The Delaware Supreme Court has revived a lawsuit initiated by RBC Capital Markets against a trust that it claims failed to pay owed interest.

Although the trial court concluded that the case should be dismissed under the doctrine of res judicata because the claims were already heard in the Delaware Court of Chancery, the Supreme Court ruled that it cannot be determined on the current record if RBC’s claim should be barred.

“It is clear, if only from the parties’ need to resort to extrinsic evidence, that any determination of what RBC knew or could have known at the time of the Chancery litigation requires a factual inquiry that is inappropriate at this procedural stage,” said Justice Jack B. Jacobs in RBC Capital Markets v. Education Loan Trust IV. “At some late stage the Superior Court might determine that RBC knew or could have known of its claim for unpaid interest when RBC litigated in the Court of Chancery. But no such determination is possible on this appeal.”

RBC, a Canadian investment bank, filed a 2011 Chancery Court lawsuit against Education Loan Trust IV, a Delaware statutory trust, and U.S. Education Loan Trust IV LLC, a Delaware limited liability company. The plaintiff owns more than $450 million of the defendant’s auction rate securities, according to court documents.

RBC alleged in the Chancery Court lawsuit that it paid excessive fees in violation of the trust indenture, reducing the amount of interest it should have received. Then-Chancery Court Chancellor Leo E. Strine Jr., current Supreme Court chief justice, dismissed RBC’s complaint in a December 2011 opinion. Strine dismissed the lawsuit for failure to state a claim because RBC’s alleged payment of excessive fees did not affect the occurrence of interest payments, but rather injured the trust itself.

In February 2012, RBC initiated another lawsuit in the Superior Court against the same defendants alleging breach of contract and breach of the implied covenant of good faith and fair dealing. RBC also amended the complaint to assert that the defendants breached the indenture and supplemental indentures by failing to pay interest it allegedly owed to RBC, according to court documents.

Superior Court Judge Fred S. Silverman dismissed RBC’s lawsuit, ruling that its claims were barred by the doctrine of res judicata. Silverman said in a May 2013 opinion that “RBC repackaged its unsuccessful claim as one for breach of contract and filed it here.”

“RBC has already had its day in court, and this court is not free to take a second look at the earlier judgment,” Silverman said. “Not only that, the Court of Chancery was the proper court to consider RBC’s claims.”

The plaintiff appealed Silverman’s decision to the Supreme Court. A three-justice panel composed of Jacobs, Randy J. Holland and Henry duPont Ridgely reversed Silverman’s ruling and remanded the case back to the Superior Court.

RBC argued on appeal that the trial court erred because the Chancery Court complaint was dismissed for lack of standing rather than on its merits, so it did not constitute a final judgment for res judicata purposes. Second, RBC asserted that its Superior Court action did not arise from the same set of facts as its Chancery claims because unpaid interest is not identical to excessive fees.

The Supreme Court ruled that RBC’s complaint should not be dismissed, holding the record had not been fully developed to apply the doctrine of res judicata.

“We find that the current record does not permit a determination, as a matter of law, that RBC’s Superior Court claim is the ‘same’ as its previously dismissed Chancery claim,” Jacobs said. “Although RBC’s Chancery claim and its current claim arose out of the same transaction, it is not possible to determine, on this record, whether RBC knew or could have known of that claim, such that RBC could have asserted the claim in its Chancery complaint. What we can (and do) conclude is that, to the extent that RBC’s claim arises from defendant’s failure to pay interest after the Chancery complaint was filed, that portion of its claim is not barred as res judicata.”

The court concluded that the portion of RBC’s complaint that needed to be vetted were the claims that the defendants did not pay interest due after the Chancery lawsuit was filed. Jacobs said that a plaintiff alleging that a party failed to pay during one period does not preclude the same plaintiff from raising future claims regarding nonpayment during a separate period.
”Here, RBC could not have known in March 2011 (when it filed the Chancery action) that it would have an enforceable claim for defendants’ breach of their contractual duty to pay interest that would fall due in later periods,” he said. “The facts underlying such later claims had not yet materialized.”

Matthew E. Fischer and Jennifer C. Wasson of Potter Anderson & Corroon represented RBC with Alan J. Stone of Milbank, Tweed, Hadley & McCloy acting as of counsel.

The defendants were represented by Kurt F. Gwynne and Brian M. Rostocki of Reed Smith, and Daniel B. Rath and Rebecca L. Butcher of Landis Rath & Cobb.  

Jeff Mordock can be contacted at 215-557-2485 or jmordock@alm.com. Follow him on Twitter @JeffMordockTLI.