is these precise circumstances, according to the Court, that res judicata steps in to "prevent multiplicity of needless litigation of issues by limiting parties to one fair trial of an issue or cause of action which has been raised or should have been raised in a court of competent jurisdiction." The doctrine will be invoked in Delaware when five factors are met:

1. the original court had jurisdiction over the subject matter and the parties;
2. the parties to the original action were the same as those parties, or in privity, in the case at bar;
3. the original cause of action or the issues decided was the same as the case at bar;
4. the issues in the prior action must have been decided adversely to the appellants in the case at bar; and
5. the decree in the prior action was a final decree.

When applying this five-factor test, Delaware courts will "pragmatically assess whether the issues 'are related in time, space, origin, or motivation, whether they form a convenient trial unit, and whether their treatment as a unit conforms to the parties' expectations or business understanding or usage.'" In other words, creative or purportedly strategic variations of related arguments and legal theories will not evade the doctrine's reach.

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Res judicata serves as one of the cornerstones of Delaware's legal framework, promoting the finality of judgments and preserving judicial resources for the state's busy courts. It is critical litigants consider res judicata when plotting litigation strategy and exercise restraint when the time for certain litigation conduct is not quite right (or ripe).

Reprinted with permission from Delaware Business Court Insider, © ALM Media Properties LLC. All rights reserved.