N.K.S. Distributors, Inc. ( 2014 )

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
N.K.S. DISTRIBUTORS, INC. and )
ROBERT F. TIGANI, SR., )
)
Plaintiffs, )
)
v. )
)
WHEELER, WOLFENDEN & ) C.A. No. N11C-11-146-JRJ
DWARES, P.A., )
)
Defendant )
)
v. )
)
CHRISTOPHER J. TIGANI, MY PAL )
LLC, MY PAL #2 LLC, and WORLD )
CLASS WHOLESALE, INC., )
)
Third-Party Defendants. )
)
OPINION
Date Submitted: June 23, 2014
Date Decided: September 26, 2014
Upon Plaintiffs’ Motion to Strike or Alternatively for Partial Summary Judgment:
DENIED.
Kevin William Gibson, Esquire, Gibson & Perkins P.C., 1326 King Street
Wilmington, DE 19899, Attorney for the Plaintiffs.
Thad J. Bracegirdle, Esquire, Wilks Lukoff & Bracegirdle LLC, 1300 N. Grant
Avenue, Suite 100, Wilmington, DE 19806, Attorney for Defendant-Third Party
Plaintiff Wheeler, Wolfenden & Dwares, P.A.
Jurden, J.
I. INTRODUCTION
Before the Court is Plaintiffs’1 Motion to Strike or Alternatively for Partial
Summary Judgment. Plaintiffs filed suit against Defendant Wheeler, Wolfenden &
Dwares, P.A. (“WWD”), alleging that WWD committed professional malpractice
while performing auditing services for N.K.S. Distributors, Inc. (“N.K.S.”).
Specifically, Plaintiffs allege that WWD negligently failed to discover the
misappropriation of millions of dollars from N.K.S. by Christopher Tigani (“Chris
Tigani”) during the time he served as N.K.S.’s President and later Vice President.
WWD filed a Third-Party Complaint against Chris Tigani and his
companies, My Pal LLC, MY Pal #2 LLC, and World Class Wholesale, Inc.
(collectively “My Pal”), and raised the affirmative defense of in pari delicto
seeking contribution from Chris Tigani and My Pal. WWD maintains that
Plaintiffs’ claims are barred in whole or in part by the equitable doctrine of in pari
delicto because Chris Tigani’s improper acts are imputed to N.K.S. by virtue of his
former position as a corporate officer and minority shareholder, such that Plaintiffs
are precluded from recovery as a fellow guilty party.
1
N.K.S., Robert F. Tigani, Sr. (“Bob Tigani”), and Robert F. Tigani, Sr. as Trustee of The
Irrevocable Trust for the Benefit of Robert F. Tigani (collectively “Plaintiffs”).
2
Plaintiffs ask the Court to strike WWD’s fourth affirmative defense raising
the doctrine of in pari delicto pursuant to Superior Court Civil Rule 12(f), or
alternatively, for partial summary judgment regarding this affirmative defense.
Plaintiffs argue that the affirmative defense of in pari delicto should be
stricken because: (1) the doctrine in the context of auditor malpractice is not
clearly settled in Delaware and is inapplicable in the present case; and (2) even if
the doctrine applies in an auditor malpractice case, Plaintiffs’ claims fall under the
“adverse interest exception” because Chris Tigani’s actions were purely self-
interested, in no way benefited N.K.S., and seriously damaged N.K.S..
Alternatively, Plaintiffs argue they are entitled to partial summary judgment on the
in pari delicto defense.
In response, WWD argues that Plaintiffs’ motion to strike is untimely
pursuant to Rule 12(f), and their request for summary judgment on the affirmative
defense of in pari delicto is premature. For the reasons that follow, Plaintiffs’
Motion to Strike or Alternatively for Partial Summary Judgment is DENIED.
II. FACTS
N.K.S. is a Delaware corporation which operates in the business of
wholesaling and distributing beer, wine, and other alcoholic beverages.2 Bob
2
Complaint at ¶4 (“Compl.”) (Trans. ID. 40893763).
3
Tigani is N.K.S.’s Chairman and President.3 Prior to his removal for financial
mismanagement in April 2009, Chris Tigani exercised day-to-day operational
control of N.K.S. as President and later Vice President for Sales and Marketing. 4
WWD is an accounting firm with its principal place of business in
Delaware.5 From approximately January 1, 2005 until May 1, 2009, N.K.S.
retained the services of WWD to audit its financial records and prepare financial
statements for N.K.S.’s officers and directors.6 Plaintiffs allege that during this
time Chris Tigani “pilfered N.K.S.’s corporate accounts and lines of credit
exclusively for his own benefit . . . [n]early destroying the company built by his
grand-father and father. . . .” 7
On January 6, 2009, Plaintiffs removed Chris Tigani from the N.K.S. Board
of Directors. 8 Subsequently, on January 19, 2009, Plaintiffs reappointed Chris
Tigani as President.9 On March 12, 2009, Plaintiffs removed Chris Tigani as
3
Id.
4
Id. at ¶¶23–27.
5
Id. at ¶5.
6
Id. at ¶¶3, 129, 141.
7
Plaintiffs’ Motion to Strike or Alternatively for Partial Summary Judgment at ¶3 (“Pl.’s Mot.”)
(Trans. ID 55431596). Plaintiffs allege that Chris Tigani used N.K.S. monies and credit to fund
his extravagant lifestyle, maintain multiple residences, purchase high-end clothing and
electronics, and charter private jets. Id. Plaintiffs also allege that through his own companies and
Third-Party Defendants My Pal, Chris Tigani illegally used N.K.S. funds and financing
improperly backed by N.K.S. assets to purchase the building and property which house N.K.S.’s
principal place of business, only to lease the property back to N.K.S. at an inflated price. Id.
8
Compl. at ¶24.
9
Id. at ¶25.
4
President and appointed him as N.K.S.’s Vice President of Sales and Marketing.10
Ultimately, on April 30, 2009, Plaintiffs removed Chris Tigani from all
employment positions with N.K.S.. 11
On May 1, 2009, having discovered some of Chris Tigani’s financial
mismanagement, N.K.S. terminated the services of WWD and shortly thereafter
hired Briggs, Bunting & Dougherty LLP (“BBD”) as N.K.S.’s outside auditor.12
According to Plaintiffs, they did not learn the full extent of Chris Tigani’s financial
mismanagement until after they hired BBD. 13
Plaintiffs allege that the BBD audit report (“BBD Audit”) and the expert
report of BBD’s Charles J. Bramley (“Bramley Report”) revealed that Chris
Tigani’s fraud “nearly destroyed N.K.S..” 14 According to Plaintiffs, the BBD
Audit revealed that N.K.S. was financially mismanaged while under Chris Tigani’s
management between 2005 and 2008. For example, as of December 31, 2008,
N.K.S. had a debt load of approximately $29,000,000.00, leaving it with no
available operating cash, and almost completely depleting all available lines of
credit.15 According to the Bramley Report, Chris Tigani converted $5,124,493.00
10
Id. at ¶26.
11
Id. at ¶27.
12
Id. at ¶¶129–130.
13
Id. at ¶¶131–133. BBD was specifically retained by N.K.S. to audit the statements of assets,
liabilities, and stockholders’ equity of N.K.S. and the related statements of revenues expenses,
retained earnings, and cash flows as of December 31, 2008. Id. at ¶131.
14
Id. at ¶133.
15
Id.
5
of N.K.S. funds to his own personal use.16 Additionally, Plaintiffs allege that, due
to Chris Tigani’s financial mismanagement and fraud, in March of 2009, N.K.S.
was forced into a Forbearance Agreement with its lenders, the terms of which
required N.K.S. to incur additional costs, expenses, and increased interest rates on
outstanding loans.17
Upon learning the full extent of Chris Tigani’s financial mismanagement
and fraud, N.K.S. filed a lawsuit in the Delaware Court of Chancery (“Chancery
Court Action”) against Chris Tigani to recover the misappropriated funds.18
Plaintiffs allege that WWD should have discovered the financial misdeeds of
Chris Tigani and alerted N.K.S.’s officers and directors, and its failure to do so
constitutes professional malpractice.
III. PARTIES’ CONTENTIONS
WWD argues that Plaintiffs’ motion to strike is untimely because under
“Rule 12(f) when a party seeks to strike an insufficient defense from a pleading . . .
it must do so by motion made . . . within 20 days after the service of the pleading
upon the party.” 19 WWD argues that Rule 12(f) required Plaintiffs to file the
instant motion to strike by no later than May 1, 2013, because WWD’s Amended
16
Id.
17
Id. at ¶123.
18
Id. at ¶134.
19
Defendant’s Answering Brief in Opposition to Plaintiffs’ Motion to Strike or Alternatively for
Summary Judgment at 5 (internal quotations omitted) (“Def.’s Ans. Br.”) (Trans. ID 55579168).
6
Answer was filed on April 12, 2013.20 Plaintiffs counter that under Rule 12(f) the
Court may strike an insufficient defense at any time. 21
With respect to WWD’s affirmative defense of in pari delicto, Plaintiffs
argue that no Delaware court has applied the doctrine of in pari delicto to an
auditor malpractice claim, and it is inapplicable in any event because of the
“adverse interest exception.” 22 Under Delaware agency law, “the knowledge of an
agent is generally imputed to his principal, except when the agent’s own interests
become adverse.” 23 According to Plaintiffs, a “malfeasant agent’s actions are not
imputed to the corporation and the doctrine of in pari delicto will not bar a
corporate-plaintiff’s suit where the ‘corporate agent responsible for the
wrongdoing was acting solely to advance his own personal financial interest, rather
than that of the corporation itself.’” 24 WWD counters that Plaintiffs’ motion for
partial summary judgment on WWD’s in pari delicto affirmative defense is
premature because there are genuine issues of material fact in dispute relating to
20
Id. Plaintiffs’ motion was not filed until May 12, 2014.
21
Plaintiffs’ Reply Brief in Support of Plaintiffs’ Motion to Strike or Alternatively for Partial
Summary Judgment at 1–2 (“Pl.’s Rep. Br.”) (Trans. ID 55632723).
22
Plaintiffs’ Opening Brief in Support of Plaintiffs’ Motion to Strike or Alternatively for Partial
Summary Judgment at 7–9 (“Pl.’s Br.”) (Trans. ID 55431596).
23
Id. at 9.
24
Id. at 11 (citing In re Am. Int'l Grp., Inc., Consol. Derivative Litig., 976 A.2d 872 (Del. Ch.
2009)).
7
the defense, and urges the Court to defer ruling until the parties have had an
opportunity to take discovery. 25
IV. STANDARD OF REVIEW
Pursuant to Superior Court Civil Rule 12:
Upon motion made by a party before responding to a pleading or, if
no responsive pleading is permitted by these Rules, upon motion
made by a party within 20 days after the service of the pleading upon
the party or upon the Court's own initiative at any time, the Court may
order stricken from any pleading any insufficient defense or any
redundant, immaterial, impertinent or scandalous matter. 26
As a general rule, a motion to strike an affirmative defense is not favored by
the courts.27 “Therefore, such a motion is granted only where the facts viewed most
favorably to the defendant cannot, as a matter of law, support the affirmative
defense[].” 28 In considering a motion to strike an affirmative defense, the Court
must determine whether the affirmative defense presents a “bona fide issue of fact
or law.”29
25
Def.’s Ans. Br. at 3–4, 9–11. WWD contends that the BBD Audit and Bramley Report have
not been authenticated or tested by WWD through depositions, and additional discovery is
necessary. Id. at 3–4. Additionally, WWD contends that while Chris Tigani claimed in the
Chancery Action that many of the expenditures in question were incurred for N.K.S.’s benefit,
the Delaware Court of Chancery never had an opportunity to resolve these fact disputes in light
of the parties’ settlement. Id. at 4.
26
Del. Super. Ct. Civ. R. 12.
27
Stinnes Interoil, Inc. v. Petrokey Corp., Diamond Industries, Inc., 1983 WL 412258, *1 (Del.
Super. 1983); McCormick v. Hoddinott, 865 A.2d 523, 525 (Del. Super. 2004) (“Motions to
strike are not favored and are granted sparingly, and then only if clearly warranted, with doubt
being resolved in favor of the pleading.”).
28
Stinnes, 1983 WL 412258, at *1 (internal quotations omitted). See also McCormick, 865 A.2d
at 525.
29
Stinnes, 1983 WL 412258, at *1.
8
On a motion for summary judgment, the Court views all facts in a light most
favorable to the non-moving party, and determines whether a genuine issue of
material fact exists.30 The Court will only grant summary judgment if no genuine
issue of material fact exists and the moving party is entitled to judgment as a
matter of law. 31 However, if the record reveals that material facts are in dispute,
or if the factual record has not been developed thoroughly enough to allow the
Court to apply the law to the facts of the case, then summary judgment must be
denied.32 “When a motion for summary judgment is supported by evidence
showing no material issues of fact, the burden shifts to the nonmoving party to
demonstrate that there are material issues of fact requiring trial.” 33
V. DISCUSSION
In pari delicto is Latin for “in equal fault.” 34 “[I]n pari delicto is a general
rule that courts will not extend aid to either of the parties to a criminal act or listen
to their complaints against each other but will leave them where their own act has
placed them.” 35 “[U]nder the in pari delicto doctrine, a party is barred from
30
Storm v. NSL Rockland Place LLC, 898 A.2d 874, 879 (Del. Super. 2005).
31
J.L. v. Barnes, 33 A.3d 902, 911 (Del. Super. 2011); Storm, 898 A.2d at 879.
32
Barnes, 33 A.3d at 911–12 (citing Ebersole v. Lowengrub, 180 A.2d 467, 470 (Del.1962)).
33
Urena v. Capano Homes, Inc., 901 A.2d 145, 150 (Del. Super. 2006) (citing Moore v.
Sizemore, 405 A.2d 679 (Del. 1979)).
34
In re Am. Int'l Grp., Inc., Consol. Derivative Litig.(AIG II), 976 A.2d 872, 882 (Del. Ch.
2009).
35
Id. (internal citations omitted).
9
recovering damages if his losses are substantially caused by activities the law
forbade him to engage in.”36
The question of whether the in pari delicto doctrine applies under Delaware
law to bar a corporation’s claim of professional malpractice against its outside
auditor has yet to be decided by a Delaware Court. However, in In re American
Intern. Group, Inc. v Greenberg (AIG I), the Delaware Court of Chancery,
applying New York law, discussed the in pari delicto doctrine in the context of
auditor malpractice. The Delaware Court of Chancery noted that New York courts
consistently apply the in pari delicto doctrine to bar claims against auditors in
situations where the auditors failed to detect or expose fraud committed by top
corporate managers.37 In dismissing the malpractice claims against AIG’s auditor,
the Court of Chancery “reluctantly” applied the New York law, expressing doubt
that “this rule of auditor immunity is . . . a sound one . . . .” 38 The Court went on to
state, “I expressly avoid any indication that the rule is one that Delaware
embraces.” 39
36
Id. at 883.
37
965 A.2d 763, 825 (Del. Ch. 2009).
38
Id. at 816–17 (“I then conclude that PWC is correct about the immunity that New York
appears to afford auditors in situations like this. I reach that conclusion reluctantly, because I do
not believe that this rule of auditor immunity is, in the blunt manner in which it has been
adopted, a sound one, and I expressly avoid any indication that the rule is one that Delaware law
embraces.”).
39
Id.
10
A motion to strike an affirmative defense is governed by Rule 12. WWD
contends that Plaintiffs’ motion to strike was untimely filed under Rule 12(f)
because it was not filed within 20 days after WWD filed its Amended Answer.40
Plaintiffs’ motion to strike is untimely under Rule 12(f). Although the Court
has the discretion under Rule 12(f) to strike an insufficient defense on its own
initiative at any time, 41 it declines to do so at this juncture. 42
Plaintiffs’ alternative motion for partial summary judgment on WWD’s in
pari delicto defense centers on whether Chris Tigani was acting solely to advance
his own personal financial interests, rather than those of N.K.S.. As noted above,
under Delaware agency law or the in pari delicto doctrine, the adverse interest
exception is seen as an exception to the general rule of imputation. 43 “That is,
where applicable, the adverse interest exception will stop the knowledge of the
corporation’s agents from being imputed to the corporation.” 44 Total abandonment
of the corporation’s interests is needed to invoke the adverse interest exception. 45
40
WWD filed its Amended Answer on April 25, 2013, and Plaintiffs filed the instant motion to
strike May 12, 2014, almost a year later.
41
Stinnes, 1983 WL 412258, at *1; Valley Forge Corp. v. Certain-Teed Corp., 1978 WL 973, at
*3 (Del. Ch. 1978).
42
Davenport Services, Inc. v. Cross, 2001 WL 34083817, *1 (Del. Super. 2001) (denying a
motion to strike on grounds that it was untimely).
43
AIG II, 976 A.2d at 891.
44
Id. at n.50 (“But regardless of whether the adverse interest exception is seen as an exception to
in pari delicto or to imputation, the effect is the same.”).
45
Id. at 891. In AIG II, the Delaware Court of Chancery declined to apply the adverse interest
exception to in pari delicto because the plaintiffs did not allege “the type of total abandonment of
the corporation’s interests traditionally needed to invoke the adverse interest exception.” Id.
11
Plaintiffs argue that there are no genuine issues of material fact in dispute
because: (1) the BBD Audit found that Chris Tigani left N.K.S. approximately in
$29,000,000.00 in debt; (2) the Bramley Report found that Chris Tigani converted
$5,124,493.00 of N.K.S. funds to his own personal use; and (3) N.K.S. was forced
into a Forbearance Agreement with its lenders, the terms of which required NKS to
incur additional costs, expenses, and increased interest rates on outstanding loans.
In response, WWD argues that material disputes of fact remain as to whether
N.K.S. may have derived some benefit from the acts of Chris Tigani because: (1)
among the issues never resolved at trial in the Chancery Action was whether, and
to what extent, the expenditures in question were pursued for the benefit of N.K.S.
and its business interests; and (2) the analysis in the Bramley Report was
inconclusive as to whether certain of the expenditures and transactions Chris
Tigani authorized were pursued for N.K.S.’s benefit. WWD further contends that
the BBD Audit and Bramley Report have not been authenticated or tested by
WWD through depositions, and additional discovery is necessary.
Viewing the facts in a light most favorable to WWD, because a genuine
issue of material fact exists as to whether N.K.S. may have derived some benefit
from the acts of Chris Tigani, Plaintiffs are not entitled to judgment as a matter of
law regarding WWD’s affirmative defense of in pari delicto.
Rather, the Court found that the plaintiffs only alleged that the top ranking AIG officials “had an
admixture of corporate and personal objectives in mind when they acted.” Id. at 892.
12
VI. CONCLUSION
For the foregoing reasons, Plaintiffs’ Motion to Strike or Alternatively for
Partial Summary Judgment is DENIED.
IT IS SO ORDERED.
_____________________________
Jan R. Jurden, Judge
13