Case of the Day: In re Heckmann Corp. Securities Litigation

The case of the day is In re Heckmann Corp. Securities Litigation (D. Del. 2011). The case was a purported class action on behalf of the common stockholders of Heckmann. The plaintiffs alleged that Xu Hong Bin, the former CEO and President of China Water & Drinks, Inc., had misrepresented the strength of China Water’s business prior to a merger between China Water and Heckmann. The litigation began when Heckmann cancelled the common stock issued to Xu as part of the merger and Xu sued in the Court of Chancery to recover those shares. Heckmann asserted a counterclaim for fraud. The Chancery case was dismissed with prejudice, possibly because of a settlement, although the opinion in the case of the day does not say.

Matthew Haberkorn, on behalf of a putative class of Heckmann shareholders, then sued Xu in the District Court for violation of the federal securities laws. Haberkorn attempted to serve Xu in China via the Hague Service Convention, but the Chinese Central Authority returned the papers with a notation that the address provided for service was insufficient. Haberkorn then moved for leave to serve Xu with process by alternate means, namely, by service on the lawyers who had represented him in the Chancery case. This is typically a fine strategy as a matter of US law, because service on US counsel avoids implicating the Hague Service Convention (which applies only where there is occasion to transmit a document abroad), although it is always a good idea to consult with foreign counsel to ensure that substituted service such as this will not adversely affect the chances of getting the US judgment recognized and enforced when the time comes. But the Chancery counsel objected that the Chancery case had ended months earlier and that they had had no communications with Xu since then and no knowledge of Xu’s current whereabouts. On these facts, the court properly denied the motion for leave to serve the summons and complaint on Xu’s Chancery counsel. This aspect of the decision seems clearly correct, as service on such facts would not be reasonably calculated to provide actual notice of the case to Xu.

The judge went on, however, to approve Haberkorn’s alternative request to serve Xu by email, and thus waded into murkier waters. The judge found that the email address Haberkorn proposed to use was one that Xu was still using, and thus that Xu would receive notice of the summons and complaint. Let’s assume that that’s true. I don’t think the judge really came to grips with the difficulty here, which, in my view, is that sending Xu an email while he is in China is essentially transmitting the documents to him in China. That being the case, it seems to me that the Hague Service Convention should apply. Does the Convention countenance service by email? It seems to me that if it does, it does so only because email is within the definition of the postal channels referred to in Article 10. But China has objected to service by postal channels.

The judge concluded by returning to clear waters and entering an order compelling the Chancery counsel to provide Haberkorn with their most recent contact information for Xu. This seems entirely appropriate. And perhaps it is the answer to the service-by-email issue: the Convention does not apply when the defendant’s address is unknown, as long as the plaintiff has made diligent efforts to discover it. And if the Convention does not apply, then under Rule 4(f)(3) service by email is permissible as a matter of US law.

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