A Delaware Chancery Court judge has granted a "mulligan" to plaintiffs who ran into a novel procedural issue in their $1.1 billion negligent misrepresentation suit against KPMG and its affiliates.

Vice Chancellor Morgan T. Zurn on Thursday allowed Otto Candies and other plaintiffs to file a new complaint despite their failure to comply with a court rule governing amended complaints in the case, which accuses KPMG of failing to detect a massive financial fraud by Citigroup Inc. and a KPMG client in Latin America.

Zurn cited the suit's "unique facts," as well as broader policy considerations, in declining to dismiss the case with prejudice.

According to court documents, Otto Candies LLC originally filed its suit in Delaware Superior Court, where the defendants moved to it dismiss it for failure to state a claim. After extensive briefing on complex jurisdictional disputes, Judge Paul R. Wallace held that the Superior Court lacked subject matter jurisdiction over the claims.

Otto Candies, which had opted to oppose the motion, transferred its case, with minor amendments, to the Chancery Court, where Zurn in February dismissed the claims. That ruling, however, exposed a question that Zurn said had never before been addressed in a written Delaware decision: whether the Chancery Court's specific rules on amendments apply when parties transfer a fully briefed motion from another Delaware state court.

According to Zurn's ruling Thursday, Chancery Court Rule 15(aaa) requires plaintiffs facing a motion to dismiss to choose between amending their complaint or standing firm and facing the possibility of dismissal with prejudice. The Superior Court, she said, has no corollary requirement.

Zurn held for the first time that the rule did apply to Otto Candies' case and found the plaintiffs to be in violation of the Chancery Court mandate. However, Zurn said it would be "unduly penal" to dismiss the case with prejudice in light of the previously undecided procedural question.

"Because the parties were the first to confront this issue, the interests of justice require a mulligan," she said, using the golf term for do-over in a 10-page memorandum opinion, which applied a good-faith exception to the rule.

She added: "Although plaintiffs would have been wise to seek clarification on the application of Rule 15(aaa), or even seek leave to amend out of caution in light of their multiple motions for judicial notice contemplating stronger pleadings, I recognize that the parties were in uncharted waters."

The ruling, however, came with a warning to future litigants that next time the court would not be so lenient. Zurn said the rule is meant to limit the number of times the Chancery Court is required to rule on multiple motions to dismiss the same action.

"Now that the issue has been sorted out, I would not give the same latitude to future parties in similar situations," she said.

Attorneys for both sides were not immediately available Friday to comment on the ruling.

Otto Candies and the plaintiffs are represented by Terry L. Wit, A. William Urquhart, Juan P. Morillo, Derek L. Shaffer and Lauren H. Dickie of Quinn Emanuel Urquhart & Sullivan in San Francisco and Washington, D.C., and David E. Ross of Ross, Aronstam & Moritz in Wilmington.

KPMG is represented by Robert A. Scher and Jonathan H. Friedman of Foley & Lardner in New York and Todd Schiltz of Drinker Biddle & Reath in Wilmington.

The case is captioned Otto Candies v. KPMG.