Litigation

Supreme Court: When Standing is Closely Related to Merits, 12(b)(6) Applies, Not 12(b)(1)

By Morris James LLP

Appriva Shareholder Litig. Co., LLC v. EV3, Inc., -- A.2d --, 2007 WL 3208783 (Del. Nov. 1, 2007)

Deciding whether a motion to dismiss based on lack of standing is considered under Rule 12(b)(6) or 12(b)(1) has implications and has divided some courts. First, lack of subject matter jurisdiction under 12(b)(1) is non-waivable and can be raised by the court sua sponte, whereas failure to state a claim under 12(b)(6) must be raised by motion. Second, a 12(b)(6) motion for failure to state a claim may be converted to a motion for summary judgment, considering matters outside the pleadings, but a 12(b)(1) motion may not. In this consolidated appeal, the Supreme Court held that when the issue of standing is closely related to the merits, a motion to dismiss for lack of standing is properly considered under 12(b)(6) for failure to state a claim. 

The appeal arose out of two actions filed in the Superior Court by shareholders of a target company. One suit was brought by the largest former shareholder and one by a litigation company formed by the shareholders.  Both cases were dismissed at the trial level under 12(b)(6) because the plaintiffs lacked standing to prosecute the actions separately and had to pursue them jointly according to the Shareholder Representative Agreement, which appointed them as representatives of the shareholders to pursue litigation.  

The Supreme Court, in reviewing one decision, held that the issue of standing was closely related to the merits—since interpretation of the contract was a prerequisite to the plaintiff/appellant’s standing—and that a motion to dismiss for lack of standing was thus properly considered by the Superior Court under 12(b)(6) for failure to state a claim. But the Supreme Court reversed the Superior Court’s decision to dismiss because the parties were not given at least 10 days notice of the court’s conversion of the 12(b)(6) motion to dismiss into a Rule 56 motion for summary judgment.

And in the other case, the Supreme Court reversed the Superior Court’s holding that the term “joint action” prohibited separate suits by the two shareholder representatives because it was not the only reasonable interpretation (i.e., the provision was actually ambiguous). Further, the Court held that on a Rule 12(b)(6) motion it was error to select the “more reasonable” interpretation as legally controlling, without admitting extrinsic evidence of the parties’ intent. (This decision was subsequently cited by Chancellor Chandler in Seidensticker v. Gasparilla Inn, Inc., 2007 WL 4054473, at *3 (Del. Ch. Nov. 8, 2007), for the proposition that Delaware courts adhere to the objective theory of contracts.) 

Full post as published by Delaware Business Litigation Report on November 26, 2007 (boomark / email).