Yavar Rzayev, LLC v. Roffman . ( 2015 )

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
IN AND FOR SUSSEX COUNTY
YAVAR RZAYEV, LLC, )
)
Plaintiff, )
)
v. ) C.A. No. S14L-12-035 MJB
)
MARVIN B. ROFFMAN, )
)
Defendant. )
Submitted: May 20, 2015
Decided: August 31, 2015
Upon Defendant’s Motion to Dismiss Counts V and VI of the Counterclaim, DENIED.
OPINION
Eric J. Monzo, Esq., Morris James LLP, 500 Delaware Avenue, Suite 1500, P.O. Box 2306,
Wilmington, Delaware, 19899, Attorney for Plaintiff.
Richard E. Berl, Jr., Berl & Feinberg, LLP, Dartmouth Business Center—Suite 3, 34382
Carpenter’s Way, Lewes, Delaware 19958, Attorney for Defendant.
BRADY, J.
1
I. INTRODUCTION
This is a breach of contract case in which a contractor is seeking a mechanic’s lien
against real property, alleging the owner failed to pay for renovations to the home. Plaintiff is
Yavar Rzayev, LLC, dba The Great House (“Plaintiff,” “Plaintiff LLC”). The owner and sole
member of Plaintiff is Yavar Rzayev (“Mr. Rzayev”). Defendant is Marvin B. Roffman
(“Defendant”), who is the owner of the residential real property in question, which is located
at 37240 Rehoboth Beach Avenue Extended, Rehoboth Beach, Delaware 19971 (the
“Property”).
Plaintiff contracted with Defendant to build an addition to Defendant’s house. It is
undisputed that, when construction was still ongoing, Defendant terminated Plaintiff.1
Plaintiff alleges that Defendant is liable in the amount of $139,773.95, which includes costs
for materials, labor, and interest charges. 2 Defendant has counterclaimed against Plaintiff,
alleging breach of contract, breach of the implied warranty of good quality and workmanlike
construction, and fraud. 3 Defendant alleges fraud against Plaintiff LLC (Count V) and against
Mr. Rzayev personally (Count VI). 4 This matter was referred to this Court on May 20, 2015. 5
Currently before the Court is Plaintiff’s motion to dismiss Counts V and VI. 6 For the reasons
detailed below, Plaintiff’s motion is DENIED.
1
Answer and Counterclaim, Item 5, at *7.
2
Complaint, Item 1, at 2.
3
Answer and Counterclaim, Item 5, at *8-12.
4
Answer and Counterclaim, Item 5, at *11-12.
5
Letter Assigning Matter to Judge Brady, Item 15.
6
Motion to Dismiss, Item 7.
2
II. DEFENDANT’S COUNTERCLAIMS FOR FRAUD
In Count V, Defendant alleges fraud against Plaintiff LLC. Defendant alleges that Mr.
Rzayev, acting on behalf of Plaintiff, represented that he would “personally oversee all
aspects of construction in order to produce a quality product.” 7 However, Defendant alleges
that Mr. Rzayev knew that he had multiple jobs in progress at the time the representation was
made, and the Mr. Rzayev knew or should have known that he could not oversee all aspects of
construction.
Defendant says that Mr. Rzayev made a false representation on behalf of Plaintiff, the
representation was intended to induce Defendant to execute a contract that “included an
exorbitant and confusing management fee[,] which was effectively 50% of the cost of time
and materials.” 8 Defendant says that he “relied upon those representations, executed the
contract, and allowed construction to proceed until it became apparent that much of the work
being done was defective and in some cases so completely useless that it had to be redone,
that the project was grossly over budget, and that [Defendant] was being improperly billed.”9
Defendant alleges that he “was damaged as a result of Plaintiff’s false representation.” 10
In Count VI, Defendant alleges fraud against Mr. Rzayev personally. Defendant says
that Mr. Rzayev is personally liable because he, “as principal of Plaintiff, LLC, directed,
ratified, approved, and consented to the fraudulent representations in Count V.” 11 Defendant
maintains that “the personal participation of Rzayev allows for the imposition of personal
7
Answer and Counterclaim, Item 5, at *11.
8
Answer and Counterclaim, Item 5, at *11.
9
Answer and Counterclaim, Item 5, at *11.
10
Answer and Counterclaim, Item 5, at *11.
11
Answer and Counterclaim, Item 5, at *12.
3
liability.” 12 In addition to ordinary damages, Defendant asks for costs, legal fees, and
punitive damages. 13
III. PLAINTIFF’S MOTION TO DISMISS FRAUD COUNTERCLAIMS
A. Motion to Dismiss Count V
Plaintiff argues that the fraud counterclaim against Plaintiff LLC should be dismissed
because (a) Defendant has failed to meet the heightened pleading standard for fraud under
Rule 9, and (b) the claim does not survive Rule 12(b) because Defendant has not pled the
elements of common law fraud.
Specifically, Plaintiff says that Defendant does not identify any particular
representations or omissions made by Plaintiff during the negotiation of the contract that were
false or made with reckless indifference to the truth. 14 Plaintiff further argues that even if a
false representation were alleged, Defendant did not allege the time or place where the
representation was made. 15 Plaintiff cites Nutt v. A.C. & S., Inc., 466 A.2d 18, 23 (Del. Super.
Ct. 1983).
Plaintiff argues that Count V also fails under Rule 12(b)(6) because Defendant has
failed to state a claim for common law fraud. 16 Plaintiff cites Dreisbach v. Walton, 2014 WL
4352100, *4 (Del. Super. Ct., Aug. 29, 2014), for the five elements of common law fraud that
the claimant must prove: (1) the defendant falsely represented or omitted facts that the
defendant had a duty to disclose; (2) the defendant knew or believed that the representation
was false or made the representation with a reckless indifference to the truth; (3) the
12
Answer and Counterclaim, Item 5at *12.
13
Answer and Counterclaim, Item 5, at *12.
14
Motion to Dismiss, Item 7, at 2.
15
Motion to Dismiss, Item 7, at 2.
16
Motion to Dismiss, Item 7, at 3.
4
defendant intended to induce the plaintiff to act or refrain from acting; (4) the plaintiff acted
in justifiable reliance on the representation; and (5) the plaintiff was injured by its reliance.17
Plaintiff says that Defendant’s counterclaim “fails to allege a single false representation or
omission by [Plaintiff].” 18
Plaintiff also says that “the agreement was reducing to writing[,] and Mr. Roffman
alleges non-performance as a reason for his failure to pay for work performed.” 19 Plaintiff
does not clearly explain the applicability of this statement, but the implied argument appears
to be that even if there were fraud concerns, they would not excuse Defendant from paying for
work that was performed.
B. Motion to Dismiss Count VI
Plaintiff argues that there is no personal liability for Mr. Rzayez 20 and contends that
individuals are not liable for their corporation’s actions merely by virtue of their corporate
positions.21 Plaintiff cites Gassis v. Corkery, 2014 WL 3565418, *5 (Del. Ch. July 21, 2014).
Plaintiff further argues that Defendant’s request for punitive damages is improper. 22 Citing
Jardel Co. v. Hughes, 523 A.3d 518 (Del. 1987), Plaintiff argues that an award of punitive
damages “is a showing of outrageous conduct with an evil motive or reckless indifference to
the rights of others.” 23 Plaintiff argues that Defendant has not alleged these characteristics in
the instant case. 24
17
Motion to Dismiss, Item 7, at 3.
18
Motion to Dismiss, Item 7, at 3.
19
Motion to Dismiss, Item 7, at 3.
20
Motion to Dismiss, Item 7, at 3.
21
Motion to Dismiss, Item 7, at 3-4.
22
Motion to Dismiss, Item 7, at 4.
23
Motion to Dismiss, Item 7, at 4.
24
Motion to Dismiss, Item 7, at 4.
5
IV. DEFENDANT’S RESPONSE TO PLAINTIFF’S MOTION TO DISMISS
First, Defendant argues that the failure to specifically plead “time or place” of the
fraudulent statements is not fatal to a fraud claim. 25 Defendant cites Tek Stainless Piping
Products v. Smith, 2013 WL 5755468 (Del. Super. Ct. Oct. 13, 2014), and argues that it is
sufficient that the allegations “state a sequence of events that places the misrepresentation in
context[,] and contains adequate detail of the affirmative representation that is the basis of the
fraud complaint.” 26 Defendant argues that, “[a]lthough no specific dates are listed, the
counterclaim identifies the parties to the conversations and sets out the context of the
discussions with sufficient particularity to place plaintiff on notice of the misconduct [that] is
charged.” 27
Tek relies on a 3rd Circuit case, Seville Industrial Machinery Corp. v. Southmost
Machinery Corp., 742 F.2d 786 (3rd Cir. 1984), which interprets nearly identical language in
Rule 9(b) of the Federal Rules. 28 The Seville court recognized that current rules of civil
procedure were designed to “eliminate the vagaries of technical pleading that once plagued
complainants, and to replace them with the considerably more liberal requirements of so-
called ‘notice’ pleading.” 29 The court reasoned that while allegations of “date, place[,] or
time” fulfill the function of particularly identifying the alleged fraudulent activity, “nothing in
the Rule requires them,” and complainants “are free to use alternative means of injecting
25
Response, Item 11, at *1.
26
Response, Item 11, at *2.
27
Response, Item 11, at *2.
28
Response, Item 11, at *2. Federal Rule 9(b) provides, “In alleging fraud or mistake, a party must state with
particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of
a person's mind may be alleged generally.” Delaware Rule 9(b) provides, “In all averments of fraud, negligence
or mistake, the circumstances constituting fraud, negligence or mistake shall be stated with particularity. Malice,
intent, knowledge and other condition[s] of mind of a person may be averred generally.”
29
Response, Item 11, at *2 (quoting Seville Industrial Machinery, 742 F.2d at 790).
6
precision and some measure of substantiation into their allegations of fraud.” 30 The Seville
rule has been widely accepted by Delaware courts. 31
Defendant maintains that his allegation of fraud against Plaintiff is “not complex” and
is sufficient to place Plaintiff on notice. 32 Defendant also says that his counterclaim
specifically alleges the five elements of fraud that Plaintiff references in the instant Motion to
Dismiss: (1) a false representation (¶ 31); (2) which Plaintiff knew or should have known was
false (¶ 32); (3) that Plaintiff intended to induce Defendant to act (¶ 33); (4) that Defendant
relied on the representation (¶ 34); and (5) that damages resulted (¶ 35). 33
Concerning Plaintiff’s argument that Mr. Rzayez cannot be personally liable for fraud,
Defendant argues that this is incorrect. Defendant cites the “personal participation doctrine,”
under which, Defendant argues, “[c]orporate officers, charged with affirmative official
responsibility in the management and control of the corporate business, cannot avoid personal
liability for wrongs committed by claiming that they did not authorize and direct that which
was done in the regular course of that business, with their knowledge and with their consent
or approval.” 34 Defendant cites T.V. Spano Building Corp., v. DNREC, 628 A.2d 53, 61 (Del.
Super. Ct. 1993); Heronemus v. Ulrick, 1997 WL 524127 (Del. Super. Ct. July 9, 1997); 2
Restatement of Agency 2d §§343-44; and Brasby v. Morris, 2007 WL 949485 (Del. Super. Ct.
Mar. 29, 2007). 35 Defendant cites Brasby as making clear that whether such personal liability
exists is a question of fact to be developed. 36 If there is a conceivable set of facts that might
30
Response, Item 11, at *2 (quoting Seville Industrial Machinery, 742 F.2d at 791).
31
See, e.g., Gregg v. Rowles, 1992 WL 364759, *2 (Del. Ch, Dec. 2, 1992); RHA Construction v. Scott
Engineering, 2011 WL 3908765, *5, n.49 (Del. Super. Ct. Sept. 1, 2011); Sammons v. Hartford Underwriters
Insurance, 2010 WL 1267222, *2, *4-6 (Del. Super. Ct. Apr. 1, 2010).
32
Response, Item 11, at *3.
33
Response, Item 11, at *3.
34
Response, Item 11, at *3.
35
Response, Item 11, at *3.
36
Response, Item 11, at *4 (citing Brasby, 2007 WL 949485, at *8).
7
be proven in support of the claim, then Rule 12(b)(6) dismissal is inappropriate. 37 Finally,
Defendant says that punitive damages are appropriate for a fraud claim. 38
V. LEGAL STANDARD
A motion to dismiss under Rule 12(b)(6) will be granted only when the court
determines “with reasonable certainty that, under any set of facts that could be proven to
support the claims asserted, the [complainant] would not be entitled to relief.” 39 For the
purpose of deciding the motion to dismiss, the court “accepts as true all well-pleaded
allegations in the complaint[] and must view all inferences drawn from the facts plead [sic] in
the light most favorable to the [complainant].” 40 “Delaware is a notice pleading jurisdiction
and the complaint need only give general notice as to the nature of the claim asserted against
the defendant in order to avoid dismissal for failure to state a claim.” 41
VI. FRAUD AND THE PERSONAL PARTICIPATION DOCTRINE
The following elements must be pled to state a claim for fraud: (1) the defendant
falsely represented or omitted facts that the defendant had a duty to disclose; (2) the defendant
knew or believed that the representation was false or made the representation with a reckless
indifference to the truth; (3) the defendant intended to induce the plaintiff to act or refrain
from acting; (4) the plaintiff acted in justifiable reliance on the representation; and (5) the
plaintiff was injured by its reliance. 42
37
Response, Item 11, at *4.
38
Response, Item 11, at *4.
39
Clinton v. Enter. Rent–A–Car, 977 A.2d 892, 895 (Del. 2009).
40
Savor, Inc. v. FMR Corp., 2001 WL 541484, *2 (Del. Super. Ct. 2001) aff'd, 812 A.2d 894 (Del. 2002).
41
Universal Capital Mgmt. v. Micco World, 2012 WL 1413598, *2 (Del. Super. Ct. Feb. 1, 2012).
42
Id.
8
Under Rule 9, “the circumstances constituting fraud, negligence[]or mistake shall be
stated with particularity.” 43 Generally, Rule 9 is interpreted to require that the complaint
“must state the time, place, and contents if the alleged fraud, as well as the individual accused
of committing the fraud.” 44 However, Delaware courts have adopted the reasoning of the
Third Circuit in Seville and consistently found that the date, place, and time allegations are not
required so long as the pleadings put defendants on notice of the misconduct with which they
are charged and protect defendants against false charges of immoral or fraudulent behavior. 45
A claim of fraud, if established, may give rise to punitive damages. 46
The personal participation doctrine holds that a corporate officer can be held liable for
his own wrongful acts. 47 Liability attaches for torts that corporate officers “commit,
participate in, or inspire, even though the acts are performed in the name of the
corporation.” 48 Courts have further clarified that individual liability attaches only where the
officer “directed, ordered, ratified, approved, or consented to” the wrongful act, 49 and that
liability is only for “misfeasance or active negligence” in the commission of the tort as
opposed to “nonfeasance or the omission of an act which a person ought to do.” 50
43
Super. Ct. Civ. R. 9(b).
44
Universal Capital Mgmt., 2012 WL 1413598 at *2.
45
Sammons v. Hartford Underwriters Insurance, 2010 WL 1267222, *4-5 (Del. Super. Ct. Apr. 1, 2010) (citing
Seville Industrial Machinery Corp. v. Southmost Machinery Corp., 742 F.2d 786 (3rd Cir. 1984)).
46
Nutt v. A. C. & S., 466 A.2d 16, 23 (Del. Super. Ct. 1983).
47
Brasby v. Morris, 2007 WL 949485, *8 (Del. Super. Ct. Mar. 29, 2007).
48
Heronemus v. Ulrick, 1997 WL 524127, *1 (Del. Super. Ct. July 9, 1997).
49
Brasby, 2007 WL 949485 at *8.
50
Heronemus, 1997 WL 524127 at *2.
9
VII. DISCUSSION
A. Count V
Claims for fraud are routinely upheld by Delaware courts even when there are defects
in the particularity of the pleadings. In Sammons v. Hartford Underwriters, the court denied
the defendant’s motion to dismiss a claim for fraud. 51 The plaintiffs were named insureds
under a Hartford automobile policy, who tendered claims for personal injury protection
(“PIP”) benefits. 52 When the insurer allegedly failed to pay in accordance with the policy, the
plaintiffs filed suit alleging consumer fraud. 53 The plaintiffs alleged, in relevant part, that
“the Hartford automobile insurance contracts at issue… contain an implied promise that
covered claims for PIP benefits under 21 Del C. §2118 will be paid by Hartford within thirty
days of receipt of the claim” and that “Hartford’s promise to pay covered claims for PIP
benefits within thirty days of receipt of the claim… was made in connection with[,] and at the
time of the sale of[,] each such contract.” 54
The insurer moved to dismiss, arguing that the fraud complaint did not meet the Rule
9 particularity standard, which the insurer argued required a statement of the time, place, and
contents of the false representations, as well as the identity of the person making the
representations. 55 Citing Seville, the court found that more specific details regarding time,
place, and contents were unnecessary; and that the complaint was adequate because it
provided detail sufficient to “place [the defendant] on notice of the precise misconduct with
51
Sammons, 2010 WL 1267222.
52
Id. at *1
53
Id.
54
Id. at *2.
55
Id.
10
which [the defendant is] charged” and to adequately protect the defendant “against
intentionally false charges.” 56
In Universal Capital, the court denied the defendants’ motion to dismiss the plaintiff’s
claim for fraud even though the court found it to be a “close call”. 57 The parties had
contracted for plaintiff to provide investors for the initial public offering of defendants’
company in exchange for warrants to purchase stock in the new public company. The
defendants terminated the contract, and plaintiff filed suit alleging breach of contract, fraud,
and various other claims. Many of the plaintiff’s claims related to a private offering
memorandum (“POM”), which defendants provided to plaintiff to use in soliciting investors.58
The plaintiff used the POM in soliciting investors, but later allegedly learned that the POM
contained “numerous material misrepresentations and omissions.” 59 The plaintiff alleged
fraud for misrepresentations in the POM document. 60 The defendants argued that the
plaintiff’s fraud claim should be dismissed because the plaintiff’s complaint “simply refers to
the POM and attributes misrepresentations to Defendant in a general way that is insufficent to
withstand dismissal.” 61
The court denied the defendants’ motion to dismiss even though the court found the
fraud pleading to be “thinly pled” in that plaintiffs provided only “scant detail” regarding the
specific allegedly false representations and only generally described the declarant as affiliated
56
Id. at *6 (citing Seville Industrial Machinery Corp. v. Southmost Machinery Corp., 742 F.2d 786 (3rd Cir.
1984)).
57
Universal Capital Mgmt., 2012 WL 1413598.
58
Id. at *1.
59
Id.
60
Id. at *3.
61
Id.
11
with defendants’ company. 62 The court held that while this case was a “close call,” the court
should allow the claim to proceed to allow for further development of the record. The court
reasoned that “[f]urther factual development through discovery will aid in determining
whether the fraud claim stands.” 63
Defendant’s position in the instant case is far stronger than that of the plaintiff in
Universal Capital. It is undisputed that Defendant has alleged all of the elements of fraud.
Plaintiff’s only argument is that Defendant did not meet the heightened pleading standard by
not specifying the allegedly fraudulent statements and by not specifying the time or place
where the representations were made. 64 Defendant has adequately alleged fraud, in a manner
sufficient to put Plaintiff on notice. Defendant has specified that Plaintiff allegedly
represented that he would personally oversee all aspects of construction. 65
Like in Sammons, the complainant has identified the alleged fraudulent
misrepresentations as occurring in the context of the contract negotiations. Defendant
implies, although he does not explicitly state, that these representations were made during the
negotiation of the October 10, 2013 contract. 66 Specifically, Defendant says that Mr. Rzayev
“represented that he would personally oversee all aspects of construction. Because of his
commitment to personal supervision, Rzayev explained that he would charge a 1/3
management fee, far more than other contractors in the area.” 67 While Defendant could have
made this passage more explicit, it is nonetheless sufficiently clear that (1) the specific
allegedly fraudulent statement was that Mr. Rzayev would personally oversee all aspects of
62
Id. at *4. The court exercised its discretion to convert the motion to dismiss into a motion for summary
judgment because the parties had already brought facts outside the complaint before the court during oral
argument and briefing. Id. at *5.
63
Universal Capital Mgmt., 2012 WL 1413598, at *4.
64
Motion to Dismiss, Item 7, at 2.
65
Answer and Counterclaim, Item 5, at *11.
66
Answer and Counterclaim, Item 5, at *11.
67
Answer and Counterclaim, Item 5, at *11.
12
construction; (2) the statement was made during the negotiation of the October 10, 2013
contract; and (3) the statement was allegedly made to induce Defendant to agree to the terms
of the contract including the higher management fee. This level of detail is sufficient to put
Plaintiff on notice of the alleged wrongful conduct.
B. Count VI
Plaintiff is correct that corporate officers are not liable for their corporation’s actions
merely by virtue of their corporate positions. 68 But when a corporate officer directly
participates in the tortious conduct, personal liability may be imposed, even when the officer
is acting on behalf of the corporation. 69 Delaware courts have held that the officer’s mere
knowledge of tortious activity is not sufficient. 70 Individual liability attaches only where the
officer “directed, ordered, ratified, approved, or consented to” the wrongful act. 71 In other
words, corporate officers are not derivatively liable for the torts of the corporation; however,
corporate officers are directly liable for the torts they personally commit, whether on behalf
of the corporation or otherwise.
In Brasby v. Morris, defendant Leroy Morris, a natural person, was an employee,
officer, agent, and director of the co-defendant company, a corporation that erects
prefabricated and modular homes. 72 The plaintiff contracted with the company to have a
home erected on his property. When the plaintiff discovered that no physical structure had
been erected at the site, after Mr. Morris allegedly repeatedly assured him that progress was
68
Motion to Dismiss, Item 7, at 3-4 (citing Gassis v. Corkery, 2014 WL 3565418, *5 (Del. Ch. July 21, 2014).
69
Heronemus, 1997 WL 524127, at *4 (explaining that the personal participation doctrine assigns liability to
corporate officers for torts that they “commit, participate in, or inspire, even though the acts are performed in the
name of the corporation”).
70
Id. at *2.
71
Brasby, 2007 WL 949485 at *8.
72
Id.
13
being made, plaintiff filed suit against the corporation and against Mr. Morris individually,
alleging breach of contract, negligence, and fraud. 73 Denying summary judgment, the court
found that the plaintiff had “alleged facts sufficient to move forward with a claim of fraud
against Leroy Morris individually” under the “personal participation doctrine” because
plaintiff asserted that Mr. Morris personally “knowingly made false statements to Plaintiff[,]
which Plaintiff in turn relied upon, to his detriment.” 74
Like in Brasby, Defendant has specifically alleged that the statements in question were
made by Mr. Rzayev himself, meeting the requirement that the officer “directed, ordered,
ratified, approved, or consented to” the wrongful act. 75 Defendant has alleged that Mr.
Rzayev made affirmative representations, meeting the requirement that liability only be
imposed for “misfeasance or active negligence” as opposed to “nonfeasance or the omission
of an act which a person ought to do.” 76 Further, whereas Brasby concerned a motion for
summary judgment, we are at the motion to dismiss stage, which requires that the claim be
allowed to stand so long as there is some conceivable set of facts that could be proven to
support the claims asserted such that the claimant would be entitled to relief. 77 The Court
finds that Defendants allegations have met this liberal standard.
73
Id. at *2.
74
Id. at *8.
75
Brasby, 2007 WL 949485 at *8.
76
Heronemus, 1997 WL 524127 at *2.
77
Clinton, 977 A.2d at 895.
14
VIII. Conclusion
Keeping in mind the high bar for 12(b)(6) dismissal and considering the allegations in
the light most favorable to the party making the claim, Plaintiff’s Motion to Dismiss Counts V
and VI is DENIED. This order is entered without prejudice for renewal of the claims made
herein after discovery has been conducted.
IT IS SO ORDERED.
________/s/______________
M. JANE BRADY
Superior Court Judge
15