CLP Toxicology, Inc. v. Casla Bio Holdings, LLC ( 2020 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
CLP TOXICOLOGY, INC., )
)
Plaintiff, )
)
v. ) C.A. No. 2018-0783-PRW
) and
CASLA BIO HOLDINGS LLC, CASLA ) C.A. No. N18C-10-332 PRW
BIO GP, LLC, CASLA PARTNERS, L.P., ) CCLD
CASLA PARTNERS LLC, CASLA )
PARTNERS CAPITAL FUND I, LP, )
SAMUEL HINES, JARED ROCHWERG, )
R2 INVESTMENTS, LLC a/k/a )
SAMSON INVESTMENT PARTNERS, )
HAWK CAPITAL PARTNERS, LP, )
PROVCO VENTURES I, LP, CLIFTON )
WRIGHT, ROY S. NEFF, LBCW )
HOLDINGS, LP, CASLA ABS )
INVESTORS, LP and LARRY HOLLIN, )
)
Defendants. )
Submitted: May 12, 2020
Decided: June 29, 2020
Corrected: August 14, 2020
MEMORANDUM OPINION AND ORDER
Upon Defendants’ Motion to Dismiss,
DENIED in part; GRANTED in part.
Christopher Viceconte, Esquire, GIBBONS P.C., Wilmington, Delaware; Anthony
J. Rospert, Esquire, Thomas M. Ritzert, Esquire, THOMPSON HINE LLP,
Cleveland, Ohio, Attorneys for Plaintiff CLP Toxicology, Inc.
Peter B. Ladig, Esquire, Elizabeth A. Powers, Esquire, BAYARD, P.A.,
Wilmington, Delaware; Jordan D. Weiss, Esquire, GOODWIN PROCTER LLP,
New York, New York, Attorneys for Casla Bio Holdings LLC, Casla Bio GP, LLC,
Casla Partners, L.P., Casla Partners LLC, Casla Partners Capital Fund I, LP,
Samuel Hines, Jared Rochwerg, R2 Investments, LLC A/K/A Samson Investment
Partners, Hawk Capital Partners, LP, Provco Ventures I, LP, Clifton Wright, Roy
S. Neff, LBCW Holdings, LP, Casla ABS Investors, LP And Larry Hollin.
WALLACE, J.
- ii -
This civil action arises out of Plaintiff CLP Toxicology, Inc.’s (“CLP”)
purchase of all Alternative Biomedical Solutions LLC’s (“ABS” or the “Company”)
securities (the “Transaction”) pursuant to a Securities Purchase Agreement (the
“SPA”). CLP and Defendants Casla Bio Holdings LLC (“Casla” or “Company
Seller”), and Casla Bio GP, LLC (“Blocker Seller” and, together with Casla, the
“Seller Defendants”) executed the SPA and closed the Transaction on December 18,
2017 (the “Closing” or “Closing Date”).
CLP alleges that Samuel Hines, Jared Rochwerg (together, the “Individual
Defendants”), and the Seller Defendants intentionally misled and induced CLP to
purchase the assets based on omissions, concealments, and material
misrepresentations.
CLP also asserts that Casla Partners, LP, Casla Partners LLC, Casla Partners
Capital Fund I, LP (collectively, the “Principal Casla Defendants”), R2 Investments,
LLC, a/k/a Samson Investment Partners (“R2”), Hawk Capital Partners, LP
(“Hawk”), Casla ABS Investors, LP (“Casla ABS Investors” and, together with R2
and Hawk, the “Principal Investor Defendants”), the Seller Defendants, and
Individual Defendants worked in confederation with one another to induce CLP to
sign the SPA. CLP claims that the Seller Defendants and Individual Defendants
acted at all relevant times as the agents of Principal Casla Defendants and the
Principal Investor Defendants.
-1-
Finally, CLP asserts that the Seller Defendants transferred the proceeds of the
sale of ABS to Provco Ventures I, LP (“Provco”), Clifton Wright, Roy Neff, LBCW
Holdings, LP (“LBCW”), Larry Hollin (collectively, the “Investor Defendants”) and
the Principal Investor Defendants with intent to defraud CLP and prevent CLP from
being able to recover the amounts owed to it as a result of the Seller Defendants’ and
Individual Defendants’ fraudulent activities.
CLP filed parallel actions in the Court of Chancery (the “Court of Chancery
Action”) and the Complex Commercial Litigation Division of the Superior Court
(the “Superior Court CCLD Action”), against the Seller Defendants, the Individual
Defendants, the Principal Casla Defendants, the Investor Defendants and the
Principal Investor Defendants (collectively, “Defendants”). Thereafter, the Chief
Justice designated the undersigned to sit in the Court of Chancery Action so that one
judicial officer could resolve the parties’ overlapping and related disputes.1
In early 2019, CLP filed an amended complaint (the “Amended Complaint”)
in the Court of Chancery Action. CLP makes the following claims:
- Charges Fraudulent Inducement and seeks Damages against Seller
Defendants and Individual Defendants (“Count I”);
- Charges Fraudulent Inducement and seeks Rescissory Damages against
Seller Defendants (“Count II”);
1
See Del. Const. art. IV, § 13(2).
-2-
- Charges Fraud and seeks Damages against Seller Defendants and
Individual Defendants (“Count III”);
- Seeks Declaratory Judgment that Casla is an alter ego of the Principal
Investor Defendants and the Investor Defendants (“Count IV”);
- Seeks Declaratory Judgment that the Individual Defendants and Seller
Defendants are agents of the Principal Investor Defendants and the
Principal Casla Defendants (“Count V”);
- Charges Breach of Section 4.21 of the SPA and seeks Damages against
Seller Defendants (“Count VI”);
- Charges Breach of Sections 4.6(b), 4.24, and 4.26 of the SPA and seeks
Damages against Seller Defendants (“Count VII”);
- Charges Breach of Sections 4.8, 4.15, and 4.17 of the SPA and seeks
Damages against Seller Defendants (“Count VIII”);
- Charges Breach of Section 9.1(c) of the SPA and seeks Damages against
Seller Defendants (“Count IX”);
- Charges Breach Section 4.26 of SPA and seeks Damages against Seller
Defendants (“Count X”);
- Seeks Unjust Enrichment/Disgorgement and Damages against Defendants,
but in the alternative to Counts VI – X as to Seller Defendants Only
(“Count XI”);
- Charges Civil Conspiracy and seeks Damages against Seller Defendants,
Individual Defendants, Principal Investor Defendants, and Principal Casla
Defendants (“Count XII”);
- Charges Fraudulent Transfer Under 6 Del. C. § 1301 et seq. and seeks
Damages against All Defendants (“Count XIII”);
- Seeks Constructive Trust and Damages against All Defendants (“XIV”).
-3-
This is the Court’s ruling on the Defendants’ Rule 12(b)(6) motion to dismiss (the
“Motion to Dismiss”) Counts I-VIII, X, and XI of the Amended Complaint.
Having considered the record and the parties’ arguments, the Court concludes
that the Motion to Dismiss must be DENIED in part and GRANTED in part.
I. FACTUAL AND PROCEDURAL BACKGROUND2
Pursuant to the SPA, CLP purchased all of the issued and outstanding shares
of the Company from Casla.3 The purchase price was based, in part, on the EBITDA
generated by ABS.4
The SPA also includes a provision in which the Company Seller is deemed to
have knowledge of facts that are within the actual knowledge of several key people.
Under the terms of the Purchase Agreement “Company’s Knowledge” is defined as
“the actual knowledge, and the knowledge that could have been acquired with
respect to any fact or matter had such individual made reasonable inquiry of or
caused reasonable investigation by the Persons who would reasonably be expected
2
Unless otherwise noted, the facts recited herein are drawn from the well-pled allegations of the
Amended Complaint, together with its attached exhibits.
3
Am. Compl. ¶ 53.
4
Id.
-4-
to have knowledge of such fact or other matter, of one or more of Simon Bergeron,
Ray Fuller, Janet McGrath or Samuel Hines.”5
A. THE SPA.
1. The Pre-Closing Representations and Warranties Concerning the
Company.
In Article IV of the SPA, the Company made several representations and
warranties to CLP as of the Closing.6
In Section 4.21 of the SPA, the Company represented and warranted to CLP
that its twenty (20) largest customers were named within Section 4.21(a) of the
Disclosure Schedule (“Material Customers”) and that “[n]o Material Customer . . .
has within the twelve (12) months prior to the date of this Agreement ceased or
materially altered its relationship with the Business, or, to Company’s Knowledge,
has threatened to cease or materially adversely alter any such relationship.”7
In Section 4.24 of the SPA, the Company represented and warranted to CLP
that its books and records were “maintained in accordance with commercially
reasonable business practices and are complete and accurate in all material respects”
and that Company “maintained a system of internal accounting controls sufficient to
5
Id. ¶ 54.
6
Id. ¶ 55; see Am. Compl., Exhibit A (“SPA”) art. IV.
7
Am. Compl. ¶ 56; SPA § 4.21.
-5-
provide reasonable assurances that (i) transactions are executed in accordance with
management’s authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with GAAP and to maintain
accountability for assets, and (iii) access to assets is permitted only in accordance
with management’s authorization.”8 In Section 4.6(b) of the SPA, the Company
represented and warranted to CLP that “[t]he Financials (including any notes
thereto) have been prepared in accordance with GAAP, consistently applied and
fairly present, in all material respects, the consolidated financial position and results
of the operations of the Group Companies in accordance with GAAP….”9
In Section 4.26 of the SPA, the Company represented and warranted to CLP
that, other than certain accounts listed in the Section 4.26 Disclosure Schedule, “all
of the accounts receivable” (a) “represent bona fide arm’s length sales in the
Ordinary Course of Business” and (b) “are collectible in the Ordinary Course of
Business, less usual allowances for doubtful accounts provided for on the face of the
Most Recent Balance Sheet.”10
In Section 4.15(vi) of the SPA and Section 4.15 of the Disclosure Schedule,
the Company identified “several pay or Compensation obligations . . . that would
8
Am. Compl. ¶ 57; SPA §4.24.
9
Am. Compl. ¶ 58; SPA § 4.6(b).
10
Am. Compl. ¶ 59; SPA § 4.26.
-6-
become payable by reason of the Contemplated Transactions” and that these
obligations were not in “material breach.”11 And in Section 4.17(b)(ii) of the SPA,
the Company represented and warranted that “no Group Company is delinquent in
any payments to any Company Employee or Contingent Worker for any wages,
salaries, commissions, bonuses, fees or other compensation due with respect to any
services performed for it to the date hereof or amounts required to be reimbursed to
such Company Employee or Contingent Worker.”12
In Section 4.8 of the SPA, the Company represented and warranted to CLP
that “[n]o Year 1 Earnout (as such term is defined in the Bergeron Employment
Agreement) will be due and payable by any Group Company in accordance with,
and subject to, the terms of the Bergeron Employment Agreement.”13
The Company represented in Section 4.17(a)(ii) of the SPA that all
independent contractors, consultants, temporary employees, leased employees or
other servants or agents performing services for the Company and classified as other
than a Company Employee were disclosed on the Section 4.17(a)(ii) Disclosure
11
Am. Compl. ¶ 60; SPA § 4.15(vi).
12
Am. Compl. ¶ 61; SPA § 4.17(b)(ii).
13
Am. Compl. ¶ 62; SPA § 4.8.
-7-
Schedule.14 The Section 4.17(a)(ii) Disclosure Schedule required the Company to
identify each Contingent Worker’s fee or compensation arrangement.15
Section 4.32(a) of the SPA provides:
(a) NONE OF THE COMPANY, NOR OR ANY OF ITS
REPRESENTATIVES, DIRECTORS, MANAGERS, PARTNERS,
OFFICERS OR DIRECT OR INDIRECT EQUITYHOLDERS HAS
MADE ANY REPRESENTATIONS OR WARRANTIES, EXPRESS
OR IMPLIED, OF ANY NATURE WHATSOEVER RELATING TO
THE COMPANY, ANY OF ITS SUBSIDIARIES OR THE
BUSINESS OF THE COMPANY, ITS SUBSIDIARIES OR
OTHERWISE IN CONNECTION WITH THE TRANSACTIONS
CONTEMPLATED HEREBY (INCLUDING ANY OF THE ASSETS
OF ANY GROUP COMPANY OR ANY PROJECTION OR
FORECAST RELATING TO ANY OF THEIR RESPECTIVE
BUSINESSES), OTHER THAN THOSE REPRESENTATIONS AND
WARRANTIES EXPRESSLY SET FORTH IN THIS ARTICLE IV.
EXCEPT AS EXPRESSLY SET FORTH HEREIN, THE
CONDITION OF THE ASSETS OF THE GROUP COMPANIES
SHALL BE “AS IS” AND “WHERE IS.”16
Section 4.32(b) of the SPA provides:
(b) Without limiting the generality of the foregoing, except as expressly
set forth in this Agreement, none of the Group Companies, nor any
Affiliate of the Group Companies, nor any of their respective
representatives, employees, officers, directors, managers, partners or
direct or indirect equityholders, has made, and shall not be deemed to
have made, any representations or warranties in the materials relating
to the Business made available to the Buyer, including due diligence
materials, or in any presentation of the Business by management of the
Group Companies or others in connection with the Contemplated
14
Am. Compl. ¶ 63; SPA § 4.17(a)(ii).
15
Id.
16
SPA § 4.32(a).
-8-
Transactions, and no statement contained in any of such materials or
made in any such presentation shall be deemed a representation or
warranty hereunder and deemed to be relied upon by the Buyer or any
of their Affiliates in executing, delivering and performing this
Agreement and the Contemplated Transactions. It is understood that
any cost estimates, projections or other predictions, any data, any
financial information or any memoranda or offering materials or
presentations, including any offering memorandum or similar materials
made available by the Group Companies and their Representatives, are
not and shall not be deemed to be or to include representations or
warranties of any such Person, and are not and shall not be deemed to
be relied upon by the Buyer or any of their Affiliates in executing,
delivering and performing this Agreement and the Contemplated
Transactions.17
2. CLP’s Disclaimer of Other Representations and Warranties.
Article V sets forth CLP’s representations and warranties. 18 Section 5.9(a) of
the SPA provides:
(a) NEITHER BUYER NOR ANY OF ITS REPRESENTATIVES,
DIRECTORS, MANAGERS, PARTNERS, OFFICERS,
EMPLOYEES OR DIRECT OR INDIRECT EQUITYHOLDERS
HAS MADE ANY REPRESENTATIONS OR WARRANTIES,
EXPRESS OR IMPLIED, OF ANY NATURE WHATSOEVER
RELATING TO BUYER OTHERWISE IN CONNECTION WITH
THE CONTEMPLATED TRANSACTIONS, OTHER THAN THOSE
REPRESENTATIONS AND WARRANTIES EXPRESSLY SET
FORTH IN THIS ARTICLE V.19
17
SPA § 4.32(b).
18
SPA art. V.
19
SPA § 5.9(a).
-9-
Section 5.9(b) of the SPA provides:
The Buyer agrees to and acknowledges the disclaimers set forth in
Section 4.32, Section 6.8 and Section 7.8.20
3. Seller Defendants’ Disclaimer of Other Representations and
Warranties.
Article VI of the SPA sets forth the Sellers’ representations and warranties.21
Section 6.8(a) of the SPA provides that none of the Seller Defendants
HAS MADE ANY REPRESENTATIONS OR WARRANTIES,
EXPRESS OR IMPLIED, OF ANY NATURE WHATSOEVER
RELATING TO SUCH SELLER, THE COMPANY, ANY OF ITS
SUBSIDIARIES OR THE BUSINESS OF SUCH SELLER, THE
COMPANY, ITS SUBSIDIARIES OR OTHERWISE IN
CONNECTION WITH THE TRANSACTIONS CONTEMPLATED
HEREBY, OTHER THAN THOSE REPRESENTATIONS AND
WARRANTIES EXPRESSLY SET FORTH IN THIS Article VI.22
Section 6.8(b) of the SPA provides that none of the Seller Defendants
has made, and shall not be deemed to have made, any representations
or warranties in the materials relating to the Business made available to
the Buyer, including due diligence materials, or in any presentation of
the Business by management of the Group Companies or others in
connection with the Contemplated Transactions, and no statement
contained in any of such materials or made in any such presentation
shall be deemed a representation or warranty hereunder and deemed to
be relied upon by the Buyer or any of their Affiliates in executing,
delivering and performing this Agreement and the Contemplated
Transactions. It is understood that any cost estimates, projections or
other predictions, any data, any financial information or any
20
SPA § 5.9(b).
21
SPA art. VI.
22
SPA § 6.8(a).
- 10 -
memoranda or offering materials or presentations, including any
offering memorandum or similar materials made available by the
Group Companies and their Representatives, are not and shall not be
deemed to be or to include representations or warranties of any such
Person, and are not and shall not be deemed to be relied upon by the
Buyer or any of their Affiliates in executing, delivering and performing
this Agreement and the Contemplated Transactions.23
Section 6.8(c) of the SPA provides that the Seller Defendants "agree to and
acknowledge the disclaimers set forth in Section 5.9(a).”24 Substantively
identical language is used with respect to the representations of the Blocker
and Blocker Seller in Section 7.8 of the SPA.
4. The Indemnification Clause.
Section 9.1(a) of the SPA provides CLP a remedy from the Seller Defendants, jointly
and severally, for breaches of these representations and warranties: the Seller
Defendants agreed to indemnify the Buyer Indemnified Parties, including CLP, for
all Losses incurred, and continuing to be incurred by the Buyer Indemnified Parties
as a result of “any breach of, or any misrepresentation with respect to, any
representations and warranties set forth in Articles IV, VI or VII” as well as “any
breach or violation of any covenant or agreement of such Seller contained in this
Agreement.”25 Section 9.3(c) provides “notwithstanding anything to the contrary
23
SPA § 6.8(b).
24
SPA § 6.8(c).
25
Am. Compl. ¶ 64; SPA § 9.1.
- 11 -
herein, neither the Deductible nor the Cap shall apply to any Losses resulting from
or arising out of (i) fraud…”26
5. The Integration Clause.
Section 10.5 of the SPA provides:
This Agreement, together with the other Ancillary Agreements and any
documents, instruments and certificates explicitly referred to herein,
constitutes the entire agreement among the Parties with respect to the
subject matter hereof and supersedes any and all prior discussions,
negotiations, proposals, undertakings, understandings and agreements,
whether written or oral, with respect thereto. There are no restrictions,
promises, warranties, covenants, or undertakings, other than those
expressly provided for herein and therein.27
B. SELLER DEFENDANTS’ AND INDIVIDUAL DEFENDANTS’ ALLEGED PRE-
CLOSING MISREPRESENTATIONS.
1. Loss of Material Customers.
In the Section 4.21(a) Disclosure Schedule, Defendants identified both ESA
Laboratories (“ESA”) and Maplewood Laboratories (“Maplewood”) as Material
Customers.28 Under Section 4.21, the Company represented that within twelve
months prior to the Purchase Agreement, neither ESA nor Maplewood “ceased or
26
SPA § 9.3(c)
27
Id. § 10.5.
28
Am. Compl. ¶ 69.
- 12 -
materially altered its relationship with the Business or, to Company’s Knowledge,
has threatened to cease or materially adversely alter any such relationship.”29
As of December 18, 2017—the Closing Date—neither ESA nor Maplewood
were in operation, nor has either ever been able to restart their toxicology
laboratories and begin processing clinical samples again.30 CLP alleges that the
Seller Defendants and the Individual Defendants were aware that ESA and
Maplewood were not operational at the time the SPA was executed.31
As to ESA, CLP alleges in detail that in September 2017, three months before
the false representations were made in the SPA, ABS employees became aware of
significant issues with ESA’s operations—including that ESA was entering a two-
week shutdown as a result of a negative business inspection—and were concerned
that ESA might never be able to reopen.32 They informed Rochwerg of their
concerns.33
As to Maplewood, CLP alleges that in October of 2017, ABS employees
learned of a dispute among Maplewood’s ownership that led to a shutdown of
29
Id. ¶ 70.
30
Id. ¶ 112.
31
Id. ¶ 113.
32
Id. ¶¶ 75-81.
33
Id. ¶¶ 75-81, 87.
- 13 -
operations and loss of employees.34 These facts too were communicated to
Rochwerg.35
ABS employees met with Maplewood representatives in November of 2017
to discuss the lab’s ongoing issues, the fact that Maplewood was not operational, and
concern as to whether Maplewood would be able to pay ABS the current amount
owing—which was in excess of $100,000.36 Maplewood represented it needed
short-term relief to restructure, and that it had hired consultants to assist.37 These
consultants asked ABS for a grace period and forgiveness of the amount owed,
saying it was necessary to turn Maplewood around.38
2. Overstated Revenue and Financial Results.
In the Summer of 2017, Rochwerg directed ABS employees to secure as many
equipment sales as possible to boost ABS revenues for the express purpose of
showing a higher EBITDA in connection with the planned sale to CLP.39 In August
34
Id. ¶¶ 100-104.
35
Id. ¶ 103.
36
Id. ¶¶ 106-107.
37
Id. ¶ 108.
38
Id. ¶¶ 106-110.
39
Id. ¶ 143.
- 14 -
2017, Radeas agreed to purchase $750,000 worth of equipment—a substantial
purchase as ABS annual equipment sales were approximately $3,000,000.40 But
ABS employee Ray Fuller (“Fuller”) felt it was more of a prospective deal, rather
than an actual purchase, and so-informed Rochwerg.41
Rochwerg then instructed Fuller to invoice the Radeas sale. Because the order
had not been fulfilled and no equipment had been shipped, the invoice was a
violation of ABS’s accounting policies and a process not in accordance with GAAP
that overstated and deliberately inflated ABS’s financial data.42 Specifically, ABS
policy provided that a customer would not be invoiced until the customer’s order
was fulfilled and the equipment shipped.43
Seller Defendants allegedly breached Sections 4.6(b), 4.24, and 4.26 through
their invoicing of the Radeas sale.44 CLP alleges that if it had known the real facts
concerning the Radeas “sale” it either would not have proceeded with acquiring ABS
or would have acquired it at a lower price.45
40
Id. ¶¶ 145-146.
41
Id. ¶¶ 147-148.
42
Id. ¶¶ 150-154.
43
Id. ¶ 142.
44
Id. ¶ 155.
45
Id. ¶ 154.
- 15 -
3. Understated Liabilities.
Seller Defendants also allegedly breached Sections 4.8, 4.15, and 4.17 of the
SPA by: (i) breaching the Company’s former Chief Executive Officer’s Employment
Agreement that entitled him to a $375,000 earn-out bonus payment; (ii) failing to
pay $833,332.29 in consulting fees owed under a Consulting Agreement between
ABS and the Company’s founder, Cliff Wright—an amount in excess of what was
specifically represented in the balance sheet as the only outstanding-balance-related
liability; and (iii) understating the doubtful accounts receivable reserve (the
“Accounts Receivable Reserve”) in the amount of $605,201 because several
accounts were not collectable in the Ordinary Course of Business.46
C. SELLER DEFENDANTS’, INDIVIDUAL DEFENDANTS’, PRINCIPAL INVESTOR
DEFENDANTS’, AND PRINCIPAL CASLA DEFENDANTS’ ALLEGED
FRAUDULENT SCHEME.
CLP contends Seller Defendants, Individual Defendants, Principal Investor
Defendants, and Principal Casla Defendants engaged in a fraudulent scheme to
misrepresent and conceal the fact that two of the Company’s Material Customers
were not in business, operating, and processing customer samples at the time of the
Closing Date.47
46
Id. ¶ 10.
47
Id.
- 16 -
Specifically, CLP alleges the Seller Defendants and the Individual Defendants
actively discussed the true state of affairs with ABS’s customer base.48 Internal
emails and discussions between the Individual Defendants and ABS employees
openly acknowledged the loss of two Material Customers.49
CLP alleges that Rochwerg directed Fuller to orchestrate the execution of a
new contract with ESA, despite the fact that it was not operational, because any
issues with the ESA account would be a potential issue for closing the transaction
with CLP.50 Fuller did so, arranging for what appeared to be a 12-month renewal
that, in fact, would likely be cancelled after just 90 days given the state of ESA’s
business.51 This contract was executed just seven days before the Closing of the
transaction with CLP.52 Rochwerg, on behalf of Seller Defendants and Individual
Defendants, designed a scheme to conceal the reality of ESA’s and Maplewood’s
statuses, and directed ABS employees to take steps to prevent CLP from learning
the true status of these accounts.53 For example, Rochwerg allegedly directed that a
48
Id. ¶ 7.
49
Id.
50
Id. ¶¶ 88-99.
51
Id. ¶ 94.
52
Id. ¶ 97.
53
See id. ¶¶ 114-136.
- 17 -
summary of ABS contracts be manipulated in a deceptive way to show a single start-
and-end date range for all contracts, rather than the true specific start-and-end
dates.54
In another incident, in advance of a meeting with lenders and CLP to discuss
the status of certain accounts, Rochwerg instructed Fuller and another ABS
employee not to volunteer information about ESA or Maplewood.55 To the contrary,
these employees were told to “stick to the script” that ESA and Maplewood were
“still under contract” even though those labs were not operational. The employees
were also told to deflect any questions seeking more specifics for contract dates
beyond those listed in the manipulated, misleading summary. 56
The Principal Investor Defendants and the Principal Casla Defendants are
alleged to have acted as part of this scheme through their agents.57 The Principal
Investor Defendants collectively owned over 69% of the membership interest in
Casla, and, according to CLP, at all relevant times, both dominated Casla and had
the right to control the conduct of Seller Defendants, Hines, and Rochwerg.58
54
Id. ¶¶ 119-123.
55
Id. ¶¶ 123-125.
56
Id. ¶ 127.
57
Id. ¶ 13.
58
Id.
- 18 -
R2 and Hawk each controlled at least one seat on Casla’s board of directors. 59 The
Principal Casla Defendants participated in this controlling block through Casla ABS
Investors. And, it is alleged, Hines and Rochwerg: are each members, principals or
officers of each of the Principal Casla Defendants; are each members of Casla’s
board of directors; and each actively participated in the management of Casla.60
D. SELLER DEFENDANTS’ TRANSFER OF SALE PROCEEDS TO THE PRINCIPAL
INVESTOR DEFENDANTS AND INVESTOR DEFENDANTS.
CLP also brings claims for unjust enrichment, fraudulent transfer, and
constructive trust.61 These claims arise from Seller Defendants alleged transfer of
the ABS sales proceeds to the Principal Investor Defendants and the Investor
Defendants with intent to defraud CLP and prevent CLP from being able to recover
the amounts owed to it as a result of the Seller Defendants’ and Individual
Defendants’ fraudulent activities.62 Specifically, CLP alleges Casla: (i) transferred
the ABS sale proceeds to the Principal Investor Defendants and the Investor
Defendants who own, operate, and control Casla such that they are insiders under
the Delaware Uniform Fraudulent Transfer Act (“DUFTA”); (ii) transferred ABS
59
Id.
60
Id.
61
Id. ¶ 15.
62
Id.
- 19 -
sale proceeds to the Principal Investor Defendants and the Investor Defendants
despite knowing that its statements in the Purchase Agreement’s representations and
warranties were false so as to decapitalize itself and avoid paying the judgment that
would ultimately be issued against it; and (iii) transferred substantially all of Casla’s
assets to the Principal Investor Defendants and the Investor Defendants, which
rendered Casla severely undercapitalized in relation to its business, likely unable to
pay CLP the amounts, and insolvent under the DUFTA.63
II. PARTIES’ CONTENTIONS
A. CLP’S CLAIMS.
CLP sets forth fourteen counts in its Amended Complaint, twelve of which
are disputed in the Motion to Dismiss.64 In summary, Counts I, II, and III relate to
the Seller Defendants’ and Individual Defendants’ omissions and misrepresentations
of material facts in negotiations with CLP leading up to the Closing and in the Article
IV representations and warranties. Count I seeks monetary damages for fraudulent
inducement against Seller Defendants and Individual Defendants. Count II seeks
rescissory damages for fraudulent inducement against Seller Defendants. Count III
63
Id. ¶ 276.
64
Defendants do not dispute the merits of Counts IX and XII. Still, Count XII for Civil
Conspiracy depends on the survival of at least one of the fraud claims.
- 20 -
seeks monetary damages for fraud against Seller Defendants and Individual
Defendants.
Counts IV and V seek declaratory judgement. Count IV seeks a declaration
that Casla is merely an alter ego of the Principal Investor Defendants and Investor
Defendants and therefore the corporate veil of Casla should be pierced. Count V
seeks a declaration that Casla, Hines, and Rochwerg were acting as the agents of the
Principal Investor Defendants and the Principal Casla Defendants and therefore the
Principal Investor Defendants are jointly and severally liable for Casla, Hines, and
Rochwerg’s misconduct.
Counts VI, VII, VIII, and X seek damages from Seller Defendants for breach
of contract. Count VI seeks monetary damages from Seller Defendants for failing
to disclose the true status of the ESA and Maplewood accounts in violation of
Section 4.21 of the SPA. Count VII seeks monetary damages for Seller Defendants’
failure to disclose the true nature of the Radeas “sale” in violation of Sections 4.6(b),
4.24, and 4.26 of the SPA. Count VIII seeks monetary damages from Seller
Defendants for failing to disclose the Bergeron earn-out bonus and the Cliff Right
consulting fees in violation of Sections 4.8, 4.15. and 4.17 of the SPA. Count X
seeks monetary damages for Seller Defendants’ failure to disclose the true status of
the Company’s accounts receivable and the proper accounting thereof in violation
of Section 4.26.
- 21 -
Count XI seeks monetary damages, disgorgement, and equitable relief for the
unjust enrichment of all Defendants. In the alternative, CLP seeks monetary
damages, disgorgement, and equitable relief for unjust enrichment of the Seller
Defendants only.
Count XIII seeks monetary damages against all Defendants via DUFTA for
fraudulent transfer of the proceeds realized from the Transaction to the Principal
Investor Defendants and Investor Defendants. Finally, Count XIV seeks damages
and equitable relief in the form of an order imposing a constructive trust over the
proceeds of the transaction held by Defendants, including disgorgement of all
proceeds readily traceable therefrom.
In their answering brief to Defendants’ Motion to Dismiss, CLP argues that
all Defendants are equitably estopped from challenging jurisdiction. Even so, CLP
contends, there is jurisdiction over the Investor Defendants, Casla Partners LLC
(collectively, “Non-Delaware Defendants”) and the Individual Defendants and the
exercise of such jurisdiction comports with due process. CLP says that the long-arm
statute provides jurisdiction over the Non-Delaware Defendants and jurisdiction
over the Individual Defendants is conferred by the Manager Consent Statute.
Finally, CLP suggests it is entitled to jurisdictional discovery at a minimum.
- 22 -
B. DEFENDANTS’ MOTION TO DISMISS.
Defendants contend (1) there is a lack of personal jurisdiction over the Non-
Delaware Defendants and the Individual Defendants; and (2) Counts I-VIII, X, and
XI fail to state cognizable causes of action.
Defendants first argue that the Non-Delaware Defendants are not equitably
estopped from challenging jurisdiction. Defendants next argue that the Non-
Delaware Defendants have taken no actions in Delaware sufficient to confer
jurisdiction under the long arm statute and that the exercise of personal jurisdiction
over the Non-Delaware Defendants does not comport with due process.
As for the Individual Defendants, Defendants contend that the Individual
Defendants are not subject to jurisdiction under the Manager Consent Statute and
that CLP did not serve the Individual Defendants under Delaware’s Long-Arm
Statute. Defendants further argue that CLP’s conspiracy theory does not provide a
basis for personal jurisdiction over the Individual Defendants.
With respect to Counts I, II, and III, Defendants allege that the anti-reliance
language in the SPA bars CLP’s fraud claims based on statements outside the four
corners of the SPA. Defendants argue further that the fraud claims are duplicative
of the breach-of-contract claims and should be dismissed. Defendants contend too
that CLP has not pled sufficient facts to establish any fraudulent representation
within the four corners of the SPA.
- 23 -
Defendants next argue that Count IV should be dismissed because CLP has
not stated a claim for veil piercing against the Principal Investor Defendants and
Investor Defendants. Defendants argue that Count V should be dismissed because
CLP has not stated a claim under agency theory against the Principal Investor
Defendants or the Principal Casla Defendants.
With respect to the breach claims in Counts VI, VII, VIII and X, Defendants
argue that CLP cannot maintain a claim for breach of the SPA by the Seller
Defendants. First, Defendants contend that the SPA bars any claims based on the
Accounts Receivable Reserve and Mr. Wright’s Consultancy Agreement. Second,
Defendants argue that CLP’s claim regarding the Bergeron Earnout are insufficient
where CLP has not even alleged that Mr. Bergeron achieved it.
With respect to Count XI, Defendants claim that CLP’s unjust
enrichment/disgorgement claim should be dismissed on the merits. Defendants
further suggest that CLP cannot assert unjust enrichment against non-parties to the
SPA. Finally, Defendants contend that Counts XIII and XIV should also be
dismissed on the merits.
- 24 -
III. STANDARD OF REVIEW65
The Defendants’ motion seeks to dismiss the Amended Complaint for failing
to state a claim on which relief can be granted.66 In Delaware, the pleading standards
for purposes of a Rule 12(b)(6) motion “are minimal.”67 When considering a
defendant’s motion to dismiss, the Court should accept all well-pleaded factual
allegations in the Complaint as true, accept even vague allegations in the Complaint
as “well-pleaded” if they provide the defendant notice of the claim, draw all
reasonable inferences in the plaintiff’s favor, and deny the motion unless the plaintiff
65
While CLP—the party that decided to file simultaneous parallel suits in two of our trial
courts—quibbles over whether the Court should apply the Court of Chancery Rules or the Superior
Court Civil Rules here, it is mute as to whether there is any substantive difference between the two
Court’s rules or any operative difference in the analyses thereunder that must be engaged to decide
this motion to dismiss. That’s because there is nothing to say—there is no difference. See Ct. Ch.
R. 12(b)(2), 12(b)(6); Del. Super. Ct. Civ. R. 12(b)(2),12(b)(6). Compare Ryan v. Gifford, 935
A.2d 258, 265 (Del. Ch. 2007) (explicating standard applied under Chancery Rule 12(b)(2)), with
Economical Steel Building Technologies, LLC, v. E. West Construction, Inc., 2020 WL 1866869,
at *2 (Del. Super. Ct. Apr. 14, 2020) (explicating that same standard as applied under Superior
Court Civil Rule 12(b)(2)). Compare also Matthew v. Laudamiel, 2012 WL 605589, at *12 (Del.
Ch. Feb. 21, 2012) (explicating standard applied under Chancery Rule 12(b)(6)), with Khushaim
v. Tullow Inc., 2016 WL 3594752, at *2 (Del. Super. Ct. June 27, 2016) (explicating that same
standard as applied under Superior Court Civil Rule 12(b)(6)). And compare Savor, Inc. v. FMR
Corp., 812 A.2d 894, 896-97 (Del. 2002) (setting forth Supreme Court’s standard of review and
spelling out the “well-settled” standards governing a motion to dismiss for failure to state a claim
under Chancery Rule 12(b)(6)), with Beck v. Brady, 2004 WL 2154284, at *1 (Del. Sept. 20, 2004)
(setting forth the Supreme Court’s standard of review and spelling out those same “well-settled”
standards governing a motion to dismiss for failure to state a claim under Superior Court Civil
Rule 12(b)(6)). And so, the Court will wait until the point in this litigation when there is a
meaningful distinction and when a decision to be made between the two courts’ sets of rules is of
moment.
66
See Ch. Ct. R. 12(b)(6).
67
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 536 (Del. 2011).
- 25 -
could not recover under any reasonably conceivable set of circumstances susceptible
of proof.68 The operative test here is one of “reasonable conceivability.”69 This
standard asks whether there is a “possibility” of recovery. 70 And Delaware’s test is
more lenient than the federal “plausibility” pleading standard, which invites judges
to “‘determin[e] whether a complaint states a plausible claim for relief’ and ‘draw
on . . . judicial experience and common sense.’”71 So this Court does not assess a
claim’s plausibility.72
When a defendant invokes Rule 12(b)(2) to seek a complaint’s dismissal for
lack of personal jurisdiction, “[t]he plaintiff has the burden to show a basis for the
Court’s jurisdiction over the nonresident defendant.”73 In determining whether a
plaintiff has met its burden, the Court engages in a two-pronged inquiry: first, it
must determine that service of process is authorized by statute, and “then [it] must
determine that the exercise of jurisdiction over the nonresident defendant comports
68
Id. (footnote omitted).
69
Id. at 537 (footnote and internal quotation marks omitted).
70
Id. at 537 n.13.
71
Id. (alteration in original).
72
See Cambium Ltd. v. Trilantic Capital Partners III L.P., 2012 WL 172844, at *2 (Del. Jan. 20,
2012) (“The Court of Chancery erred by applying the federal ‘plausibility’ standard in dismissing
the amended complaint.”).
73
Terramar Retail Centers, LLC v. Marion #2-Seaport Trust U/A/D/ June 21, 2002, 2017 WL
3575712, at *4 (Del. Ch. Aug. 18, 2017) (citation omitted).
- 26 -
with traditional due process notions of fair play and substantial justice.”74 “The
plaintiff has the burden to offer affirmative proof that these two steps are satisfied
as to each defendant.”75
IV. DISCUSSION
A. PERSONAL JURISDICTION.
1. There is Personal Jurisdiction Over the Individual Defendants.
Defendants argue that there is a lack of personal jurisdiction over the
Individual Defendants, including under Section 18-109 of the Delaware Limited
Liability Company Act, (the “LLC Manager Consent Statute”).76 The LLC Manager
Consent Statute authorizes personal jurisdiction over persons serving as managers
of Delaware limited liability companies “in all civil actions or proceedings brought
in the State of Delaware involving or relating to the business of the limited liability
company, or a violation by the manager . . . of a duty to the limited liability company
or any member of the limited liability company, whether or not the manager . . . is a
manager . . . at the time suit is commenced.”77
74
Ryan v. Gifford, 935 A.2d 258, 265 (Del. Ch. 2007).
75
Hartsel v. Vanguard Group, Inc., 2011 WL 2421003, at *7 (Del. Ch. June 15, 2011), aff’d, 38
A.3d 1254 (Del. 2012).
76
DEL. CODE ANN. tit. 6, § 18-109 (2018).
77
Id. at § 18-109(a).
- 27 -
So what is the scope of “involving or relating to the business of the limited
liability company”?
Defendants contend this Court’s Hartsel v. Vanguard Group decision answers
that question. In Hartsel, the Court observed that an action involves or relates to the
business of an LLC if:
(1) the allegations against [the manager] focus centrally on his rights,
duties and obligations as a manager of a Delaware LLC; (2) the
resolution of this matter is inextricably bound up in Delaware law; and
(3) Delaware has a strong interest in providing a forum for disputes
relating to the ability of managers of an LLC formed under its law to
properly discharge their respective managerial functions.78
And, the Court explained, “Delaware courts interpret the ‘rights, duties and
obligations as a manager of a Delaware LLC’ to refer to rights, duties, and
obligations a manager owes to his organization.”79
CLP counters with our Supreme Court’s more recent Hazout v. Tsang Mun
Ting decision. In Hazout, the Supreme Court held that it may exercise personal
jurisdiction over a non-resident officer or director of a Delaware corporation in any
civil action in which the corporation is a party and the officer or director is a
“necessary or proper party” under 10 Del. C. § 3114 (the “Corporate Director and
78
Hartsel, 2011 WL 2421003, at *8 (citations omitted).
79
Id. (quoting Vichi v. Koninklijke Philips Elecs. N.V., 2009 WL 4345724 (Del. Ch. Dec. 1,
2009)).
- 28 -
Officer Consent Statute”).80 The Supreme Court overturned longstanding precedent
that limited § 3114 personal jurisdiction over corporate directors and officers to
actions involving alleged breaches of a fiduciary or statutory duty owed to the
corporation or its stockholders by the non-resident officer or director.81 The
Supreme Court—relying on § 3114’s plain language—abrogated this Court’s Hana
Ranch, Inc. v. Lent82 (and its progeny) and conducted a de novo review of the
Superior Court’s interpretation of § 3114:
In its analysis, the Superior Court acknowledged the effect Hana Ranch
had of limiting the application of § 3114 to suits that involve claims of
breach of a corporate fiduciary’s duty. Being mindful of that constraint,
the Superior Court strained to find jurisdiction over Hazout under the
Internal Affairs Claim Provision. Even though the trial court
acknowledged that Tsang did not allege that Hazout breached a duty
that he owed in his official capacity, it determined that “the alleged
misconduct would be adverse to Hazout’s fiduciary duty to Silver
Dragon.” The Superior Court also observed that “Hazout acted in his
corporate capacity as Silver Dragon’s Director, President, CEO and
Principal Financial and Accounting Officer when he transferred the
money to his company, Travellers.” On those grounds, the trial court
determined that the Internal Affairs Claim Provision could be used to
exercise jurisdiction over Hazout.83
80
Hazout v. Tsang Mun Ting, 134 A.3d 274, 288-94 (Del. 2016).
81
Id.82
424 A.2d 28 (Del. Ch. 1980).
83
Hazout, 134 A.3d at 283.
- 29 -
The Supreme Court said of the Superior Court’s analysis:
To our minds, it is counterproductive to embrace Hana Ranch and then
create an incentive to read the Internal Affairs Claim Provision
overbroadly. Rather, the historical view of the Court of Chancery that
the Internal Affairs Claim Provision addressed only claims against
nonresident fiduciaries of Delaware corporations for internal affairs
claims involving an argument that they breached statutory or fiduciary
duties they owed to the corporation or its stockholders is the correct one
dictated by the language of that provision. In this case, Hazout is not
being sued for having breached any duty he owed to Silver Dragon or
its stockholders. He is being sued by Tsang for torts he allegedly
committed against Tsang and the Investor Group in the course of
negotiating on behalf of Silver Dragon and by using his powers at Silver
Dragon to divert their funds to his affiliate.84
In short, the Supreme Court opted for a plain-language approach.85 And
thereunder, the Supreme Court found the Corporate and Officer Consent Statute
conferred jurisdiction over Hazout to Delaware state courts.86 It’s noteworthy that
the Hartsel test originates from Hana Ranch’s reasoning,87 the Hazout Court closely
examined Hana Ranch’s reasoning, and the Hazout Court then decidedly moved
away from Hana Ranch’s narrow approach.
84
Id. at 292.
85
Id. at 293-94.
86
Id.
87
Hartsel, 2011 WL 2421003, at *9 n.56 (citing Assist Stock Management L.L.C. v. Rosheim,
753 A.2d 974 (Del. Ch. 2000)); Assist Stock Management, 753 A.2d at 979-81 (citing Hana
Ranch).
- 30 -
Although Hazout concerned the Corporate Director and Officer Consent
Statute, this Court’s decision last year in Metro Storage International v. Harron
applied Hazout in the LLC context.88
In Metro Storage, this Court found the LLC Manager Consent Statute and the
Corporate Director and Officer Consent Statute at issue in Hazout to be “comparable
jurisdictional” statutes.89 And so, Metro Storage convincingly explains, the history
of the corporate director and officer consent statute equally supports allowing
Delaware courts to exercise personal jurisdiction over key individuals who take
action on behalf of an LLC.90
The Corporate Director and Officer Consent Statute originally applied only to
directors, and provided Delaware courts no ability to exercise personal jurisdiction
over senior officers.91 Because this omission was problematic, the General
Assembly eventually expressly extended § 3114 to senior officers.92 But, as this
Court observed in Metro Storage, the LLC Manager Consent Statute has avoided a
88
Metro Storage Int’l LLC v. Harron, 2019 WL 3282613, at *11 (Del. Ch. July 19, 2019).
89
Id.90
Id. at *21.
91
See In re American International Group, Inc., 965 A.2d 763, 778 (Del. Ch. 2009); Metro
Storage, 2019 WL 3282613, at *21.
92
See DEL. CODE ANN. tit. 10, § 3114(b) (2019).
- 31 -
similar problem by always enabling a Delaware court to exercise personal
jurisdiction over one who “participates materially” in the business of an LLC—
regardless of that individual’s title—for claims relating to his or her actions.93
It follows, therefore, that this Court should look beyond any individual’s title
and consider whether the alleged actions underlying the claims fall within the scope
of the LLC Manager Consent Statute. Defendants argue here that Hazout should be
limited only to corporate directors and officers. Defendants say “both pre- and post-
Hazout, Delaware courts have consistently applied Hartsel’s three-pronged due
process analysis.”94 But the cases Defendants cite hardly support the broad
propositions Defendants wish the Court to adopt—that Hazout must be limited only
to corporate directors and officers and that in the LLC context a Delaware court must
apply Hartsel’s three-pronged due process analysis. Rather, those cases are
examples of where Hartsel’s due process analysis was applied to tort or contract
claims unconnected to the internal affairs or corporate governance issues that
Delaware law is concerned with.95 The situation here is different and most akin to
93
Metro Storage Int’l LLC v. Harron, 2019 WL 3282613, at *21 (Del. Ch. July 19, 2019).
94
Moving Defs.’ Reply Br. in Further Supp. of Their Mot. to Dismiss (“Defs. Reply”) at 6.
95
See, e.g., CelestialRX Investments, LLC v. Krivulka, 2019 WL 1396764, at *20 (Del. Ch. Mar.
27, 2019) (“The Plaintiffs’ claims against Mazur during that time period deal with his duties and
obligations as a director and manager of Akrimax.”); Baier v. Upper New York Investment Co.
LLC, 2018 WL 1791996, at *9 (Del. Ch. Apr. 16, 2018) (“[T]he alleged fraudulent scheme was
commenced and completed prior to the existence of the LLC Defendants. It is inconceivable how
Johny’s alleged wrongdoing, which occurred prior to the formation of the LLC Defendants, arose
- 32 -
Hazout—that is, the specific claims against the Individual Defendants involve
“actions in [their] official capacity of negotiating contracts that involved that change
of control of a Delaware[-formed entity].”96
And so due process, in the context of the LLC Manager Consent Statute, is
satisfied. The Hazout Court explained that, “[b]y becoming a director and officer of
a Delaware corporation, Hazout purposefully availed himself of certain duties and
protections under our law.”97 And, the Court found, “the claims against Hazout
involve his actions in his official capacity of negotiating contracts that involved the
change of control of a Delaware public corporation.”98 Here, the parties to the SPA
out of his rights, duties and obligations as manager of limited liability companies that were not yet
in existence when the wrongdoing occurred. Moreover, the Complaint acknowledges that the LLC
Defendants ‘have no offices, no employees, and conduct no business.’ Thus the claims at issue
cannot possibly focus on Johny’s rights, duties and obligations as manager of the LLC Defendants
where, by Danny’s own admission, there is nothing for Johny to do (or not do) as relates to these
entities.”) (citations omitted); Republic Business Credit, LLC v. Metro Design USA, LLC, 2016
WL 3640349, at *10 (Del. Super. Ct. June 29, 2016) (“[T]his case involves tort claims unconnected
with the internal affairs of DE Metro Design.”); Wiggins v. Physiologic Assessment Services, LLC,
138 A.3d 1160, 1165 (Del. Super. Ct. 2016) (finding employee failed to meet burden that claims
concerning the nonresident CEO’s duty to ensure employer compliance with employment laws
were centrally focused on CEO’s rights, duties, and obligations as manager); Schweitzer v. LCR
Capital Partners, LLC, 2020 WL 1131716, at *6 (Del. Super. Ct. Mar. 9, 2020) (concerning a
violation of a Connecticut wage laws between two Connecticut residents).
96
Hazout, 134 A.3d at 293.
97
Id. at 292; see also LVI Group Investments, LLC v. NCM Group Holding, LLC, 2018 WL
1559936, at *10 (Del. Ch. Mar. 28, 2018) (Exercising personal jurisdiction over individual
defendant directors and officers of a Delaware corporation who had purposefully availed
themselves of certain duties and protections under Delaware law by agreeing to serve as directors
and officers of a Delaware corporation was “consistent with due process.”).
98
Hazout, 134 A.3d at 293.
- 33 -
agreed that Delaware law would govern and that any action arising out of the SPA
would be brought in Delaware. So not one of the Individual Defendants can credibly
suggest that he never foresaw that he would be subject to litigation in Delaware over
his conduct.99 The Court finds that there is jurisdiction over the Individual
Defendants because they are alleged to have used their capacity as managers of Casla
to commit the well-pled wrongs when negotiating contracts involving the change of
control of ABS.
2. There is No Personal Jurisdiction Over the Non-Delaware Defendants.
CLP asserts Delaware’s Long-Arm Statute, the alter ego theory of
jurisdiction, the agency theory of jurisdiction, and the conspiracy theory of
jurisdiction allow for this Court’s exercise of personal jurisdiction over the Non-
Delaware Defendants.100 Defendants argue that CLP cannot obtain jurisdiction over
the Non-Delaware Defendants under any theory.
99
See Hazout, 134 A.3d at 293-94.
100
CLP’s argument that Defendants are equitably estopped from challenging jurisdiction fails. As
alleged, Non-Delaware Defendants’ held positions as unit holders or limited parties and any
benefits these non-Delaware Defendants received were indirect because they depended upon the
acts of the managers of the respective entities to further distribute funds from the sale of ABS.
And the mere contemplation of benefits is not sufficient to constitute a direct benefit. See
Neurvana Med., LLC v. Balt USA, LLC, 2019 WL 4464268, at *4 (Del. Ch. Sept. 18, 2019),
reargument denied, 2019 WL 5092894 (Del. Ch. Oct. 10, 2019).
- 34 -
All of these theories require CLP to plead an act within the state of Delaware
sufficient to confer jurisdiction over the Non-Delaware Defendants.101 In its
answering brief, CLP provides a summary of the acts allegedly conferring
jurisdiction:
[t]hese acts, and their effects, involved no less than eight Delaware
entities: two Delaware entities (Seller Defendants) made knowingly
false representations in the Purchase Agreement to a third Delaware
entity (CLP), who through the Purchase Agreement, governed by
Delaware law with a Delaware forum selection clause, acquired a fourth
Delaware entity (ABS). (See generally FAC). These fraudulent
representations harmed a Delaware entity (CLP), yet benefited each of
the co-conspirators, including six Delaware entities (Seller Defendants,
Casla Partners, LP, Casla Partners Fund I, LP, and Principal Investor
Defendants).102
Specifically, CLP alleges all Defendants “received substantial direct benefits from
the Purchase Agreement and should reasonably have anticipated defending against
lawsuits related to the Purchase Agreement in Delaware”103 and “perpetuated and
101
See Mobile Diagnostic Grp. Holdings, LLC v. Suer, 972 A.2d 799, 804 (Del. Ch. 2009)
(“Under Delaware’s long-arm statute, Delaware courts can exercise personal jurisdiction over a
defendant for a claim that ‘arises from’ a ‘jurisdictional act’ enumerated in the statute.”); EBG
Holdings LLC v. Vredezicht’s Gravenhage 109 B.V., 2008 WL 4057745, at *11 (Del. Ch. Sept. 2,
2008) (“The second common factor is that a successful showing of alter ego or agency does not
necessarily mean that the principal or parent is subject to jurisdiction. As theories of indirect
jurisdiction, the underlying question on both theories is whether the subsidiary’s actions satisfy §
3104 of the long-arm statute.”); Istituto Bancario Italiano, SpA v. Hunter Eng’g Co., Inc., 449
A.2d 210 (Del. 1982) (The third part of the five-part test for jurisdiction under the conspiracy
theory requires a plaintiff to show “a substantial act or substantial effect in furtherance of the
conspiracy occurred in the forum state.”).
102
CLP Ans. Br. at 23-24.
103
Am. Compl. ¶ 38.
- 35 -
carried out the fraud and other misconduct alleged herein, which had effects in
Delaware on CLP, which is a Delaware corporation.”104 CLP alleged that these
Defendants transacted business in Delaware through their involvement with the
Purchase Agreement, Casla, and ABS, out of which arise CLP’s claims.
Additionally, with respect to Casla Partners LLC, CLP alleged that it holds an equity
interest in Casla ABS Investors and controls that entity.105
These alleged acts do not suffice to confer specific jurisdiction under either
Section 3104(c)(1) of Delaware’s Long Arm Statute or any of CLP’s other alleged
theories. Section 3104(c)(1) permits a Court to exercise jurisdiction over a non-
resident Defendant that “[t]ransacts any business or performs any character of work
or service in the State.”106 But “[b]ecause Section 3104(c)(1) constitutes a specific
jurisdiction provision, it only allows jurisdiction over causes of action that are
closely intertwined with the jurisdictional contact.”107 And none of the jurisdictional
contacts suggested by CLP are so closely intertwined.
104
Id. ¶ 40.
105
Am. Compl. ¶ 46.
106
DEL. CODE ANN. tit. 10, § 3104(c)(1) (2018).
107
In re Mobilactive Media, LLC, 2013 WL 297950, at *28 (Del. Ch. Jan. 25, 2013).
- 36 -
First, the holding of an interest in a Delaware entity is not an act in Delaware
sufficient to confer specific jurisdiction.108 Second, a choice of law provision in a
contract selecting Delaware law is not an act in the State of Delaware for purposes
of conferring jurisdiction.109 Third, in Delaware, “[i]t is well established law that
merely contracting with an entity that is incorporated within a forum state does not
provide necessary connections between the contract and the forum to support a
finding of jurisdiction.”110 And lastly, “the passive receipt of income by defendants
from debt and equity securities of Delaware companies does not constitute sufficient
contacts with the state to support a finding of minimum contacts.”111
CLP also alleges that there is jurisdiction because the “entire transaction
revolved around Delaware and its corporate law.”112 Relying on Crescent/Mach I
108
AeroGlobal Capital Management, LLC v. Cirrus Industries, Inc., 871 A.2d 428, 439 (Del.
2005) (“We acknowledge that the ownership of a Delaware subsidiary does not, without more,
amount to the transaction of business under Delaware’s Long Arm Statute.”).
109
Mobile Diagnostic, 972 A.2d at 805.
110
Abajian v. Kennedy, 1992 WL 8794, at *10 (Del. Ch. Jan. 17, 1992).
111
Hart Holding Co. Inc. v. Drexel Burnham Lambert Inc., 1992 WL 127567, at *5 (Del. Ch. May
28, 1992) (“The isolated act of investing in the shares of a Delaware corporation creates a
foreseeable relationship with this state in only one respect: the law of Delaware will determine the
nature of the rights thereby acquired. While that relationship is sufficient alone to support in
personam jurisdiction in a narrow class of cases . . . it surely cannot support in personam
jurisdiction for a general conspiracy and fraud claim.”).
112
CLP Ans. Br. at 24.
- 37 -
Partners, L.P. v. Turner,113 CLP contends that with the transaction’s focus on
Delaware law and the transfer of a Delaware entity between Delaware entities, “a
substantial act in furtherance of the plan . . . occurred in Delaware.”114
Crescent/Mach, however, centered on a merger that involved the formation of a
Delaware entity and a filing with Secretary of State.115 This Court has held “[t]he
formation of a Delaware entity or the filing of a corporate instrument in Delaware to
facilitate the challenged transaction satisfies this element.”116 But none of that’s
alleged here. CLP has not said the SPA required a specific filing with Delaware’s
Secretary of State, nor that a Delaware entity was formed as a result of the SPA. So
the required close nexus is lacking in CLP’s claims.117
CLP also argues that there is general jurisdiction over the Non-Delaware
Defendants under Section 3104(c)(4) of Delaware’s Long Arm Statute. Section
3104(c)(4) provides for personal jurisdiction over non-resident defendants if the
defendant causes tortious injury within or outside Delaware from an act or omission
113
846 A.2d 963, 977 (Del. Ch. 2000) (merger between Delaware corporations under Delaware
corporate law was a substantial act in furtherance of the conspiracy).
114
CLP Ans. Br. at 24.
115
Crescent/Mach, 846 A.2d at 977.
116
Hamilton Partners, L.P. v. Englard, 11 A.3d 1180, 1198 (Del. Ch. 2010).
117
See LVI Grp. Invs., LLC v. NCM Group Holdings, LLC, 2017 WL 3912632, at *5 (Del. Ch.
Sept. 7, 2017) (“To confer jurisdiction, the transaction of business must have a ‘tight nexus’ to the
cause of action and must ‘form a source of the claim.’”).
- 38 -
outside of the State if the defendant “regularly does or solicits business, engages in
any other persistent course of conduct in the State or derives substantial revenue
from services, or things used or consumed in the State[.]”118 “Specifically,
subsection (c)(4) jurisdiction arises only ‘when a defendant has had contacts with
this state that are so extensive and continuing that it is fair and consistent with state
policy to require that the defendant appear here and defend a claim.’”119 CLP claims
this element is satisfied because (1) each of the Investor Defendants holds an equity
interest in Casla;120 (2) Casla Partners LLC’s sole member is Hines, whom Plaintiffs
have alleged controlled and dominated ABS;121 (3) Casla entities are closely related
and share overlapping management and ownership;122 (4) Casla Partners LLC had
an advisory services agreement with ABS;123 and (5) CLP’s injury arises out of the
118
DEL. CODE ANN. tit. 10 § 3104(c)(4) (2018).
119
Comput. People, Inc. v. Best Int’l Grp., Inc., 1999 WL 288119, at *7 (Del. Ch. Apr. 27, 1999);
see also HMG/Courtland Props., Inc. v. Gray, 729 A.2d 300, 310 (Del. Ch. 1999) (“The[]
conditions [of Section 3104(c)(4)] are rigorous and require a showing of substantial and continuous
activity in Delaware.”).
120
See Am. Compl. ¶¶ 22, 24, 30-34.
121
See id.122
CLP Ans. at 20.
123
Id.- 39 -
Investor Defendants’ and Casla Partners LLC’s fraud, which is related to their
investments in Delaware.124
A non-resident’s ownership interest in a Delaware entity, without more, does
not provide a basis for the “persistent course of conduct in [Delaware]” required for
general jurisdiction.125 The Altech Indus., Inc. v. Al Tech Specialty Steel Corp. case
that CLP cites is inapposite.126 In Altech the federal district court recognized general
jurisdiction where: the defendant corporation acquired the stock of a Delaware co-
defendant as a result of a merger under Delaware law; the majority of defendant’s
subsidiaries were Delaware corporations; the defendant corporation regularly filed
and recorded corporate documents with Delaware’s Secretary of State; the defendant
corporation used a Delaware-based corporation trust company as its agent; and the
defendant corporation regularly employed Delaware corporation law to merge its
subsidiaries.127 CLP has alleged neither the formation of a company in Delaware
nor any filing with the Secretary of State as the result of the Transaction.
Because CLP has not even made a prima facie case for personal jurisdiction
over the Non-Delaware Defendants, jurisdictional discovery is also denied. “If a
124
Am. Compl. ¶ 40.
125
Conn. Gen. Life Ins. Co. v. Pinkas, 2011 WL 5222796, at *3 (Del. Ch. Oct. 28, 2011).
126
542 F. Supp. 53 (D. Del. 1982).
127
Id. at 55.
- 40 -
plaintiff presents factual allegations that suggest ‘with reasonable particularity’ the
possible existence of the requisite ‘contacts between [the parties] and the forum
state,’ the plaintiff’s right to conduct jurisdictional discovery should be
sustained.”128 But jurisdictional discovery is not appropriate until there is
demonstration of a non-frivolous ground for jurisdiction.129
Given the dearth of factual allegations, CLP cannot use jurisdictional
discovery to simply “fish for a possible basis for this court’s jurisdiction.”130 No,
the Court must determine whether certain discovery avenues, “if explored, might
provide the ‘something more’ needed” to establish personal jurisdiction.131 To merit
jurisdictional discovery, plaintiffs show that their factual allegations establish with
reasonable particularity the possible existence of requisite contacts. Yet, CLP does
not explain how discovery would provide the “something more” needed to establish
personal jurisdiction. And CLP has failed to establish with requisite particularity
any act in Delaware sufficient to confer jurisdiction.
128
Toys “R” Us, Inc. v. Step Two, S.A., 318 F.3d 446, 456 (3d Cir. 2003) (quoting Mellon Bank
(East) PSFS, Nat’l Ass’n v. Farino, 960 F.2d 1217, 1223 (3d Cir. 1992)).
129
In re Am. Int’l Gp., 965 A.2d at 831 n.195 (Del. 2011).
130
Id.131
Toys “R” Us, 318 F.3d at 456.
- 41 -
Jurisdictional discovery will not change the documents governing the
Transaction nor will it create new contacts sufficient to confer jurisdiction over the
Non-Delaware Defendants. Accordingly, all claims against the Non-Delaware
Defendants must be dismissed.
B. CLP’S FRAUD CLAIM SURVIVES.
Defendants argue that the Court should dismiss the fraud claim because it is
barred by the SPA’s anti-reliance language and integration provision. According to
Defendants these provisions bar CLP from claiming it reasonably relied on any
alleged misrepresentations or omissions outside of those representations and
warranties specified in the SPA.
1. The non-reliance provision limits fraud claims to written
representations in the SPA.
Article IV of the SPA sets forth the Company’s representations and
warranties. Defendants rely on the non-reliance and integration provisions in
Sections 4.32, 5.9, 6.8, 7.8 and 10.1 of the SPA to make its argument. Section 4.32
provides:
Without limiting the generality of the foregoing, except as expressly set
forth in this Agreement, none of the Group Companies, nor any
Affiliate of the Group Companies, nor any of their respective
representatives, employees, officers, directors, managers, partners or
direct or indirect equity holders, has made, and shall not be deemed to
have made, any representations or warranties in the materials relating
to the Business made available to the Buyer, including due diligence
materials, or in any presentation of the Business by management of the
Group Companies or others in connection with the Contemplated
- 42 -
Transactions, and no statement contained in any of such materials or
made in any such presentation shall be deemed a representation or
warranty hereunder and deemed to be relied upon by the Buyer or any
of their Affiliates in executing, delivering and performing this
Agreement and the Contemplated Transactions. It is understood that
any cost estimates, projections or other predictions, any data, any
financial information or any memoranda or offering materials or
presentations, including any offering memorandum or similar
materials made available by the Group Companies and their
Representatives, are not and shall not be deemed to be or to include
representations or warranties of any such Person, and are not and shall
not be deemed to be relied upon by the Buyer or any of their Affiliates
in executing, delivering and performing this Agreement and the
Contemplated Transactions.132
Substantively identical language is used with respect to the representations of the
Company Seller and Blocker Seller in Section 6.8133 and the Blocker and Blocker
Seller in Section 7.8.134 In Section 5.9(b) of the SPA, CLP represented that “[t]he
Buyer agrees to and acknowledges the disclaimers set forth in Section 4.32, Section
6.8 and Section 7.8.”135 Section 10.1 is a standard integration clause that should not
be considered a non-reliance provision.136
132
SPA § 4.32(b) (emphasis added).
133
See id. § 6.8.
134
See id. § 7.8.
135
Id. § 5.9(b).
136
See Novipax Holdings LLC v. Sealed Air Corp., 2017 WL 5713307, at *12 (Del. Super. Ct.
Nov. 28, 2017).
- 43 -
CLP claims Defendants’ argument ignores the fact that CLP’s fraud claims
(Counts I, II, and III) are based on fraudulent statements in the SPA’s representations
and warranties and that a fraud claim can be based on a purchase agreement’s
representations and warranties. Additionally, CLP claims that even if CLP were
relying on extra-contractual statements, the SPA “specifically preserved the right to
pursue a legal remedy for fraud,” which demonstrates that the parties did not intend
to wholly disclaim reliance on intentional fraud made outside the parameters of the
SPA’s representations and warranties.137 CLP cites Section 9.3(c) to show that the
parties expressly preserved CLP’s right to seek relief outside of the provisions set
forth in the Purchase Agreement for claims of fraud.138
CLP relies on Anvil Holding Corp. v. Iron Acquisition Co. Inc. to argue that
its fraud claim is cognizable in spite of the non-reliance provisions.139 In Anvil, this
Court refused, for two reasons, to dismiss a fraud claim when the defendant resorted
to the non-reliance provisions of the subject agreement.140 First, the Anvil court
found that the non-reliance provisions did not unambiguously demonstrate that both
137
See CLP Ans. Br. at 38 (quoting Anvil Holding Corp. v. Iron Acquisition Co. Inc, 2013 WL
2249655, at *1 (Del. Ch. May 17, 2013)).
138
CLP Ans. Br. at 39; see § 9.3(c) (“Notwithstanding anything to the contrary herein, neither the
Deductible nor the Cap shall apply to any Losses resulting from or arising out of (i) fraud . . .”).
139
2013 WL 2249655.
140
Id. at *8.
- 44 -
parties disclaimed reliance on extra-contractual statements. Second, the Anvil court
found that the “exclusive remedies” clause, in which the parties agreed to reserve all
rights to claims based on fraud, preserved the fraud claim.141 The exclusive remedies
provision thus provided further evidence that the parties intended that fraud claims
could be based on extra-contractual representations.142
Similar to Anvil, the parties included an exclusive remedies provision and
expressly provided that fraud claims were reserved. Unlike Anvil, the Company, the
Seller Defendants, and CLP expressly represented in Sections 4.32, 5.9, 6.8, and 7.8
that they were not relying on any extra-contractual representations. Still, the fraud
claims may proceed based on the written representations in the SPA. As in Novipax
Holdings v. Sealed Air Corp., both parties had disclaimed reliance and also included
an exclusive remedies provision that expressly reserved fraud claims.143 The
Superior Court there explained “the non-reliance provision likely places a limit on
the types of fraud claims that can be brought to those based on written
representations in the APA . . . when drafters specifically preserve the right to assert
141
Id.
142
Id.
143
2017 WL 5713307, at *12.
- 45 -
fraud claims, they must say so if they intend to limit that right to claims based on
written representations in the contract.”144
While Defendants read otherwise, the language in the SPA does not warrant
dismissal of CLP’s fraud claim. At this stage of the proceedings, the Court finds
that the parties preserved a fraud claim in Section 9.1(c), but limited that fraud claim
through the non-reliance provisions in Section 4.20 and 5.7 to written
representations in the SPA. As alleged, the representations relied upon are intra-
contractual. Throughout paragraphs 69-155 of the Amended Complaint, however,
CLP appears to be relying on extra-contractual misrepresentations and omissions.145
To the extent that CLP is relying on extra-contractual misrepresentations and
omissions, those are barred by the non-reliance provisions.
2. The fraud claim is pled with the requisite particularity.
Defendants also attack the fraud claim with suggestions that it (1) is not
pleaded with particularity and (2) alleges no damages separate from the breach-of-
contract damages. As to the first argument, it is abundantly clear that the Amended
Complaint pleads fraud with the requisite particularity. In general, the Amended
Complaint alleges that: Defendants made material misrepresentations, CLP
144
Id.145
See Am. Compl. ¶¶ 69-155.
- 46 -
justifiably relied on those misrepresentations, Defendants knew the representations
were false or made them recklessly and with the intent to deceive CLP, CLP was
fraudulently induced into the transaction, and CLP suffered damages as a result.
As to the second argument, CLP asserts separate claims for fraud that are not
duplicative of its breach-of-contract claims. For example, the Individual
Defendants—who actively engaged in the fraud alleged in the Amended
Complaint—are not parties to the SPA and therefore the damages for fraud asserted
against them are not duplicative of any breach-of-contract claim. Counts I and III,
therefore, cannot be dismissed as against the Individual Defendants.
“Delaware courts have consistently held that to successfully plead a fraud
claim, the allegedly defrauded plaintiff must have sustained damages as a result of a
defendant’s action.”146 The damages allegations, however, may not simply rehash
the damages allegedly caused by breach of contract.147 Moreover, plaintiff cannot
“bootstrap a claim of breach of contract into a claim for fraud by alleging that a
contracting party never intended to perform its obligations.”148
146
Cornell Glasgow, LLC v. La Grange Props. LLC, 2012 WL 2106945, at *8 (Del. Super. Ct.
June 6, 2012) (quoting Dalton v. Ford Motor Co., 2002 WL 338081, at *6 (Del. Super. Ct. Feb.
28, 2002)).
147
Id. at *8-9 (dismissing a fraud claim because the plaintiffs’ damages allegation was nothing
more than a “rehash” of the allegations in its breach of contract claims).
148
Id. at *8.
- 47 -
It appears that the principal claim in the Amended Complaint is for fraud and
fraudulent inducement, which would render the SPA void. And the breach-of-
contract claim, on the facts presented here, is a valid alternative pleading for
remedy.149 CLP alleges that it obtained contractual representations and covenants to
ensure that the Business, including stability of customers, still existed at the Closing.
CLP, however, purportedly misrepresented and concealed information regarding
Material Customers and its Radeas equipment sales, in order to induce CLP into the
SPA. These allegations, if true, go beyond a mere intention not to comply with the
terms of the Agreement. As such, at this juncture, the fraud claim is sufficiently
different from the breach-of-contract claim.150
While the two claims are different, Defendants are correct that CLP pleads
damages that on their face are similar for both claims. But CLP prays for rescission
of the transaction or rescissory damages, which is a remedy for fraud. This Court
has held that a claim for rescission or rescissory damages separates a fraudulent
149
See The Anschutz Corp. v. Brown Robin Capital, LLC, 2020 WL 3096744, at *15 (Del. Ch.
June 11, 2020) (Noting that “[a]s a general rule, the bootstrapping bar makes perfect sense. When
a party claims he was fraudulently induced into entering a contract by promises that were then
included in the negotiated language of that very contract, his remedy should be in contract, not tort
. . . . [But w]hile our courts do not hesitate to dismiss bootstrapped fraud claims, our courts also
recognize that the bootstrap rule is not absolute.”).
150
Id.- 48 -
inducement claim from breach-of-contract damages.151 Nonetheless, if discovery
demonstrates that CLP’s damage claims for breach of contract and fraud are the
same, the Court can revisit the issue prior to a trial.
C. FRAUDULENT INDUCEMENT.
A fraud claim can be based on representations found in a contract.152 But the
allegations of fraud must be separate from the breach-of-contract claim.153 And
“[a]llegations that are focused on inducement to contract are ‘separate and distinct’
conduct.”154
CLP’s allegations rely on the representations, warranties, and covenants
contained in Sections 4.6(b), 4.21, 4.22, and 4.24. Under these sections, the
Individual Defendants and Seller Defendants represented, warranted, and
covenanted to make certain disclosures regarding its Business prior to the Closing.
For example, In Section 4.21(a), the Company represented that “[n]o Material
151
See Abry, 891 A.2d at 1064; see also 3M Co. v. Neology, Inc., 2019 WL 2714832, at *14 (Del.
Super. Ct. June 28, 2019) (holding that fraud claim was not impermissibly bootstrapped where
plaintiff was seeking rescissory damages, “which are a remedy for fraud, not breach of contract”);
Firmenich Incorporated v. Natural Flavors, Inc., 2020 WL 1816191, at *10 (Del. Super. Ct. Apr.
7, 2020).
152
ITW Global Investments. Inc. v. Am. Indus. Partners Cap. Fund IV, L.P., 2015 WL 3970908,
at *6 (Del. Super. Ct. June 24, 2015) (quoting Furnari v. Wallpang, Inc., 2014 WL 1678419, at *4
(Del. Super. Ct. Apr. 16, 2014)).
153
Id.154
Id.- 49 -
Customer . . . has within the twelve (12) months prior to the date of this Agreement
ceased or materially altered its relationship with the Business, or, to Company’s
Knowledge, has threatened to cease or materially alter any such relationship.”155
Despite this representation and warranty, Seller Defendants and Individual
Defendants actively and intentionally concealed that two of the customers they
identified as a Material Customers, ESA and Maplewood, were no longer
operational, and had therefore “ceased or materially altered [their] relationship with
the Business or, to Company’s Knowledge, ha[d] threatened to cease or materially
adversely alter any such relationship.”156 Seller Defendants therefore fraudulently
represented in the representations and warranties of the SPA that ESA and
Maplewood had not altered their relationship with ABS in the twelve months
preceding the date of the Agreement. These are not extra-contractual statements on
which CLP disclaimed reliance.
The same is true with the fraud concerning the Radeas transaction. The
Company represented and warranted that its book and records were “maintained in
accordance with commercially reasonable business practices and are complete and
accurate in all material respects,” that the Company “maintained a system of internal
155
Am. Compl. ¶ 56 & SPA § 4.21(a).
156
Id. ¶¶ 69-137.
- 50 -
accounting controls . . . ” and that its Financials were prepared in accordance with
GAAP.157 Nonetheless, Seller Defendants and Individual Defendants directed ABS
employees to improperly book sham equipment sales to Radeas in order to inflate
ABS’s EBITDA and inflate the amount CLP paid for ABS.158 This fraud is based
on CLP’s reliance on the representations and warranties expressly set forth in the
SPA.
The facts of this case are similar to both Novipax159 and Abry.160 In Novipax,
the plaintiff, the buyer of the company, relied on representations in the subject asset
purchase agreement about how the defendant was to conduct the business and about
the financial viability of the business before the closing, including the business’s
major customers.161 However, after the parties closed the transaction, the plaintiff
learned that those representations were false, and that defendant did not correct the
misrepresentations before the closing in an attempt to induce the plaintiff into
closing the transaction.162 The Superior Court found this sufficient to support a claim
157
Id. ¶¶ 57-58.
158
Id. ¶¶ 138-155.
159
2017 WL 5713307, at *13 (Del. Super. Ct. Nov. 28, 2017).
160
891 A.2d 1032.
161
Novipax, 2017 WL 5713307, at *13.
162
Id.- 51 -
for fraudulent inducement at the initial pleading/motion to dismiss stage of the
litigation.163 Similarly, CLP alleges that after the transaction closed, it learned of
Defendants’ misrepresentation concerning the operational state of two material
customers—a misrepresentation that Defendants never sought to correct before the
Closing—and a misrepresentation made and continued in an attempt to induce CLP
into closing the transaction.164
In Abry, the parties entered into a purchase agreement for the buyer’s purchase
of a portfolio company.165 The purchase agreement contained several
representations and warranties about the company’s financial statements.166 After
the parties entered into the purchase agreement, the buyer discovered that the
financial statements prior to the purchase agreement were fraudulently manipulated
by the seller.167 This Court refused to dismiss the fraudulent inducement claim,
finding that the “financial statements were represented and warranted in the
Agreement and were therefore intended to induce the Buyer to sign the Agreement
and close the sale to purchase the Company.”168 Similarly, CLP claims Defendants
163
Id.164
Am. Compl. ¶¶ 70-74, 189, 198.
165
Abry, 981 A.2d at 1034-35.
166
Id.
167
Id. at 1038-40.
- 52 -
improperly booked sham equipment sales to Radeas to inflate ABS’s EBITDA and
the amount CLP paid for ABS. Accordingly, CLP has pled facts sufficient to support
a claim for fraudulent inducement at this stage in the litigation.
D. BREACH OF CONTRACT.
Defendants next seek to dismiss the breach-of-contract claims. CLP has
alleged that Seller Defendants breached Sections 4.6(b), 4.8, 4.15, 4.17, 4.21, 4.22,
and 4.24. Defendants first argue that all of the Article IV representations and
warranties alleged to be breached are only representations by the Company, not the
Seller Defendants. Second, Defendants contend that CLP has not alleged any facts
that demonstrate that Seller Defendants breached any provision of the SPA.
Defendants’ first argument is a technical one. Defendants are correct that the
Company is the only party specifically named to make the representations and
warranties concerning the group of companies in Article IV.169 Before analyzing the
particular language of the SPA, is important to look at the SPA in context. In Abry,
the Court analyzed the stock purchase agreement’s terms in light of the seller’s
relationship with the company that was sold:
Both the Seller and the Buyer are private equity firms. The Company
was a portfolio company of the Seller. That meant that the Seller had
an intense interest in its value and in keeping with that, the Seller had
168
Id. at 1051.
169
See SPA art. 4.
- 53 -
assigned key personnel, specifically Dominguez, to monitor the
performance of the Company and interact with the Company’s
management during the sale. But that did not necessarily mean that the
Seller knew the Company in the same intimate manner that the
Company's managers did. The managers had no prior affiliation with
the Seller, and like any other private equity firm, the Seller was as much
a monitor of, as a partner with, the Company’s management.
In view of this common context, it is not surprising that the Stock
Purchase Agreement’s terms recognized a distinction between the
Seller and the Company and gave this distinction importance in
addressing questions relating to liability. The Agreement did not
conflate the Seller with the Company and make it responsible for
everything the Company and the Company’s management did or said.
Rather, the Seller only accepted responsibility for the Company’s
actions and words to the extent set forth in the Agreement and the
required Officer’s Certificate. Nothing about that arrangement is novel
to anyone with any rudimentary familiarity with negotiated acquisition
agreements, particularly those involving private equity firms.170
The business context of Abry is significantly different from the circumstances
of this case. CLP claims that the Company made the representations under the
control and direction of the Seller Defendants and the Individual Defendants.
Specifically, CLP alleges Sellers should be liable because: (1) Rochwerg signed the
Purchase Agreement on behalf of ABS and the Seller Defendants; (2) Rochwerg,
who held the same assortment of titles of VP, Secretary, and or Treasurer for ABS
and the Seller Defendants,171 controlled the disclosures, representations and
170
Abry, 981 A.2d at 1040-41.
171
See Am. Compl., Ex. A at signature pages.
- 54 -
warranties made by ABS in connection with CLP’s acquisition; and (3) Seller
Defendants expressly agreed to indemnify CLP for any breaches of Article IV
regardless of which party actually made the representations.172 Under the well-pled
standard of a motion to dismiss, even vague allegations in the Complaint are well-
pled if Defendants were provided notice of the claim.173 Even if the Seller
Defendants are liable only for indemnification of the Company’s violations of
Article IV, the Court will not dismiss CLP’s claims merely because the Amended
Complaint “does not invoke the word ‘indemnification.’” 174 CLP’s breach-of-
contract claims provide notice of the claim, even if it does not explicitly state it seeks
indemnification under Section 9.1.175 These allegations are sufficient to show that
the Seller Defendants should be liable for violations of Article IV.
As for the second argument, this Court need not address whether there was a
breach of the SPA. CLP’s claim against the Seller Defendants is based on their
violations of Sections 4.6(b), 4.8, 4.15, 4.17, 4.21, 4.22 and 4.24.176 For the present
172
CLP Ans. Br. at 52.
173
See Eurofins Panlabs, Inc. v. Ricerca Biosciences, LLC, 2014 WL 2457515, at *5 (Del. Ch.
May 30, 2014).
174
Id.175
Id; see also Anvil, 2013 WL 2249655, at *9 (finding buyer had stated a claim against sellers
for the company’s breaches of the purchase agreement because the sellers had agreed to indemnify
the buyer for the company’s breach).
176
See Am. Compl. ¶¶ 160-161, 164-178, 239-244, 249-253.
- 55 -
motion, the Court must accept all well-pleaded allegations as true. The Court must
construe these allegations and the inferences to be drawn therefrom in the light most
favorable to CLP. In doing so, the Court finds that the allegations, if true, support a
claim for breach of contract, specifically. Therefore, the Court will not dismiss the
breach-of-contract claims.
E. FRAUDULENT TRANSFER.
CLP asserts fraudulent transfer claims against all of the defendants except the
Seller Defendants because they allegedly are the transferees of the proceeds that
were fraudulently transferred to them with the debtor’s actual intent to hinder, delay,
or defraud. Defendants argue that CLP must prove that each defendant alleged to
have fraudulently transferred proceeds of the fraudulent transaction is a debtor under
DUFTA and that each transferred proceeds with the intent to hinder, delay, or
defraud CLP.
But under DUFTA’s plain language, a plaintiff may bring an action to avoid
a transfer or attach the “asset transferred or other property of the transferee.”177 And
CLP does not need a judgment against the Seller Defendants in order to pursue
claims for fraudulent transfer against transferees. Because under DUFTA, a
177
DEL. CODE ANN. tit. 6, § 1307(a)(1) & (2) (2018) (emphasis added).
- 56 -
“debtor” is one who is “liable on a claim.”178 And a claim “means a right to payment,
whether or not the right is reduced to judgment.”179
Defendants also argue CLP must show that Seller Defendants transferred their
assets to the remaining Defendants with “actual intent to hinder, delay or defraud
any creditor.”180 CLP has asserted allegations sufficient to state a claim for
fraudulent transfer. Specifically, CLP alleges the following: (1) Seller Defendants
transferred their assets “[w]ithout receiving a reasonably equivalent value in
exchange for the transfer or obligation, and the debtor . . . believed or reasonably
should have believed that the debtor would incur, debts beyond the debtor’s ability
to pay as they became due”;181 (2) Seller Defendants transferred assets “without
receiving a reasonably equivalent value in exchange for the transfer or obligation”
and were “insolvent at that time or the debtor became insolvent as a result of the
transfer”;182 and (3) Seller Defendants’ “transfer was made to an insider for an
antecedent debt, the debtor was insolvent at that time and the insider had reasonable
178
Id. at § 1301(6).
179
Id. at § 1301(3) (emphasis added).
180
Id. at § 1304(a)(1).
181
Id. at § 1304(a)(2); Am. Compl. ¶¶ 276, 278-279.
182
DEL. CODE ANN. tit. 6, § 1305(a) (2018); Am. Compl. ¶¶ 276, 278-279.
- 57 -
cause to believe the debtor was insolvent.”183 CLP’s allegations are sufficient to
survive Defendants’ motion to dismiss.184
F. UNJUST ENRICHMENT.
Defendants argue that CLP has failed to state a claim for unjust enrichment
against all Defendants. As to the Seller Defendants, Defendants argue that CLP
cannot recover for disgorgement based upon unjust enrichment because CLP does
not allege anywhere that there was not a valid and enforceable agreement governing
the subject of this dispute. Defendants are correct in arguing that CLP cannot
maintain both a cause of action for breach of contract and unjust enrichment.
However, breach of contract and an unjust enrichment claim may survive a motion
to dismiss when pled as alternative theories of recovery. 185 CLP has adequately
alleged unjust enrichment as an alternative theory of recovery here. If the principal
claim in this case is for fraud and fraudulent inducement and the fraudulent
inducement renders the SPA void, then a claim for unjust enrichment may thus
183
DEL. CODE ANN. tit. 6, § 1305(b) (2018); Am. Compl. ¶¶ 276, 278-279.
184
See Am. Compl. ¶¶ 276-280.
185
BAE Sys. Info. & Elec. Sys. Integration, Inc. v. Lockheed Martin Corp., 2009 WL 264088, at
*8 (Del. Ch. Feb. 3, 2009) (“In some instances, both a breach of contract and an unjust enrichment
claim may survive a motion to dismiss when pled as alternative theories for recovery.”) (emphasis
in original); Yu v. GSM Nation, LLC, 2018 WL 2272708, at *21 (Del. Super. Ct. Apr. 24, 2018)
(“In some cases, however, both a breach of contract and an unjust enrichment claim may survive
a motion to dismiss when pled as alternative theories of recovery.”) (emphasis in original).
- 58 -
proceed under the theory that no valid contract exists. Therefore, the Court will not
dismiss the unjust enrichment claim, but CLP must eventually decide under what
theory it wishes to proceed—fraud and unjust enrichment or breach of contract.
As to the remaining moving defendants, Defendants argue that CLP does not
state a claim for unjust enrichment because only the Seller Defendants signed the
SPA. Although non-signatories generally cannot be bound by the terms of a
contract,186 CLP has alleged that the non-parties to the contract owed a duty arising
out of tort rather than contract.187 Specifically, CLP has alleged that the non-
signatory related parties engaged in scheme to defraud CLP and received benefits
resulting from that fraud.188 These allegations are separate and independent from
the fact that the Seller Defendants breached the SPA and are thus sufficient to
survive Defendants’ motion to dismiss.
G. DECLARATORY JUDGMENT.
CLP seeks the Court’s declaratory judgment that: (1) Casla, Hines, and
Rochwerg were agents of the Principal Investor Defendants and the Principal Casla
Defendants; and (2) Casla is an alter ego of the Principal Investor Defendants.
186
NAMA Holdings, LLC v. Related World Mkt. Ctr., LLC, 922 A.2d 417, 430 (Del. Ch. 2007).
187
See Am. Compl. ¶¶ 184, 254-263.
188
See id.; Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 2014 WL
6703980, at *27-28 (Del. Ch. Nov. 26, 2014) (“If the Plaintiffs can implicate these defendants in
a fraud, they obviously have a remedy at law in damages.”).
- 59 -
1. CLP Has Adequately Alleged Its Agency Theory.
Defendants argue that CLP fails to allege a basis to hold the Principal Investor
Defendants and the Principal Casla Defendants liable for Hines, Rochwerg, and
Casla’s purported misconduct under an agency theory. In evaluating a claim under
an agency theory the factual inquiry includes whether: “(1) the agent ha[s] the power
to act on behalf of the principal with respect to third parties; (2) the agent do[es]
something at the behest of the principal and for his benefit; and (3) the principal
ha[s] the right to control the conduct of the agent.”189
Due to the fact-intensive nature of the claim, whether a party was acting as an
agent should not be decided on a motion to dismiss.190 “The standard in Delaware
is notice pleading.”191 And CLP has met this standard.
As outlined in the Amended Complaint, Casla, Rochwerg, and Hines were
acting as the agents of the Principal Casla Defendants and Principal Investor
Defendants because of the control exercised by the Principal Casla Defendants and
the Principal Investor Defendants over Casla and ABS.192 Principal Casla
189
EBG Holdings LLC v. Vredezicht’s Gravenhage 109 B.V., 2008 WL 4057745, at *11 (Del. Ch.
Sept. 2, 2008) (alterations in original) (quoting Fasciana v. Elec. Data Sys. Corp., 829 A.2d 160,
169 n.30 (Del. Ch. 2003)).
190
EBG Holdings LLC, 2008 WL 4057745, at *11 (Del. Ch. Sept. 2, 2008).
191
Carlyle Investment Mgmt. L.L.C. v. Moonmouth Co. S.A., 2015 WL 5278913, at *14 n.75 (Del.
Ch. Sept. 10, 2015) (citing Cent. Mortg. Co., 27 A.3d at 536)).
192
Am. Compl. ¶¶ 13, 21-29, 50.
- 60 -
Defendants and Principal Investor Defendants all owned a significant controlling
interest in Casla, the entity that owned ABS, and/or were members or representatives
on Casla’s board of directors. So, they controlled the operation of both Casla and
ABS.193
CLP has sufficiently alleged that the Principal Casla Defendants and Principal
Investor Defendants, therefore, had the right to control Casla, ABS, and ABS’s
management. This management included Rochwerg and Hines who were working
out of ABS’s offices and managing ABS on a day-to-day basis.194
Further, CLP alleges Casla, Rochwerg, and Hines had the power to act, and
in fact did act, both on behalf of the Principal Casla Defendants and Principal
Investor Defendants and at those Defendants’ direction when managing ABS and
when defrauding CLP.195 CLP claims the Principal Investor Defendants and Casla
Partners, L.P., are liable based on their fraudulent conduct, rather than solely by
reason of their being a member or manager of Casla.
CLP has adequately alleged its agency theory. However, as stated before,
Casla Partners LLC is dismissed from this claim for lack of personal jurisdiction.
193
Id.194
Am. Compl. ¶¶ 24-25, 50.
195
Id. ¶¶ 24-25, 50.
- 61 -
2. CLP’s Alter Ego Theory May Be Viable.
Defendants argue that CLP has not plead specific facts supporting its
suggestion that the Principal Investor Defendants and the Principal Casla Defendants
should be liable under an alter ego theory. This alter ego theory of liability “allows
courts to permit contractual [and tort] creditors to reach the assets of the owners of
the entity based on a multi-factor test.”196 Appropriate circumstances for piercing
the corporate veil are not limited to fraud, and include using the corporate form to
contravene the law or commit a public wrong.197
Whether to pierce the corporate veil is a fact-intensive inquiry that requires
the court to evaluate whether the owners of the entity unjustly misused the corporate
form.198 Some of the factors to be considered include: “(1) whether the company
was adequately capitalized for the undertaking; (2) whether the company was
solvent; (3) whether corporate formalities were observed; (4) whether the dominant
196
Feeley v. NHAOCG, LLC, 62 A.3d 649, 667 (Del. Ch. 2012).
197
David v. Mast, 1999 WL 135244, at *1-2 (Del. Ch. Mar. 2, 1999) (piercing the corporate veil
where the defendant advertised that “an undercapitalized, massively indebted corporation that . . .
had been ‘winding down’ for years and that had been ‘discounted two years before August 1997’
could guarantee its work for up to 10 years”).
198
Id. at *2-3.
- 62 -
shareholder siphoned company funds; and (5) whether, in general, the company
simply functioned as a facade for the dominant shareholder.”199
CLP has alleged that the Principal Investor Defendants have an equity interest
that totals more than 69% of the total equity interest in Casla, heavily participated in
Casla’s management as directors or representatives on Casla’s board, worked closely
with Casla in managing ABS, and directed themselves to be paid significant
compensation from Casla’s coffers.200 CLP alleges that the Principal Investor
Defendants ignored all corporate formalities with respect to Casla in their
management of Casla and ABS.201
CLP also contends the Principal Investor Defendants used Casla solely as a
risk-free investment vehicle with no regard for corporate formalities. For instance,
CLP explained at length how Casla and the Individual Defendants defrauded CLP
into paying an inflated price for ABS.202 Then, immediately after this transaction,
the Principal Investor Defendants decided to decapitalize Casla and transfer
199
See, e.g., U.S. Bank N.A. v. U.S. Timberlands Klamath Falls, L.L.C., 2005 WL 2093694, at *1
(Del. Ch. Mar. 30, 2005).
200
Am. Compl. ¶¶ 26-29, 45.
201
Id. ¶ 49.
202
Id. ¶¶ 53-209.
- 63 -
essentially all of Casla’s assets to themselves, knowingly leaving Casla unable to
pay a judgment for Casla’s fraud.203
Defendants argue that CLP fails to state a claim because the parties
specifically agreed to what portion of the sale proceeds would be distributed and
what portion would remain with the Seller Defendants to fund post-Closing
obligations under Section 8.11 of the SPA. It is conceivable, however, that SPA
Section 8.11 could be construed only as a representation from Sellers, and not a
provision that CLP expressly acknowledged and accepted. Under the facts alleged
in the Amended Complaint and allowing for the reasonable inferences drawn from
those facts, the Court simply cannot say there is no reasonable conceivability that
CLP might be able to obtain recovery on their claim for fraudulent transfer.
H. CONSTRUCTIVE TRUST IS A POTENTIAL REMEDY.
“The doctrine of a constructive trust is based on the equitable principle that
‘one who would be unjustly enriched, if permitted to retain property, is under an
equitable duty to convey it to the rightful owner.’”204 A constructive trust is not
203
Id. ¶¶ 13-16, 43, 49, 184, 213-214.
204
Ciappa Constr., Inc. v. Innovative Property Resources, LLC, 2007 WL 914640, at *1 (Del.
Super. Ct. Mar. 2, 2007) (quoting Hogg v. Walker, 622 A.2d 648, 652 (Del. 1993)).
- 64 -
itself a cause of action but is instead an equitable remedy.205 It is often a remedy for
unjust enrichment, however it also can be a remedy for fraudulent transfers.206
CLP has alleged that Defendants: (1) are “wrongfully in possession of
specifically identifiable property, namely the proceeds of the transaction, which in
equity belongs to CLP”; (2) “knew its actions in obtaining this properly were
wrongful, fraudulent, unfair, and unconscionable”; and (3) would be unjustly
enriched at CLP’s expense if Defendants are “permitted to retain the proceeds of the
transaction.”207 In sum, CLP has pled sufficient facts in its fraudulent transfer and
unjust enrichment claims to support the potential remedy of a constructive trust.
V. CONCLUSION
For the foregoing reasons, Defendants’ Motion to Dismiss is hereby
GRANTED as to all claims against the Non-Delaware Defendants for lack of
personal jurisdiction and DENIED as to all other claims.
IT IS SO ORDERED.
/s/ Paul R. Wallace
_______________________
Paul R. Wallace, Judge
Original to Prothonotary
cc: All Counsel via File and Serve
205
VTB Bank v. Navitron Projects Corp., 2014 WL 1691250, at *6 n.60 (Del. Ch. Apr. 28, 2014).
206
See Duffield Assocs., Inc. v. Lockwood Bros., LLC, 2017 WL 2954618, at *4 (Del. Ch. July
11, 2017).
207
Am. Compl. ¶¶ 282-285.
- 65 -