Surf's Up Legacy Partners, LLC v. Virgin Fest LLC ( 2021 )

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
SURF’S UP LEGACY PARTNERS, LLC )
(f/k/a KAABOO, LLC), EVENTPRO )
MANAGEMENT, LLC (f/k/a KAABOO )
MANAGEMENT, LLC), EVENTPRO )
PRODUCTION SERVICES, LLC (f/k/a )
KB EVENTPRO, LLC), EVENTPRO )
DEL MAR, LLC (f/k/a KAABOO - )
DEL MAR, LLC), EVENTPRO )
SERVICES, LLC (f/k/a KAABOOWORKS )
SERVICES, LLC), EVENTPRO )
CONTRACT SERVICES, LLC (f/k/a )
KAABOO CONTRACT SERVICES, LLC), )
and EVENTPROWORKS, LLC (f/k/a )
KAABOOWORKS, LCC), )
)
Plaintiffs-Counterclaim Defendants, ) C.A. No. N19C-11-092
) PRW CCLD
v. )
)
VIRGIN FEST, LLC, VFLA EVENTCO, )
LLC, and KSD OWNCO, LLC (f/k/a SAN )
DIEGO FEST OWNCO, LLC), )
)
Defendants-Counterclaim Plaintiffs, )
)
VIRGIN FEST INVESTCO, LLC, )
)
Defendant-Counterclaim Plaintiff- )
Counterclaim Defendant. )
Submitted: December 9, 2020
Decided: January 13, 2021
Upon Defendant-Counterclaim Plaintiff-Counterclaim Defendant Virgin Fest
Investco, LLC’s Motion to Dismiss
GRANTED
Upon Plaintiffs-Counterclaim Defendants Surf’s Up Legacy Partners, LLC, et al.,
Counterclaim Plaintiff-Counterclaim Defendant Bryan Gordon, and Counterclaim
Defendants Robert Walker and Seth Wolkov’s Motion to Dismiss
DENIED
MEMORANDUM OPINION AND ORDER
Theodore A. Kittila, Esquire, James G. MacMillan, III, Esquire, HALLORAN
FARKAS + KITTILA LLP, Wilmington, Delaware, Attorneys for Plaintiffs-
Counterclaim Defendants Surf’s Up Legacy Partners, LLC, et al., Counterclaim
Plaintiff-Counterclaim Defendant Bryan Gordon, and Counterclaim Defendants
Robert Walker and Seth Wolkov.
Eric M. George, Esquire (pro hac vice), Kim S. Zeldin, Esquire (pro hac vice),
BROWNE GEORGE ROSS LLP, Los Angeles, California, Attorneys for Plaintiffs-
Counterclaim Defendants Surf’s Up Legacy Partners, LLC, et al.
Robert K. Beste, Esquire, Jason Z. Miller, Esquire, SMITH, KATZENSTEIN &
JENKINS LLP, Wilmington, Delaware, Attorneys for Defendants-Counterclaim
Plaintiffs Virgin Fest, LLC, et al., and Defendant-Counterclaim Plaintiff-
Counterclaim Defendant Virgin Fest Investco, LLC.
Marvin S. Putnam, Esquire (pro hac vice), Jessica Stebbins Bina, Esquire (pro hac
vice), R. Peter Durning, Jr., Esquire (pro hac vice), LATHAM & WATKINS LLP,
Los Angeles, California, Attorneys for Defendant-Counterclaim Plaintiff-
Counterclaim Defendant Virgin Fest Investco, LLC.
WALLACE, J.
This decision is a mash-up comprised of two tunes from a litigation
soundtrack produced by the breakdown of a business relationship between the
entities that orchestrated the KAABOO and Virgin Fest live music and outdoor
entertainment festivals. Seven Delaware limited liability companies that planned
and operated events under the KAABOO label (collectively, the “KAABOO
Entities”) allege Virgin Fest Investco, LLC (“Investco”), a Delaware limited liability
company, tortiously interfered with the contractual network they created with
Investco’s affiliates until they were silenced into complete non-performance. In one
of many responses, Investco, together with those affiliates (also Delaware limited
liability companies—collectively, the “Virgin Fest Entities”), allege three of the
KAABOO Entities’ managers, Bryan Gordon, Robert Walker, and Seth Wolkov
(human beings—collectively, the “Managers”) engaged in various acts of fraud
causing the Virgin Fest Entities to deal with the KAABOO Entities when they
otherwise wouldn’t have.
In the first motion (“Motion I”), Investco seeks dismissal of the tortious
interference claim on affiliate privilege grounds. The affiliate privilege doctrine
immunizes a controller from tort liability for its affiliates’ contractual breaches. The
privilege is not absolute, however, and will not protect a controller that induces its
affiliates’ breaches in bad faith. Seizing on this exception, the KAABOO Entities
insist their allegations show Investco’s bad faith. But the Court doesn’t hear it.
-1-
Accordingly, Motion I is GRANTED and that tortious interference claim is
DISMISSED.
In the second motion (“Motion II”), the KAABOO Entities and Managers
seek dismissal of three fraud-based accusations, contending that contractual
provisions bar fraud claims against the Managers and alternatively, that the Virgin
Fest Entities do not allege fraud with Rule 9(b) particularity. Applying the well-
settled plain meaning analysis, the Court finds that those provisions unambiguously
permit the fraud counterclaims to proceed against the Managers. Facing no other
stops, the Court also finds that the Virgin Fest Entities have satisfied Rule 9(b)’s
heightened pleading standard and allows those counterclaims to sound another day.
Accordingly, Motion II is DENIED.
-2-
I. FACTUAL BACKGROUND
A consolidated disposition resolving dueling (but not cross) motions to
dismiss requires a bit of range to score. The allegations blaring from both sides are
divergent and hotly-contested and one may rightly think the stories hopelessly
disharmonious. But, the Court must here accept much of each tale as true, and will
shepherd the opposing views of the facts within neighboring fences for clarity’s
sake.
A. MOTION I’S ALLEGATIONS – THE KAABOO VIEW.
The KAABOO Entities were formed to plan and operate live festivals and
sought to strengthen their hold on that industry.1 In 2017, they recruited Jason Felts
as a director to leverage his influence within the Virgin Group conglomerate and
open a pathway to collaboration with those firms.2 This led to the creation of the
three defendant Virgin Fest Entities, including Virgin Fest, LLC, which wholly owns
the others and is managed solely by Investco.3 A joint venture with those newly-
developed counterparties had been conceived to expand KAABOO’s audiences by
advertising live events under Virgin Group branding in market segments previously-
1
The KAABOO Entities’ Complaint ¶¶ 22-23 (D.I. 1) (“KAABOO Compl.”).
2
Id. ¶ 29.
3
Id. ¶¶ 30-31.
-3-
unexplored.4 Despite its potential, though, the common enterprise was met with
hardship that ultimately would clarion the beginning of its end.5
In 2019, the KAABOO Entities suffered a series of reversals and failed to
attract investors.6 To avoid a liquidity crisis, the KAABOO Entities concluded a
fundamental change was in order.7 Instead of running their own live events, the
KAABOO Entities decided they should manage the live events of others.8
Achieving this objective would require the transfer of overperforming assets,
including their most lucrative event, to a willing buyer. 9 And so, they turned to the
Virgin Fest Entities.10
The parties executed a Letter of Intent (“LOI”) to sell the Virgin Fest Entities
a number of upcoming or planned festivals and a license to use KAABOO-related
intellectual property for those events.11 Among the terms were multi-million dollar
4
Id.
5
Id. ¶¶ 35-36.
6
Id.
7
Id.
8
Id.
9
Id. ¶¶ 36-37.
10
Id. ¶¶ 39-40.
11
Id.
-4-
payments from the Virgin Fest Entities and a management arrangement whereby the
KAABOO Entities would run the events the Virgin Fest Entities purchased.12 The
transaction was scheduled to close shortly before the KAABOO Entities’ most
lucrative festival—on the same day many of the bills necessary to secure artists and
vendors came due.13
Between the LOI and closing date, the KAABOO Entities’ financials
deteriorated further.14 This incited the Virgin Fest Entities to insist on aggressive,
risk-allocating terms.15 To that end, the transaction was renegotiated to provide
assignment of additional KAABOO assets in exchange for a more elaborate event
management scheme,16 and to convey non-voting Investco stock to the KAABOO
Entities.17 The parties memorialized these and other LOI terms in a barrage of
interrelated agreements (collectively, the “Transaction Contracts”) to which
Investco was not a co-signer.18
12
Id. ¶ 41.
13
Id. ¶¶ 42-43.
14
Id. ¶ 45.
15
Id. ¶¶ 47-48.
16
Id.
17
Id. ¶ 49.
18
Id. ¶¶ 59-71.
-5-
But, the deals didn’t close as planned.19 The Virgin Fest Entities failed to
obtain funding necessary for consummating the acquisition, which in turn made the
KAABOO Entities miss payments to trade creditors who were threatening to cease
preparations.20 Nevertheless, the closing was rescheduled to the festival’s eve.21 But
too, on that day, the KAABOO Entities received another serving of hard times and
hard dealing.22 The Virgin Fest Entities announced that third-party financing had
fallen through and thus insisted on more onerous terms, including a personal
guarantee from one of the KAABOO Entities’ directors.23 When the dust settled,
the transactions had been completed and virtually all of the KAABOO Entities’
assets were sold.24
The show would go on, however.25 About a week after closing, the Virgin
Fest Entities began requesting uncompensated services from the KAABOO Entities
not contemplated by their agreements.26 The Virgin Fest Entities also took issue
19
Id. ¶ 53.
20
Id. ¶¶ 53-54.
21
Id. ¶ 58.
22
Id. ¶¶ 55-57.
23
Id.
24
Id. ¶ 58.
25
Id. ¶¶ 72-84.
26
Id. ¶¶ 72-73.
-6-
with employee layoffs and staffing changes without expressing an interest in those
matters before.27 The crescendo: the Virgin Fest Entities questioned the KAABOO
Entities’ exposure, asserting that the latter omitted integral liabilities from their
balance sheets when conducting due diligence.28 Most of these objections were
lodged in a written demand, which the KAABOO Entities construed as a repudiation
of the parties’ bargain.29 Out of that interpretation the subject of Motion I grows.
And now, the other version.
B. MOTION II’S ALLEGATIONS – THE VIRGIN FEST VIEW.
On March 16, 2016, Gordon and Wolkov, the founders of KAABOO, met
with Felts, the founder of Virgin Produced (“VP”), to discuss the prospect of a
deeper foray into the entertainment industry.30 Gordon thought his expertise on
corporate governance complemented Felts’s marketing knowledge—a combination
Gordon believed would be advantageous to both firms.31 After this initial meeting,
27
Id. ¶¶ 74-76.
28
Id. ¶¶ 80-81.
29
Id. ¶ 77.
30
The Virgin Fest Entities’ Complaint ¶¶ 42-45 (D.I. 13) (“Virgin Fest Compl.”).
31
Id. ¶¶ 42-43.
-7-
Gordon became the controlling stockholder of VP and Felts took a position on
KAABOO’s board.32
In the summer of 2018, Felts proposed a partnership between the Virgin Fest
and KAABOO Entities. Gordon accepted.33 The deal conveyed 50-50 equity in
Virgin Fest, LLC to Gordon and Felts.34 Gordon stood as a manager of both the
KAABOO Entities and Virgin Fest, LLC after closing.35 Wolkov remained solely
with the KAABOO Entities.36 And Walker became the KAABOO Entities’ Chief
Financial Officer.37
Around September 2018, the parties brainstormed fundraising ideas for lifting
the groups off of the ground.38 Felts suggested a courtship of Marc Hagle and his
wife, two affluent benefactors.39 Gordon did secure capital and ownership interests
32
Id. ¶¶ 44-45.
33
Id. ¶ 46.
34
Id.
35
Id.
36
Id.
37
Id.
38
Id. ¶¶ 47-49.
39
Id.
-8-
from Hagle by pitching KAABOO’s success.40 But, as it turned out, he did so by
inflating his pitch with false records.41
The KAABOO Entities soon began spiraling downward. In February 2019,
KAABOO Cayman co-hosted a festival with the Dart Group that produced an
appreciable loss.42 Gordon assured investors that the event was funded with equity.43
In fact, it was funded with debt evidenced by promissory notes tying the KAABOO
Entities to the festival’s entire $1.8 million balance.44
The Managers concealed the impact of these and other losses from Felts and
Hagle when, in June 2019, Gordon invited the Virgin Fest Entities to buy the
KAABOO Cayman festival without mentioning its poor health.45 When Hagle asked
Gordon to provide financial records to aid in evaluating the proposal, Gordon
declined and focused on the KAABOO Entities’ long-term gains.46 When pushed
40
Id.
41
Id.
42
Id. ¶¶ 50-51.
43
Id.
44
Id.
45
Id. ¶¶ 52-53.
46
Id.
-9-
further, Gordon noted “leasing” problems with the Dart Group, abandoned the
concept and devised a different one.47
In the summer of 2019, Gordon told Felts and Hagle that the Virgin Fest
Entities should acquire the Del Mar festival because Gordon was no longer interested
in owning it.48 During a June 24, 2019 meeting, the Managers presented records—
prepared mostly by Walker—representing that the Del Mar festival generated $24.5
million in gross receipts, turned a $275,000 profit and had unencumbered cash
flow.49 But, the records were based on projections, rather than current standing, and
questionable valuation assumptions (e.g., there would be no production costs to the
festival going forward).50 The records also reflected that Gordon overstated the Del
Mar festival’s goodwill.51 According to interested buyers, the festival was worth no
more than $6.5 million, though Gordon said it was worth at least $20 million.52
Citing a conflict of interest, Gordon left the KAABOO Entities’ side of the
table to Wolkov, who continued negotiations with Felts and Hagle.53 But Gordon
47
Id. ¶¶ 53-54.
48
Id. ¶ 54.
49
Id. ¶¶ 55-60.
50
Id.
51
Id.
52
Id.
53
Id.
-10-
still participated in drafting the parties’ non-binding LOI. On August 13, 2019,
about one month before the Del Mar festival, the parties nearly finalized the LOI. It
provided for the Virgin Fest Entities’ potential acquisition of the Del Mar festival,
two KAABOO startups and all of the KAABOO Entities’ tangible and intangible
assets.54 At this time, Gordon also demanded the Virgin Fest Entities place a $2
million deposit to finance the Del Mar festival’s overhead.55 The Virgin Fest Entities
paid the deposit on the condition that it be recouped from the festival’s proceeds. 56
But the Managers siphoned that capital out of the KAABOO Entities and didn’t pay
its creditors or the Virgin Fest Entities.57
On September 4, 2019, and with time of the essence, Gordon then urged the
Virgin Fest Entities to pay $6.5 million to cover additional expenses.58 Gordon
assured the Virgin Fest Entities the increase would be a short-term loan repayable
once Gordon secured capital from Fortress, a private equity firm. 59 Gordon did not
allow any Virgin Fest Entities to contact Fortress on the parties’ behalves.60 Gordon
54
Id. ¶¶ 61-63.
55
Id. ¶ 64.
56
Id. ¶¶ 64-65.
57
Id. ¶¶ 89, 212-13.
58
Id. ¶¶ 66-67.
59
Id. ¶ 67.
60
Id. ¶ 69.
-11-
further stated that Fortress would supply versatile debt that could be readily
converted into equity.61 Coupled with the Virgin Fest Entities’ immediate
investment, Gordon insisted that no suppliers would be left unpaid.62 But Gordon
never obtained convertible securities and none of the vendors was paid.63
On September 12, 2019, the Virgin Fest Entities accepted most of the LOI’s
terms by relying on budgets and pro-forma documents provided by the Managers
during due diligence.64 Too, on that day, the parties entered into the Transaction
Contracts.65 One of these Contracts was the Asset Purchase Agreement (“APA”).66
It was signed by the Virgin Fest Entities, the KAABOO Entities (through Wolkov),
and Gordon personally, and specified the transfer of assets from the KAABOO to
the Virgin Fest Entities.67 In the APA, the KAABOO Entities represented that they
had disclosed all material liabilities in their organizational family.68 This
61
Id. ¶ 67.
62
Id.
63
Id. ¶¶ 70-71.
64
Id. ¶¶ 72-73.
65
Id. ¶¶ 74-83.
66
Id. ¶¶ 76-77.
67
Id. Investco did not sign the APA.
68
Id.
-12-
representation was the APA’s linchpin, as the Virgin Fest Entities never agreed to
purchase junk assets.69 The APA also had no anti-reliance provision; so the Virgin
Fest Entities never second-guessed the KAABOO Entities’ documents.70
The KAABOO Entities apparently lied about their exposure. Immediately
after closing, the Virgin Fest Entities discovered undisclosed liabilities that the
Managers concealed during negotiations and omitted in due diligence, including:
1) unpaid bills from dozens of Del Mar festival creditors now seeking to
attach the Virgin Fest Entities’ newly-owned assets;
2) an active lawsuit against some KAABOO Entities, in which the
Virgin Fest Entities were named subsequently as fraudulent
transferees;
3) a breached lease of public land that was under investigation by the
California Attorney General’s Office;
4) the outstanding $1.8 million debt from the Cayman festival;
5) an outstanding $4 million debt from a KAABOO Texas festival; and
6) at least four other active lawsuits brought by former constituents and
counterparties against the KAABOO Entities.71
69
Id.
70
Id.
71
Id. ¶¶ 85-86, 89, 138-67.
-13-
The Virgin Fest Entities communicated their concerns to the KAABOO
Entities, which the latter interpreted as a breach of the Transaction Contracts.72 In
due course, the KAABOO Entities sued. The Virgin Fest Entities answered with the
suite of fraud-based counterclaims pertinent to Motion II.
C. THE CLAIMS FACING THE MUSIC.
1. Motion I – Tortious Interference with Contractual Relations.
The KAABOO Entities bring three claims, but only one is relevant here—
tortious interference with contractual relations.73 In that count and based on the
facts recited above, they allege Investco “intentionally and without justification
interfered” with their contracts through its “direct control” over the Virgin Fest
Entities stemming from its status as the managing member of their sole owner.74
Investco responds with a 12(b)(6) dismissal motion,75 asserting the count fails to
state a claim because of a privilege to participate “justifiably” in its affiliates’
business affairs free of tort liability.76
72
KAABOO Compl. ¶ 94.
73
Id. ¶¶ 93-98.
74
Id. ¶¶ 96-97.
75
Investco Motion to Dismiss (D.I. 14).
76
See generally Investco Opening Brief (D.I. 15).
-14-
2. Motion II – Extra-Contractual Fraud, Intra-Contractual Fraud &
Civil Conspiracy to Commit Fraud.
In their ninth counterclaim and based on the pre-closing conduct recounted
above, the Virgin Fest Entities allege the Managers committed extra-contractual
common law fraud, fraudulent inducement, fraudulent misrepresentation and
fraudulent concealment.77 Specifically, they claim:
1) Gordon intentionally concealed the KAABOO Entities’ impaired
financials to coax the Virgin Fest Entities into believing the deal would
be liability-free;
2) Gordon misled the Virgin Fest Entities about his purpose in selling the
assets, which was not due to his lack of interest in owning them, but
rather was due to their underperformance and exposure to undisclosed
liabilities;
3) The Managers provided incomplete and future-oriented valuation data
to obfuscate or totally hide present losses;
4) Gordon informed the Virgin Fest Entities falsely that the additional
$6.5 million fee would cover all vendor bills;
5) Gordon misled the Virgin Fest Entities into believing he would obtain
convertible debt from Fortress to assist in reducing their expenses;
6) Gordon failed to inform the Virgin Fest Entities that the purchase price
would not cover all current liabilities;
7) The Managers concealed the numerous claims against the KAABOO
Entities to which the Virgin Fest Entities became exposed after closing;
8) Walker, as the KAABOO Entities’ CFO, aided Gordon and Wolkov in
providing whitewashed financial statements to the Virgin Fest Entities;
77
Virgin Fest Compl. ¶¶ 206-18.
-15-
9) The Managers misappropriated the Virgin Fest Entities’ $2 million
down payment; and
10) The Managers conducted thin due diligence so the Virgin Fest Entities
would accept the KAABOO Entities’ representations despite their
falsity.78
In their tenth counterclaim and based on the pre-closing conduct recounted
above, the Virgin Fest Entities allege Gordon and Wolkov committed intra-
contractual “Fraud” as defined by the APA.79 In claiming so, they restate the
allegations asserted in their ninth counterclaim.
Finally, in their eleventh counterclaim and based on the pre-closing conduct
recounted above, the Virgin Fest Entities allege the Managers conspired to defraud
them.80 In claiming so, they restate the allegations asserted in their ninth
counterclaim.
Like their adversary, the KAABOO Entities and Managers respond with a
12(b)(6) dismissal motion,81 arguing these counterclaims are barred by the APA’s
terms and in any event fail to allege fraud with Rule 9(b) particularity. 82
78
Id.
79
Id. ¶¶ 219-25.
80
Id. ¶¶ 226-30.
81
See KAABOO Motion to Dismiss (D.I. 103).
82
See generally KAABOO and Managers’ Opening Brief (D.I. 104) (“KAABOO & Managers
Op. Br.”)
-16-
III. LEGAL STANDARD
“The standard of review on a motion to dismiss is derived from Superior Court
Civil Rule 12(b)(6), which provides” that a party may so move “if the claimant fails
‘to state a claim upon which relief can be granted.’”83 In considering a motion to
dismiss, the Court must: “(1) accept all well pleaded factual allegations as true,
(2) accept even vague allegations as ‘well pleaded’ if they give the opposing party
notice of the claim, (3) draw all reasonable inferences in favor of the non-moving
party, and (4) [not dismiss the claim] unless the [claimant] would not be entitled to
recover under any reasonably conceivable set of circumstances.”84
But the benefits of liberal construction afforded a non-movant do not extend
to “conclusory allegations that lack specific supporting factual allegations.”85
Indeed, the Court “is not required to accept every strained interpretation of the
allegations” a non-movant proposes.86 And so, the Court will dismiss if the non-
movant fails to plead specific allegations supporting an element of its claim or where
83
Brightstar Corp. v. PCS Wireless, LLC, 2019 WL 3714917, at *2 (Del. Super. Ct. Aug. 7,
2019) (quoting Super. Ct. Civ. R. 12(b)(6)).
84
Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Holdings LLC, 27 A.3d 531, 535 (Del.
2011).
85
Ramunno v. Cawley, 705 A.2d 1029, 1034 (Del. 1998).
86
Malpiede v. Townson, 780 A.2d 1075, 1083 (Del. 2001).
-17-
no reasonable, i.e., unstrained, interpretation of the facts alleged reveals a remediable
injury.87
IV. DISCUSSION
A. TORTIOUS INTERFERENCE AND THE AFFILIATE PRIVILEGE (MOTION I).
“Under Delaware law, the elements of a claim for tortious interference with
a contract are: ‘(1) a contract, (2) about which defendant knew, and (3) an
intentional act that is a significant factor in causing the breach of such contract,
(4) without justification, (5) which causes injury.’”88 This claim mixes two
carefully-distilled species of liability—contract and tort—and could frustrate
sophisticated counterparties’ efforts to “order their affairs and bargain for specific
results.”89 Delaware law “elevates contract law over tort” in the business context
and prefers damages due from a breach be calculated, whenever possible, by the
“predictability of the parties’ agreement,” rather than through the fiat of a “far less
87
Brightstar, 2019 WL 3714917, at *3 (citing Otto Candies, LLC v. KPMG LLP, 2018 WL
1960344, at *3 (Del. Super. Ct. Apr. 25, 2018)).
88
Bhole, Inc. v. Shore Invs., Inc., 67 A.3d 444, 453 (Del. 2013) (quoting Irwin & Leighton, Inc.
v. W.M. Anderson Co., 532 A.2d 983, 992 (Del. Ch. 1987)). The affiliate privilege doctrine
undermines the “justification” element. See, e.g., Shearin v. E.F. Hutton Grp., Inc., 652 A.2d 578,
589 (Del. Ch. 1994). Accordingly, if it applies, then it is claim-dispositive. See Brightstar, 2019
WL 3714917, at *3 (observing that dismissal is warranted if the complaint fails to demonstrate
specific facts “supporting an element of [a] claim” (citing Otto Candies, 2018 WL 1960344, at
*3)).
89
NACCO Indus., Inc. v. Applica Inc., 997 A.2d 1, 35 (Del. Ch. 2009).
-18-
certain, after-the-fact, judicially-fashioned tort remedy.”90 As a result, Delaware
courts “have tended to narrowly circumscribe the scope” of tortious interference
claims to avoid “chilling third parties from competing for business in any
marketplace in which existing contracts obtain.”91
The affiliate or “interference” privilege evolved from these principles and
serves to minimize the risk of deterring intrafirm consultation on matters of
commercial significance.92 The privilege supplies a defense to overbroad attacks on
the “justification” for a controller’s involvement with its affiliates’ contracts that
might otherwise convert any of the controller’s business judgments into personal
guarantees.93 Indeed, it is primarily those scattergun approaches that ignore the legal
distinctness inherent to the corporate personality that the privilege unloads.94 And
90
Id.91
Shearin, 652 A.2d at 589.
92
See id. at 589-91.
93
Id. at 589 (explaining claims of “improper” interference “inevitably involve a complex
normative judgment relating to” the justification element (internal quotation marks omitted)); see
Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP, 2019 WL 4927053, at *25 (Del.
Ch. Oct. 7, 2019) (“The tort of interference with contractual relations is intended to protect a
promisee’s economic interest in the performance of a contract by making actionable improper
interference with the promisor’s performance. The adjective ‘improper’ is critical. For
participants in a competitive capitalist economy, some types of intentional interference are a
legitimate part of doing business.” (internal quotation marks omitted)); see also Renco Grp., Inc.
v. MacAndrews AMG Holdings LLC, 2015 WL 394011, at *9 (Del. Ch. Jan. 29, 2015) (“[A] party
to a contract cannot interfere with its own contractual relations, and affiliates can be understood to
share that contractual interest.” (citation omitted)).
94
See, e.g., Renco, 2015 WL 394011, at *9 (rejecting a tortious interference claim on affiliate
privilege grounds and observing “[t]he standard for finding liability for controllers must be high
-19-
so, in accord therewith, Delaware courts will “balance the important policies served
by a claim for tortious interference with contract against the similarly important
policies served by the corporate form” when evaluating whether a controller’s
interference was “unjustified.”95
That balance is struck to prevent tortious interference claims from doubling
as backdoor respondeat superior theories (by imputing tort liability to controller
entities for the contractual breaches of controlled entities) or blunt instruments for
piercing the corporate veil (by deeming controller and controlled contractual
equivalents).96 Delaware courts do not lightly impose such liability or disregard
entity separateness.97 Rather, they expect that counterparties will do so bilaterally if
or everyday consultation or direction between parent corporations and subsidiaries about
contractual implementation would lead parents to be always brought into breach of contract cases”
(internal quotation marks omitted)).
95
Bandera, 2019 WL 4927053, at *26; see Shearin, 652 A.2d at 591 (observing that intra-firm
“interference” is not necessarily improper (citation omitted)); see also Feeley v. NHAOCG, LLC,
62 A.3d 649, 667 (Del. Ch. 2012) (“[T]he separate legal existence of juridical entities is
fundamental to Delaware law.”).
96
See, e.g., Otto Candies, LLC v. KPMG, LLP, 2020 WL 4917596, at *9-13 (Del. Ch. Aug. 21,
2020) (discussing with nuance the relationship between agency law and veil piercing and the ways
in which vicarious liability in tort and contract differ from direct liability in veil piercing).
97
See, e.g., id. at *9 (beginning veil-piercing and vicarious liability analysis with recognition of
“the fundamental premise that under ordinary circumstances, one entity will not be held
responsible for the actions of another” (citation omitted)); Wenske v. Blue Bell Creameries, Inc.,
2018 WL 5994971, at *5 (Del. Ch. Nov. 13, 2018) (“[A] true novelty would be to disregard the
separateness of a parent and a subsidiary simply because a plaintiff would prefer to hold both liable
for the subsidiary’s breach of contract. Our law does not countenance this result.”); Wallace ex
rel. Cencom Cable Income Partners II, Inc., L.P. v. Wood, 752 A.2d 1175, 1183 (Del. Ch. 1999)
(“Persuading a Delaware court to disregard the corporate entity is a difficult task.” (internal
quotation marks omitted)).
-20-
they wish.98 Accordingly, where, as here, there is no contractual mechanism for
holding a non-party controller responsible for the controlled’s breaches, a complaint
must contain “alleged facts to rebut the presumption”99 that the controller was
“pursuing its legitimate profit seeking” interests “in good faith”100—i.e., by showing
that the controller’s “sole motive”101 in interfering was “bad faith to injure
plaintiff.”102 Otherwise, the privilege protects the controller from primary or
vicarious tort liability for the breach of a contract connected to its enterprise but to
which the controller itself was not a signatory.103
So the issues before the Court are twofold: (1) the threshold question of
whether Investco is “affiliated” with the Virgin Fest Entities and thus can invoke the
98
See, e.g., Bandera, 2019 WL 4927053, at *26 (“A party who wishes to have a parent entity
or other controller backstop the obligations of the controlled entity can do so by contract, either by
making the parent a party to the agreement or by obtaining a guarantee. A party should not be able
to use a claim of tortious interference with contract to reap the benefits of protections that it did
not obtain at the bargaining table.”).
99
Renco, 2015 WL 394011, at *9 (emphasis in original).
100
Shearin, 652 A.2d at 591.
101
WaveDivision Holdings, LLC v. Highland Cap. Mgmt., L.P., 49 A.3d 1168, 1174 (Del. 2012)
(emphasis in original).
102
Bhole, 67 A.3d at 453.
103
Id.; see Shearin, 652 A.2d at 591 (“[T]here can be no non-contractual liability to the affiliated
corporation, which is privileged to consult and counsel with its affiliates, unless the plaintiff pleads
. . . the affiliate sought not to achieve permissible financial goals but sought maliciously or in bad
faith to injure plaintiff.”).
-21-
privilege; and (2) the follow-up question of whether the KAABOO Entities have
alleged bad faith sufficient to nevertheless prevent the privilege’s invocation.
1. Investco is an “Affiliate” of the Virgin Fest Entities.
Parent companies are affiliated with their subsidiaries.104 Likewise, two
commonly-owned entities are affiliates.105 Too, the privilege applies whenever the
alleged tortfeasor “controls an entity that was a party to the contract”106 or “share[s]
[a] common economic interest[] with a party to the contract.”107 Here, the KAABOO
Entities allege Investco is the sole manager of Virgin Fest, LLC—“a party to the
contract” that wholly owns the other two Virgin Fest Entities. They have, therefore,
pleaded Investco’s “control” over all affiliated parties alleged to be in breach.108
Struggling in opposition, the KAABOO Entities try to cabin the affiliate
privilege to “the parent-subsidiary corporate relationship” by arguing Investco—a
managing member of a parent LLC that wholly owns the other two contracting
104
See Shearin, 652 A.2d at 590 & n.14.
105
See James Cable, LLC v. Millenium Digit. Media Sys., L.L.C., 2009 WL 1638634, at *4-5
(Del. Ch. June 11, 2009).
106
NAMA Holdings, LLC v. Related WMC LLC, 2014 WL 6436647, at *26 (Del. Ch. Nov. 17,
2014).
107
Skye Min. Invs., LLC v. DXS Cap. (U.S.) Ltd., 2020 WL 881544, at *33 (Del. Ch. Feb. 24,
2020) (internal quotation marks omitted).
108
NAMA Holdings, 2014 WL 6436647, at *26.
-22-
companies—cannot invoke the privilege.109 But this distinction is meritless. As the
Court of Chancery explained, “the relationship among wholly owned affiliates with
a common parent is no different . . . than that between a parent and a subsidiary
[because] such entities share the commonality of economic interests which underlay
the creation of an interference privilege.”110 The KAABOO Entities offer no
principled basis, in law or in the facts they’ve alleged, to depart from this long- and
well-understood principle conclusion and to treat LLCs less favorably than
corporations.
2. The Allegations are Devoid of Investco’s Bad Faith.
Recall that the complaint must “allege[] facts”111 showing Investco’s
interference was unjustified—a meddling motivated not by legitimate economic
goals, but with bad faith to injure the KAABOO Entities.112 This the complaint fails
to do. The KAABOO Entities allege no actions Investco took to interfere with their
contracts, let alone “malicious” ones.113 Indeed, the references to Investco in the
109
KAABOO Answering Brief at 13-15 (D.I. 27) (“KAABOO Ans. Br.”).
110
See Shearin, 652 A.2d at 590 n.14.
111
Renco, 2015 WL 394011, at *9 (emphasis in original).
112
See Bhole, 67 A.3d at 453; Shearin, 652 A.2d at 591; see also WaveDivision, 49 A.3d at 1174
(“The defense of justification does not require that the defendant’s proper motive be its sole or
even its predominate motive for interfering with the contract. Only if the defendant’s sole motive
was to interfere” should a court find “improper interference” (emphasis in original)).
113
See Bhole, 67 A.3d at 453.
-23-
complaint identify the circumstances of Investco’s formation114 and describe the
parties’ use of an ownership stake in Investco as consideration for their various
agreements.115 And so, the only obvious nexus from the alleged breach to Investco
is that Investco is the controlling member of one breaching party that owns the
others—precisely the type of residual liability the privilege eliminates and Delaware
law plainly rejects.116
To bolster their deficient pleadings, the KAABOO Entities speculate that
Investco may have caused the Virgin Fest Entities to become financially unable to
honor their duties to pay.117 Though this type of wrongdoing could be sufficient to
overcome the privilege,118 the complaint must explain how Investco “both induced
a breach of contract and rendered [the Virgin Fest Entities] unable to satisfy [their]
contractual obligations”119 to do so. The complaint just doesn’t.
114
KAABOO Compl. ¶¶ 30-34.
115
Id. ¶¶ 49, 56, 57, 63, 84.
116
See, e.g., Wenske, 2018 WL 5994971, at *5; Shearin, 652 A.2d at 591.
117
KAABOO Ans. Br. at 22.
118
See, e.g., AM Gen. Holdings LLC v. Renco Grp., Inc., 2013 WL 5863010, at *13 (Del. Ch.
Oct. 31, 2013) (“In those cases where Delaware courts found that an alleged tortfeasor acted in
bad faith after it was found to qualify for the limited affiliate exception, plaintiffs pleaded facts
alleging that the tortfeasor had shifted the debtor entity's assets such that the entity was insolvent
and could not satisfy its obligations to the creditor plaintiff.” (citations omitted)).
119
NAMA Holdings, 2014 WL 6436647, at *30 (emphasis added).
-24-
The bare assumption that Investco, as controller of Virgin Fest, LLC, must
have commanded the breach is a conclusory supposition, not a specific fact from
which an inference of impropriety may be properly drawn.120 Nor does the muted
assertion that Investco “intentionally and without justification interfered” with the
transactions indite any instances of misconduct.121
Those cases on which the KAABOO Entities rely all involved insolvent
breaching parties in which a controlling entity was alleged to have forced their
insolvency by siphoning the breaching parties’ assets and arrogating those assets to
itself.122 But here, their allegations lead only to a conclusion that the Virgin Fest
Entities have breached the Transaction Contracts, not that Investco extracted value
from them to force their insolvency and thus induce their non-performance.123
120
KAABOO Compl. ¶¶ 96-97; see Ramunno, 705 A.2d at 1034 (Court “ignore[s] conclusory
allegations that lack specific supporting factual allegations” when assessing dismissal motions).
121
KAABOO Compl. ¶¶ 96-97; see Malpiede, 780 A.2d at 1083 (Court not required to “accept
every strained interpretation of the allegations” when assessing dismissal motions).
122
See PPL Corp. v. Riverstone Holdings LLC, 2019 WL 5423306, at *13 (Del. Ch. Oct. 23,
2019) (“[I]t is well-pled here that [defendant] use[d] its control of a subsidiary, not to enrich the
subsidiary, but to divert value from the subsidiary to itself in a bad faith manner.” (internal
quotation marks omitted)); WP Devon Assocs., L.P. v. Hartstrings, LLC, 2012 WL 3060513, at *4
(Del. Super. Ct. July 26, 2012) (plaintiff met its burden by pleading parent caused subsidiary to
“sell substantially all of its operating assets,” which left it without capital to make payments under
the subject agreements (internal quotation marks omitted)).
123
Cf. Allied Cap. Corp. v. GC-Sun Holdings, L.P., 910 A.2d 1020, 1024 (Del. Ch. 2006); PPL
Corp., 2019 WL 5423306, at *13; AM Gen. Holdings, 2013 WL 5863010, at *13; WP Devon
Assocs., 2012 WL 3060513, at *4.
-25-
As the “master[s] of the [their] complaint,”124 the KAABOO Entities could
have pursued other avenues to reach Investco. Certain allegations in the complaint
sound of the outrageousness that might lead a fact finder to genres of action bringing
Investco extra-contractual liability. Having not pleaded them, though, those causes
of action are not in the case, and the tortious interference claim, by itself, is a tune
without a hook. Even if the Court engaged a “strained interpretation” of the
complaint’s Investco-targeted allegations,125 it would find they present nothing more
than a respondeat superior or veil-piercing attempt to collapse an LLC into its
legally-separate manager. This Delaware law does not allow. Accordingly, the
KAABOO Entities fail to plead bad faith sufficient to overcome the privilege and
the tortious interference claim must be silenced here.
B. THE APA’S “LIMITATIONS” ON FRAUD CLAIMS (MOTION II).
In order to address the Virgin Fest Entities’ fraud-based counterclaims, the
Court must first decide whether they contracted-away their right to bring them. The
parties agree there are only two terms in the APA that potentially limit fraud liability:
Section 7.15 (the “No Recourse Provision”) and Section 6.06 (the “Exclusive
Remedies Provision”).
124
Halpern Fam. Prop. Invs., L.P. v. Anderson, 2011 WL 3568342, at *1 (Del. Super. Ct. June
13, 2011).
125
But see Malpiede, 780 A.2d at 1083 (relieving courts of the pain of such interpretive
straining).
-26-
The “No Recourse Provision” declares –
All claims or causes of action (whether in contract or in tort, or
in law or in equity) that may be based upon, arise out of or relate
to this Agreement or any other Transaction Document, or the
negotiation, execution or performance of this Agreement or any
other Transaction Document, may be made only against (and
subject to the terms and conditions thereof) the entities that are
expressly identified as parties hereto and no individual officer or
signatory on behalf of such parties shall have any personal
liability or liabilities arising under, in connection with or related
to this Agreement or any other Transaction Document.126
And the Exclusive Remedies Provision declares –
The Parties hereby agree that, from and after the Closing Date,
the indemnification provisions set forth in this Article VI are the
exclusive provisions in this Agreement with respect to the
liability of Sellers and Buyers for the breach, inaccuracy or
nonfulfillment of any representation or warranty or any
covenants, agreements or obligations contained in this
Agreement and the sole remedy of the Buyer Indemnified Parties
and the Seller Indemnified Parties for any claims for breach of
representation or warranty or covenants, agreements or other
obligations arising out of this Agreement or any Law or legal
theory applicable thereto; provided that nothing herein shall
(a) preclude any Party from seeking any remedy against any
Person based upon Fraud by any other Party (including any
Fraud by an officer or manager of any Seller or Buyer in
connection with the consummation of the transactions
contemplated by this Agreement). . . .127
126
Asset Purchase Agreement § 7.02 (D.I. 42) (emphasis added) (hereinafter “APA”).
127
Id. (emphasis added).
-27-
They do not agree, though, on the Provisions’ meanings. The KAABOO Entities
and Managers contend the No Recourse Provision “overrides” the Exclusive
Remedies Provision and precludes suits against the Managers in fraud.128 For their
part, the Virgin Fest Entities argue the No Recourse Provision is unenforceable as-
applied to fraud and add that the Exclusive Remedies Provision, the “more specific”
Provision, controls anyway.129 In confronting this discord, the Court employs
familiar instruments to harmonize both Provisions.
1. Plain Meaning Analysis Governs the APA Interpretation Dispute.
Under Delaware law, “[t]he proper construction of any contract is purely a
question of law.”130 “The objective [of interpretation] is to give full effect to the
parties’ mutual intent at the time of contracting.”131 In respecting that mutual intent,
the Court “read[s] a contract as a whole and . . . give[s] each provision and term
[purpose], so as not to render any part of the contract” superfluous.132 And “[w]hen
the contract is clear and unambiguous,” the Court “give[s] full effect to the plain-
128
KAABOO & Managers Op. Br. at 15-17.
129
Virgin Fest Entities’ Answering Brief at 2-14 (D.I. 105) (“Virgin Fest Ans. Br.”).
130
Exelon Generation Acquisitions, LLC v. Deere & Co., 176 A.3d 1262, 1266-67 (Del. 2017).
131
Bobcat N. Am., LLC v. Inland Waste Holdings, LLC, 2019 WL 1877400, at *5 (Del. Super.
Ct. Apr. 26, 2019) (citing Exelon, 176 A.3d at 1263); see Salamone v. Gorman, 106 A.3d 354,
367-68 (Del. 2014).
132
Kuhn Constr., Inc. v. Diamond State Port Corp., 990 A.2d 393, 396-97 (Del. 2010).
-28-
meaning of the contract’s . . . provisions.”133 But, a contract is not ambiguous merely
because the parties advance opposing reads.134 Ambiguity exists only when disputed
provisions are “fairly or reasonably susceptible to more than one meaning.”135
2. The APA Does Not Bar Fraud Claims Against the Managers.
A natural reading of the No Recourse Provision is that directors and officers
are not personally liable for claims brought “arising under” or “relating to” the
APA.136 In other words, as the Provision’s title makes clear, the Virgin Fest Entities
have “no recourse” to the Managers, personally or in their managerial capacities, for
grievances connected in any way to the deal.137 Indeed, the Court need not look far
to confirm the parties’ intent on this point. Merely one section later, Gordon agreed
to personally guarantee payment of excess liabilities incurred by the Del Mar
festival.138 If the No Recourse Provision did not protect managers from personal
133
Hallisey v. Artic Intermediate, LLC, 2020 WL 6438990, at *3 (Del. Ch. Oct. 29, 2020)
(internal quotation marks omitted).
134
Bobcat, 2019 WL 1877400, at *5 (citing Alta Berkeley VI C.V. v. Omneon, Inc., 41 A.3d 381,
385 (Del. 2012)).
135
Alta Berkeley, 41 A.3d at 385.
136
See APA § 7.15.
137
Id. (titled “No Recourse” and limiting claims to those against “the entities that are expressly
identified as parties,” for which “individual officer[s]” have no “personal liability”).
138
See APA § 7.16 (titled the “Gordon Guarantee”).
-29-
liability for the KAABOO Entities’ unsatisfied debts, then why include a redundant
personal guarantee?139
Acknowledging this, the Virgin Fest Entities turn back to the Exclusive
Remedies Provision, which they say is a chink in the bulletproof armor the Managers
don in the No Recourse Provision.140 This “exception”-based rationale makes sense.
The Exclusive Remedies Provision unambiguously declares nothing “herein”—i.e.,
in the APA as whole—negates claims of “[f]raud by an officer or manager” of the
KAABOO Entities, regardless of “Party” status.141 So, while the parties generally
agreed the No Recourse Provision would bar “tort” claims against the Managers,
they also expressly agreed the APA would not bar the bringing of fraud claims.142
They could not have contracted otherwise. Delaware courts refuse to enforce
139
See Kuhn, 990 A.2d at 396-97 (directing courts to interpret contracts in a manner harmonizing
all provisions).
140
See, e.g., Virgin Fest Ans. Br. at 6-10.
141
APA § 6.06 (making actionable “Fraud” “by any other Party (including any Fraud by an
officer or manager of any Seller or Buyer in connection with the consummation of the transactions
contemplated by this Agreement)”). The failure to capitalize “officer” and “manager” indicates
that non-Parties and non-signatories were intended to be captured. See, e.g., Charlotte Broad.,
LLC v. Davis Broad. of Atlanta, L.L.C., 2015 WL 3863245, at *5 (Del. Super. Ct. June 10, 2015)
(refusing to “ignore that the plain language . . . [did] not include the capitalized term[s]” defendant
sought to insert and declining to “add[] a . . . restriction not found in the plain language”).
142
Compare APA § 7.15 with id. §§ 6.04 (defining fraud in a manner substantively
indistinguishable from the common law), 6.06 (permitting fraud lawsuits).
-30-
contracts purporting to condone—or at least insulate—intentional fraud.143
Accordingly, the APA blocks the Managers’ escape from fraud claims.
To press their wobbly construct, the KAABOO Entities and Managers pretend
the “any officer or manager” language doesn’t exist.144 But that read is ruinous to
their constructions, which render meaningless the carve-out for managerial fraud—
an outcome clearly contrary to the parties’ mutual intent.145 For nearly the same
reason, their stingy view of the word “herein” doesn’t persuade.146 If the “herein”
clause were confined to “Article VI”, then either the broad immunity offered by the
143
See, e.g., Simons v. Cogan, 549 A.2d 300, 303 (Del. 1988); Harff v. Kerkorian, 347 A.2d 133,
134 (Del. 1975) (per curiam); Abry Partners V, L.P. v. F&W Acquisition LLC, 891 A.2d 1032,
1036 (Del. Ch. 2006); Mabon, Nugent & Co. v. Tex. Am. Energy Corp., 1988 WL 5492, at *3 (Del.
Ch. Jan. 27, 1988); Cont’l Ill. Nat’l Bank & Trust Co. of Chi. v. Hunt Int’l Res. Corp., 1987 WL
55826, at *5-6 (Del. Ch. Feb. 27, 1987); see also Quadrant Structured Prods. Co., Ltd. v. Vertin,
106 A.3d 992, 1016-17 (Del. Ch. 2013) (analyzing applicable “no recourse” case law). The
KAABOO Entities and Managers protest the force of these cases because many involved
interpretation of “indenture” agreements. But whether the parties are bondholders and issuers or
targets and acquirers, Delaware courts are indifferent to parties’ labels for their transactions when
a disclaimer of intentional fraud is concerned. See, e.g., Airborne Health, Inc. v. Squid Soap, LP,
984 A.2d 126, 136-37 (Del. Ch. 2009) (“Because of Delaware’s strong public policy against
intentional fraud, a knowingly false contractual representation can form the basis for a fraud claim,
regardless of the degree to which the agreement purports to disclaim or eliminate tort remedies.”
(citation omitted)).
144
KAABOO & Managers Op. Br. 15-17 (omitting discussion of the parenthetical language in §
7.15).
145
See Sonitrol Holding Co. v. Marceau Invs., 607 A.2d 1177, 1183 (Del. 1992) (“[A] contract
should be interpreted in such a way as to not render any of its provisions illusory or meaningless”
or in a way that “frustrates the meaning, purpose and intent of the parties’ agreement.” (citations
omitted)).
146
See KAABOO & Managers Op. Br. at 16-17; KAABOO & Managers Reply Brief at 5-7 (D.I.
106) (arguing the word “herein” means “here [] in” the Exclusive Remedies Provision, which
prevents suits against the Managers in fraud).
-31-
No Recourse Provision, or the narrow vulnerability reserved by the Exclusive
Remedies Provision, would be superfluous.147 Delaware law forbids judicial
rehabbing of plain language and so the Court will not take up the KAABOO Entities’
tool.148
C. RULE 9(B) SCRUTINY OF THE FRAUD COUNTERCLAIMS (MOTION II).
In the absence of contractual barriers to resolving the Virgin Fest Entities’
fraud-based counterclaims, the next and final question is whether each of those
counts is pleaded with Rule 9(b) particularity.
“Delaware law requires plaintiffs to plead fraud and misrepresentation claims
with particularity—a heightened pleading standard.”149 To satisfy Rule 9(b) and
thus repel a 12(b)(6) dismissal motion, the claimant must allege “(1) the time, place,
and contents of the false representation; (2) the identity of the person making the
representation; and (3) what the person intended to gain by making the
147
See Sonitrol, 607 A.2d at 1183 (directing courts not to interpret an agreement in a manner
rendering some or all of their terms meaningless or contradictory).
148
See, e.g., Urdan v. WR Cap. Partners, LLC, 2020 WL 7223313, at *6 n.17 (Del. Dec. 3, 2020)
(“Absent some ambiguity, Delaware courts will not destroy or twist [contractual] language under
the guise of construing it.” (internal quotation marks omitted)).
149
EZLinks Golf v. PCMS Datafit, Inc., 2017 WL 1312209, at *3 (Del. Super. Ct. Mar. 13, 2017)
(citing Del. Super. Ct. Civ. R. 9(b)); see Avve, Inc. v. Upstack Techs., Inc., 2019 WL 1643752, at
*5 (Del. Super. Ct. Apr. 12, 2019) (observing that Rule 9(b) “deviates from the [short and plain
statement (“notice pleading”)] rule and imposes a heightened pleading standard for fraud”).
-32-
representation.”150 “When the necessary facts are . . . within the opposing party’s
control,” however, “less particularity is required.”151 As a result, when the
allegations upon which the accuser depends are obscured or possessed by the
accused, the claim can survive dismissal so long as “the circumstances of the fraud”
are drawn “with detail sufficient to apprise the [accused] of the basis for the
claim.”152
1. The Fraud and Fraudulent Inducement, Misrepresentation and
Concealment Claims are Pleaded with Rule 9(b) Particularity.
The KAABOO Entities and Managers attempt to set these frauds up as a series
of hurdles the Virgin Fest Entities must clear.153 But Delaware courts reject this
course because all fraud claims require proof of the same or nearly the same generic
elements.154 Put differently, any doctrinal variations inherent to each individual
150
EZLinks Golf, 2017 WL 1312209, at *3 (internal quotation marks omitted); see Kostysyzn v.
Martuscelli, 2015 WL 721291, at *3 (Del. Super. Ct. Feb. 18, 2015); Abry Partners, 891 A.2d at
1049.
151
Brightstar, 2019 WL 3714917, at *9 (citations omitted).
152
Id. (internal quotation marks omitted).
153
KAABOO & Managers Op. Br. at 17-31.
154
See. e.g., Maverick Therapeutics, Inc. v. Harpoon Therapeutics, Inc., 2020 WL 1655948, at
*26 (Del. Ch. Apr. 3, 2020) (“The elements of fraud and fraudulent inducement are the same.”);
see id. n.339 (acknowledging that it would be “tautological” to repeat an analysis of each fraud
claim because the claims incorporate variations of each other’s elements). The KAABOO Entities
and Managers tacitly recognize this in parenthetically noting a fraudulent inducement case to
support dismissal of the fraudulent concealment counterclaim. See KAABOO & Managers Op.
Br. at 21-22 (citing Acorn USA Holdings, LLC v. Premark Int’l, Inc., 2003 WL 22861168 (Del.
Super. Ct. July 16, 2003)).
-33-
typification of fraud derive either from the nature of the alleged fabrication or the
motivation for the alleged deception.155 That being so, a paradigmatic fraud case
requires only:
(1) a false representation, usually one of fact, made by the defendant;
(2) the defendant’s knowledge or belief that the representation was
false, or was made with reckless indifference to the truth;
(3) an intent to induce the plaintiff to act or to refrain from acting;
(4) the plaintiff’s action or inaction taken in justifiable reliance upon
the representation; and
(5) damages . . . as a result of such reliance.156
The Virgin Fest Entities’ modifiers—inducement, misrepresentation and
concealment—all concern the first element: “a false representation.”157 A false
representation may be “‘an overt misrepresentation (i.e., a lie), a deliberate
concealment of material facts, or . . . silence in the face of a duty to speak.’” 158
Deliberate concealment has occurred if a defendant “took some action affirmative in
nature designed or intended to prevent, and which [did] prevent, the discovery of
facts giving rise to the fraud claim[;] some artifice to prevent knowledge of the
155
Maverick, 2020 WL 1655948, at *26
156
Id.; see E.I. DuPont de Nemours & Co. v. Fla. Evergreen Foliage, 744 A.2d 457, 461-62 (Del.
1999).
157
Maverick, 2020 WL 1655948, at *26.
158
Id. (quoting Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1074 (Del. 1983)).
-34-
facts[;] or some representation intended to exclude suspicion and prevent inquiry.”159
And a defendant has a duty to speak in the face of which he cannot remain silent “if,
before the consummation of a business transaction, [the defendant] acquire[d]
information that [he] knows will make untrue or misleading a previous
representation that when made was true.”160
Relatedly, “scienter may be demonstrated . . . [by showing] motive and
opportunity for the inducement.”161 More important, “[i]n cases where a fraud claim
centers on a transaction, the transaction itself may serve as both the motive and the
opportunity to commit the fraud.”162 And lastly, reliance is justified in the
contractual context where there is no anti-reliance provision,163 where the plaintiff
was reasonably diligent, or where the plaintiff does not share the defendant’s
understanding of the same essential terms.164
159
Maverick, 2020 WL 1655948, at *26 (internal quotation marks omitted) (brackets in original);
see Lock v. Schreppler, 426 A.2d 856, 860 (Del. Super. Ct. 1981).
160
Maverick, 2020 WL 1655948, at *26 (internal quotation marks omitted).
161
Id. at *29.
162
Id.
163
See, e.g., Infomedia Grp., Inc. v. Orange Health Sols., Inc., 2020 WL 4384087, at *4-5 (Del.
Super. Ct. July 31, 2020) (observing that Delaware courts routinely enforce anti-reliance
provisions, which preclude a plaintiff from using extra-contractual evidence, including
counterparty negotiation statements, to support breach-of-contract and fraud lawsuits).
164
See Maverick, 2020 WL 1655948, at *30-31.
-35-
Looking to the Virgin Fest Entities’ allegations, it is reasonably conceivable
that the Managers’ negotiation behavior and other pre-closing initiatives defrauded
their counterparties into acquiring a liability-ridden enterprise unawares. In support
of their theories, the Virgin Fest Entities marshal these facts, among others, to
“apprise the defendant[s] of the basis for the[ir] [counter]claims”:165
(1) As early as June 2019, the Managers began presenting financial
records to Felts and Hagle which cloaked current liabilities and
losses to make the acquisitions appear commercially attractive;166
(2) In July 2019, the Managers misrepresented the Del Mar
festival’s profits and anticipated cash flow and their reasons for
selling it to Felts and Hagle by basing budgets on future
projections and economically invalid assumptions to hide
present debt and litigation exposure;167
(3) About 30 days before the Del Mar festival, the Managers
represented that the Virgin Fest Entities’ $2 million down
payment would cover all present liabilities, even though there
were current liabilities in excess of that investment and the
Managers intended to misdirect the money instead;168
(4) On September 4, 2019, Gordon assured the Virgin Fest Entities
an additional $6.5 million would cover all vendor bills without
revealing the extent to which the KAABOO Entities were
indebted to their trade creditors;169 and
165
Brightstar, 2019 WL 3714917, at *9 (internal quotation marks omitted).
166
E.g., Virgin Fest Compl. ¶¶ 54-60.
167
Id.168
E.g., id. ¶¶ 61-71, 89, 212-13.
169
E.g., id. ¶¶ 64-67.
-36-
(5) Immediately after closing, the Virgin Fest Entities became aware
of the various debts incurred by and litigation against the
KAABOO Entities, which comprise the current liabilities and
losses that were hidden by the untrue accounting and financial
records provided and pre-closing statements made.170
At this point, these well-pleaded allegations are entitled to truth, which means
that material liabilities either were intentionally not disclosed (deliberate
concealment) or were starving for correction (breach of the duty to speak) at
closing.171 That also means the Managers could have been motivated by executing
the Transaction Contracts right before the 2019 Del Mar festival to cast off
responsibility for its upcoming and ongoing expenses.172 And without an anti-
reliance provision or mutual understanding of the same essential terms, it is fair to
conclude that the Virgin Fest Entities could not have been expected to ferret out this
wrongdoing when the Managers alone possessed the accurate—but withheld—
170
E.g., id. ¶¶ 85-86, 89, 138-67.
171
See, e.g., APA § 3.05 (“[N]o Seller has any liabilities related to the Business that are of a
nature required to be disclosed on a balance sheet prepared in accordance with generally accepted
accounting principles. . . .”); id § 3.10 (“[T]o Sellers’ Knowledge, no representations or warranties
by Sellers in this Agreement . . . contain[] any untrue statement of material fact or, to Sellers’
knowledge, omits any material fact necessary to make the statements or facts contained therein not
misleading.”); see also Maverick, 2020 WL 1655948, at *26 (explaining what must be pleaded for
fraud liability to attach).
172
Maverick, 2020 WL 1655948, at *29 (observing that scienter may be established in devising
the agreement in the first place).
-37-
books and balance sheets.173 In this instance, then, “less particularity” suffices, as
the KAABOO Entities and Managers guarded the “necessary facts” on which the
counterclaims rest.174 And so, these claims satisfy Rule 9(b).
Attempting to make nothing out of something, the KAABOO Entities and
Managers cherry-pick allegations and characterize them as not clearly false, or as
unproblematic future predictions or opinions.175 But their attempt here comes to
naught for at least three reasons. First, the Virgin Fest Entities need not prove fraud
at this stage. Instead, the Court will dismiss only if the allegations do not entitle the
Virgin Fest Entities to relief “under any reasonably conceivable set of
circumstances.”176 Second, the Virgin Fest Entities plead not only false statements,
but also deliberate concealment and breach of the duty to speak.177 And third, though
some of the Managers’ statements might be predictive or opinion-like in form, they
173
See, e.g., Infomedia, 2020 WL 4384087, at *4-5; cf. Maverick, 2020 WL 1655948, at *30-31
(explaining reliance is not justifiable where the parties do not share the same understanding of the
essential terms or the plaintiff is not reasonably diligent (citations omitted)).
174
Brightstar, 2019 WL 3714917, at *9 (citations omitted).
175
KAABOO & Managers Op. Br. 23-28; see id. at 23 (“It is well-settled in Delaware that
predictions about the future cannot give rise to actionable common law fraud . . . and nor can
expressions of opinion.” (citing WyPie Invs., LLC v. Homschek, 2018 WL 1581981, at *8 (Del.
Super. Ct. Mar. 28, 2018)) (cleaned up))).
176
Cent. Mortg., 27 A.3d at 535.
177
See Maverick, 2020 WL 1655948, at *-26.
-38-
are not in substance.178 Here, the Virgin Fest Entities allege the Managers duped
them into accepting the KAABOO Entities’ assets on terms framed as forward-
looking but structured to mask present financial ruin.179
2. The APA “Fraud” Claim is Alleged with Rule 9(b) Particularity.
The tenth counterclaim rings hollow. The Virgin Fest Entities allege Gordon
and Wolkov (who signed on behalf of the KAABOO Entities) have committed
“Fraud” as defined by the APA. The APA defines Fraud as “any false
representation, misrepresentation, deceit, or concealment of a fact with the intention
to deceive, conceal or otherwise cause injury.”180 On its own terms, this definition
is virtually interchangeable with common law fraud. Accordingly, it follows that
here incantation of the APA’s specific “Fraud” verse, pens the Virgin Fest Entities’
fraud allegation with requisite Rule 9(b) particularity.
178
See Edinburgh Holdings, Inc. v. Educ. Affiliates, Inc., 2018 WL 2727542, at *12 (Del. Ch.
June 6, 2018) (“[A] promise of future conduct can be actionable in fraud” if the plaintiff “plead[s]
specific facts that lead to a reasonable inference that the promisor had no intention of performing
at the time the promise was made.” (internal quotation marks and emphasis omitted)).
179
See Mooney v. E.I. du Pont de Nemours & Co., 2017 WL 5713308, at *6 (Del. Super. Ct.
Nov. 28, 2017) (observing that “statements of opinion and predictions about the future,” though
“usually” not cognizable, may be if “a plaintiff . . . plead[s] circumstances permitting an inference
that the defendants ‘were positioned to know that they were making erroneous statements of
material facts and had an interest in doing so.’” (quoting Trenwick Am. Litig. Trust v. Ernst &
Young, L.L.P., 906 A.2d 168, 211 (Del. Ch. 2006))).
180
APA § 6.04.
-39-
3. Conspiracy to Commit Fraud is Alleged with Rule 9(b) Particularity.
In their eleventh counterclaim, the Virgin Fest Entities allege the Managers’
deception amounted to a civil conspiracy. The gravamen of their theory is the
Managers colluded to hide the KAABOO Entities’ liabilities and to glaze the deal
with doctored financial records. The KAABOO Entities and Managers argue these
allegations falter because the Virgin Fest Entities have not pleaded the existence of
an explicit agreement.181 But at a motion to dismiss stage, Delaware courts require
merely “sufficient facts to support an inference that the defendants . . . acted in
concert with one another.”182 That is because “a conspiracy can be inferred from the
pled behavior of the alleged conspirators.”183 Here, it is not plausible that the
Managers acted without choreography. Given their concert in drafting the APA and
providing financial representations, the allegations permit an inference of planning
and coordination. Accordingly, this counterclaim withstands dismissal.
181
KAABOO & Managers Op. Br. at 31 (citing Latesco, L.P. v. Wayport, Inc., 2009 WL
2246793, at *9 n.33 (Del. Ch. July 24, 2009)).
182
Agspring Holdco, LLC v. NGP X US Holdings, L.P., 2020 WL 4355555, at *21 (Del. Ch. July
30, 2020) (citing Empire Fin. Servs., Inc. v. Bank of N.Y., 900 A.2d 92, 97 n.16 (Del. 2006)).
183
Agspring, 2020 WL 4355555, at *21 (internal quotation marks omitted); see Prairie Cap. III,
L.P. v. Double E Holding Corp., 132 A.3d 35, 64-65 (Del. Ch. 2015) (finding civil conspiracy
theory survived motion to dismiss where no explicit agreement was alleged).
-40-
4. The Fraud Allegations are Not Bootstrapped
Breach-of-Contract Claims.
As a last resort, the KAABOO Entities and Managers suggest the fraud
allegations are inadequate because they are really breach-of-contract allegations. It
is true that “[a] contracting party may not bootstrap a breach of contract claim into
a fraud claim merely by adding [words of fraud] or alleging that the contracting
parties never intended to perform.”184 “A bootstrapped fraud claim . . . [which] takes
the simple fact of nonperformance, adds a dollop of the counterparty’s subjective
intent not to perform, and claims fraud” is indeed a non-starter.185 But, contractual
representations may form the basis of a fraud claim “where a plaintiff has . . . made
particularized allegations that a [counterparty] knew contractual representations
were false or lied regarding [a] contractual representation. . . .”186 And when
distinguishing fraud and breach-of-contract claims, Delaware courts generally look
184
Swipe Acquisition Corp. v. Krauss, 2020 WL 5015863, at *11 (Del. Ch. Aug. 25, 2020)
(internal quotation marks omitted).
185
Smash Franchise Partners, LLC v. Kanda Holdings, Inc., 2020 WL 4692287, at *16 (Del.
Ch. Aug. 13, 2020).
186
Pilot Air Freight, LLC v. Manna Freight Sys., Inc., 2020 WL 5588671, at *26 (Del. Ch. Sept.
18, 2020) (citing Smash, 2020 WL 4692287, at *11) (internal quotation marks omitted); see
Anschutz Corp. v. Brown Robin Cap., LLC, 2020 WL 3096744, at *15 (Del. Ch. June 11, 2020).
-41-
to the timing of the alleged misconduct to determine whether the inducement to deal
is “separate and distinct” from the inducement to perform.187
Here, the Virgin Fest Entities have not alleged the Managers’ fraud was a ruse
to shirk performance. To the contrary, they allege the Managers defrauded them
into executing an agreement that the KAABOO Entities intended to honor—except
on terms secretly unfavorable to the Virgin Fest Entities. And because all of the
alleged fraud happened pre-closing, it is reasonably conceivable that the Managers’
acts of inducement were calculated to obtain signatures, not to dictate the manner in
which obligations were to be discharged.188 Because the Virgin Fest Entities proffer
“particularized allegations” about the Managers’ knowledge of the “false . . .
contractual representation[s]” they developed during the bargaining process and
ultimately memorialized in the APA, the fraud-based counterclaims are not
impermissibly bootstrapped.189
187
EZLinks Golf, 2017 WL 1312209, at *5 (citations omitted); see Pilot Air, 2020 WL 5588671,
at *26 (observing that bootstrapping is not present “when the conduct occurs prior to the execution
of the contract and ‘thus with the goal of inducing the plaintiff’s signature and willingness to close
on the bargain.’” (quoting In re Bracket Holding Corp. Litig., 2017 WL 3283169, at *18-19 (Del.
Super. Ct. July 31, 2017))).
188
See Pilot Air, 2020 WL 5588671, at *26; In re Bracket, 2017 WL 3283169, at *18-19.
189
Pilot Air, 2020 WL 5588671, at *26; see EZLinks Golf, 2017 WL 1312209, at *5 (Court
“focus[es] on when the fraudulent conduct is alleged to have occurred” when evaluating a
bootstrapping argument).
-42-
V. CONCLUSION
This case seems far from ready for the lights to come up. But as the parties
rehearse, the Court GRANTS Investco’s motion (Motion I) and DISMISSES the
tortious interference claim and DENIES the KAABOO Entities and Managers’
motion (Motion II).
IT IS SO ORDERED.
/s/ Paul R. Wallace
Paul R. Wallace, Judge
-43-