Allergy Research Group, LLC v. Nutritional Therapeutics, Inc. ( 2022 )

IN THE SUPERIOR COURT FOR THE STATE OF DELAWARE
ALLERGY RESEARCH )
GROUP, LLC. )
)
Plaintiff-Counterclaim )
Defendant, )
)
v. ) C.A. No.: N21C-10-073 FJJ
)
NUTRITIONAL THERAPEUTICS, )
INC. and JOHN CASEY, )
)
Defendants-Counterclaim )
Plaintiffs. )
Submitted: April 22, 2022
Decided: April 25, 2022
OPINION AND ORDER ON ALLERGY RESEARCH GROUP, LLC’S
MOTION TO DISMISS AND MOTION TO STAY DISCOVERY
AND NUTRITIONAL THERAPEUTICS, INC. and JOHN CASEY’S
MOTION FOR PARTIAL SUMMARY JUDGMENT
David Holmes, Esquire and Christopher Page, Esquire, Cross & Simon LLC,
Wilmington, Delaware, Attorneys for Plaintiff.
Scott Czerwonka, Esquire, Wilks Law, LLC, Wilmington, Delaware, Attorney for
Defendant
Jones, J.
Allergy Research Group, LLC (“ARG” or “Plaintiff”), has filed a complaint
against Nutritional Therapeutics, Inc. (“NTI”) and John Casey (“Casey”)
(collectively “Defendants”), alleging that the Defendants have defaulted on a note
and that Casey was responsible for that default because he signed a guaranty. In
response to this Complaint, Defendants have filed an Answer and a Counterclaim
(“SAC”). In its Counterclaim, Defendants allege they were fraudulently induced to
enter into the note and guaranty. Defendants request Declaratory Relief, seek
specific performance under a stock purchase agreement, and allege a breach of
contract. ARG has moved for Partial Dismissal of the Counterclaims. ARG has also
moved to stay discovery pending decision on the Motion to Dismiss. Defendants
have moved for partial summary judgment as to Count V of the Counterclaim. This
is the Court’s decision on these motions.
STANDARD OF REVIEW
Under Superior Court Civil Rule 12(b)(6), the legal issue to be decided is
whether a plaintiff can recover under any reasonably conceivable set of
circumstances susceptible of proof under the complaint.1 If any reasonable
conception can be formulated to allow Plaintiffs’ recovery, the motion must be
denied.2 The Court must accept as true well-pleaded allegations for Rule 12(b)(6)
1
Vinton v. Grayson, 189 A.3d 695, 700 (Del. Super. 2018).
2
Id. (citing Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 535 (Del. 2011)).
2
purposes.3 All reasonable factual inferences will be drawn in the non-moving party’s
favor.4 If the claimant may recover under that standard, then the Court must deny
the motion to dismiss.5 This is because “[d]ismissal is warranted [only] where the
plaintiff has failed to plead facts supporting an element of the claim or, that under
no reasonable interpretation of the facts alleged, could the complaint state a claim
for which relief might be granted.”6
Under Superior Court Civil Rule 9(b),7 fraud must be pled with particularity.8
In order to satisfy Rule 9(b), a party must allege with particularity the : (i) time,
place, and contents of the false representations: (ii) the identity of the person9 making
the false statements; and (iii) the benefit to be obtained by making them. Essentially,
the Counterclaim Plaintiff is required to allege the circumstances of the fraud with
detail sufficient to apprise the defendant of the basis of the claim.10
FACTS
The facts are drawn from the Defendants’ Counterclaim as this Court must
accept all well-pleaded factual allegations as true.
3
Anderson v. Tingle, 2011 WL 3654531, at *2 (Del. Super. Ct. Ct. August 15, 2011).
4
Wilmington Sav. Fund Soc’y, F.S.B. v. Anderson, 2009 WL 597268, at *2 (Del. Super. Ct. Mar. 9, 2009) (citing
Doe v. Cahill, 884 A.2d 451, 458 (Del. 2005)).
5
Spence v. Funk, 396 A.2d 967, 968 (Del. 1978).
6
Hendenberg v. Raber, 2004 WL 2191164, at *1 (Del. Super. Ct. August 20, 2004).
7
Super. Ct. Civ. R. 9(b).
8
Trentwick American Litigation Trust v. Ernest & Young, LLC., 906 A.2d 168, 207 (Del.Ch. 2006), aff’d 931 A.2d
438 (Del. 2007).
9
Nutt v. AC&S, Inc., 466 A.2d 18 (Del. Super. Ct. 1983), aff’d sub. nom., Mergenthaler v. Asbestos Corp. of
America, 480 A.2d 647 (Del. 1984).
10
CRE Niagra Holdings, LLC v. Resorts GRP, Inc., 2021 WL 1292792 (Del. Super. Ct. 2021).
3
On or around January 22, 2014, ARG entered into a Stock Purchase
Agreement with NTI and its stockholders, whereby ARG agreed to acquire all of the
issued and outstanding common shares of NTI (the “SPA”). Pursuant to the terms of
the SPA, the purchase of shares was to take place in phases. Fifty-one (51) percent
of the shares were purchased by ARG on the Initial Closing Date. An additional ten
(10) percent of the shares were issued upon the conversion of various convertible
loans issued to Casey and the Company in connection with the SPA. The Final Share
Purchase of all remaining shares was scheduled to take place on around July 27,
2017, as long as certain conditions were met. One of those conditions was that the
parties were to obtain an independent business valuation in order to determine the
fair purchase price of the remaining shares.
Pursuant to the SPA, ARG’s President, Manfred Salomon (“Salomon”) was
appointed as President of NTI and Casey was appointed as NTI’s Chief Operating
Officer.
In late 2014, the parties discussed NTI’s plan to introduce a new product line,
However, NTI needed funds to cover the purchase of inventory and to hire new
labor. ARG committed to providing the necessary funds as an investment. On April
30, 2015, ARG provided $300,000 to NTI to support the new product launch. This
investment was not memorialized in any contemporaneous written agreement or
document. Given the anticipated closing under the SPA pursuant to which ARG
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would complete its acquisition of NTI, the parties agreed that these funds were an
investment with ARG never requesting repayment until negotiating the transactions
described below. With control over NTI’s books and operations leading up to the
anticipated closing under the SPA, ARG manipulated NTI’s books and listed this
investment as a liability. This action was taken unbeknownst to Casey or any
independent officer or director of NTI.
On or around January 26, 2016, ARG loaned NTI $80,000 to support working
capital and firm up NTI’s balance sheet. NTI has since repaid the $80,000 to ARG.
The final closing was contractually required to occur by July 27, 2017. ARG
began pushing for the closing to occur without an independent business valuation.
NTI insisted that the parties comply with the SPA, and eventually, the parties agreed
to engage The Mentor Group to conduct a valuation. The Mentor Group eventually
valued the Company at $7,657,000. Based on ARG’s contractual obligation to
purchase the remaining 39% of NTI shares, the final purchase price of the remaining
shares of NTI was $2,986,230. The parties agreed that it would not be appropriate
to apply the control and marketability discounts suggested by The Mentor Group.
With the valuation completed by The Mentor Group, NTI pressed for the
closing to take place under the SPA. ARG refused to close on its purchase of the
remaining shares of NTI.
5
After ARG refused to comply with their contractual obligations to close on
the purchase of shares of NTI based on The Mentor Group valuation, the parties
discussed an agreement whereby NTI would relieve ARG of their contractual
obligations to pay approximately $3 million to complete the transaction under the
SPA. In exchange for releasing ARG from its contractual obligation to close, NTI
would buyback ARG’s shares for nominal value. NTI enlisted the assistance of Jerry
Silver, a long-time consultant for NTI.
During the early months of 2020, the parties did not make much progress on
the negotiations of a potential buyback. During this same period, Casey was
suffering from severe health problems which resulted in his hospitalization.
Casey’s health further deteriorated and he was scheduled for an organ
transplant in June of 2020. Salomon and ARG were well-aware of Casey’s health
condition. While the transplant was scheduled for late June, Casey was told to be
ready as a transplant candidate because an organ could become available at any time.
Despite knowing of Casey’s serious health condition, in late May of 2020, ARG
pressed to finalize the transaction.
In connection with negotiating the buyback transaction, ARG demanded that
the Defendants execute the Second Amended Note and the Guaranty. In addition,
the parties executed an Agreement to Terminate Obligations Under the SPA. ARG
included the following clauses in the Agreement to Terminate:
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WHEREAS, subsequent to the execution of the Purchase
Agreement, Purchaser loaned the Company $300,000 in
working capital pursuant to a promissory note dated
February 23, 2015, with a maturity date of February 22,
2016 bearing interest rate of .40% per annum, and on
January 27, 2016 loan an additional $80,000 the
Company; and
WHEREAS, the loans were combined into an amended
and restated promissory note dated March 17, 2016 to
extend the maturity date to December 31, 2016, to increase
the principle amount of the note to $381,520,00 and to
increase the interest rate to the then APR of .65% per
annum (the “Amended and Restated Note”) ….
This Agreement to Terminate also noted that the Amended and Restated Note would
be refinanced and a new note executed along with a personal guarantee.
On behalf of NTI, Silver asked ARG’s legal counsel for copies of the original
note and the Amended and Restated Note. On June 2, 2020, ARG’s counsel
(Gretchen Cowen) responded via email and told Silver “I do not have a signed copy
of [the Amended and Restated Note] nor was I able to located [sic] a signed copy of
the 2015 note although I am pretty sure Laura has the signed copy on that one.”
Casey had several telephone conversations with Salomon in the last few days of May
and the first couple days of June. During those telephone conversations, Casey asked
Salomon to send copies of the original note and the Amended and Restated Note.
Salomon repeatedly represented to Casey that these previous notes existed and
promised to send them after the documents were executed. However, Salomon
insisted that the documents be executed immediately because there was an
7
impending change in management, he would be leaving ARG, and the transaction
was in jeopardy if the documents were not signed immediately.
In justifiable reliance on Salomon’s false representations that the previous
promissory notes existed and would be provided to NTI after closing, and that
Salomon was imminently leaving ARG and the documents had to be signed
immediately, Casey (on behalf of NTI, himself and as Sellers’ Representative) was
induced to execute (i) the Second Amended Note and Guarantee, and (ii) an
Agreement to Terminate Obligations under the SPA, which released ARG of its
contractual obligations to purchase the remaining shares of NTI. Casey also executed
these documents under duress and coercion because of his serious medical condition.
Salomon continued as President of ARG well after May 31, 2020.
NTI continued to fulfill purchase orders made by ARG. Under the terms of
the purchase order, payment is due within 30 days of the delivery of the product. As
of January 6, 2022, ARG owes $108,488.52 related to fulfilled purchase orders,
which are now past due.
MOTION TO DISMISS COUNT IV
Count IV of the Counterclaim seeks specific performance of the parties Stock
Purchase Agreement. As this is an equitable claim, ARG has moved to dismiss this
claim on the basis that this Court does not have jurisdiction. ARG is correct that this
8
Court lacks jurisdiction for a claim for specific performance.11 Defendant’s claim
for specific performance is DISMISSED without prejudice.12
MOTION TO DISMISS COUNTS I - III
Counts I – III of the Counterclaim are premised on fraudulent inducement. To
state a claim for fraudulent inducement, one must allege:
(1) the defendant falsely represented or omitted facts that
the defendant had a duty to disclose; (2) the defendant
knew or believed that the representation was false or made
the representation with a reckless indifference to the truth;
(3) the defendant intended to induce the plaintiff to act or
refrain from acting; (4) the plaintiff acted in justifiable
reliance on the representation; and (5) the plaintiff was
injured by its reliance.13
As a preliminary matter, ARG claims that Defendants failed to comply with
10 Del.C. §3901(d) because an Amended Affidavit of Defense was not filed. The
record shows that an Amended Affidavit was filed on February 10, 2022.14 Therefore
this argument is without merit.
ARG maintains that Defendants have not sufficiently pled their fraudulent
inducement claim and, as a result, it should be dismissed. This Court disagrees. The
11
Mills v. Gosling Creek, Inc., 1993 WL 485901 (Del. Super. Ct. 1993).
12
Defendant’s claim that this Court should not be dismissed because the parties were working on how to proceed on
this issue – this is not a valid reason to avoid a clear jurisdictional issue. The Defendants are free to seek designation
or transfer but at this point this Court lacks jurisdiction over this claim. In fact, Defendants in their paperwork have
asked this Court to seek designation in order for this Judge to handle the claim for specific performance.
13
Sofregen Med. Inc. v. Allergan Sales, LLC, 2021 WL 14000071, at *2 (Del. Super. Ct. April 1, 2021). ITW Global
Investments, Inc. v. American Industrial Partners Capital Fund, VI LP, 2015 WL 3970908 (Del. Super. Ct. 2015).
14
See Docket Entry 9, transaction 67299918.
9
verified Answer and Counterclaim adequately plead with the required specificity the
elements of fraudulent inducement.
First, the SAC sets forth the details regarding the false representations of fact
made by ARG.15 In connection with entering into the Second Amended Note and
Guarantee, and the Agreement to Terminate Contractual Obligations under the SPA,
ARG falsely represented to Defendants the existence of an original note and an
amended note.16 Defendants also specifically allege that both before and after the
June 2 email, Casey asked Salomon to send copies of the original note and the
Amended and Restated Note.17 Defendants further alleged that Salomon repeatedly
represented to Casey that these previous notes existed and promised to send them
after the documents were executed.18 In addition, ARG falsely represented that
Salomon was immediately leaving ARG and the documents needed to be signed
immediately.19
Second, Defendants have pled that ARG knew the representations were false
or made with reckless indifference to the truth.20 Specifically, Defendants allege that
ARG, through Salomon, repeatedly assured Defendants that the previous notes
would be produced, “despite knowing that the previous notes do not exist or were
15
SAC ¶¶ 19-22, 35.
16
Id. at ¶¶ 19-22, 35.
17
Id.
18
Id.
19
Id.
20
Id. at ¶¶ 20-21, 36.
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fraudulently executed.”21 Moreover, Defendants specifically allege that Salomon
“knew the representation that he would be leaving ARG was false, as he continued
to serve as president of ARG well after” the negotiations. Id. ¶ 21.
Third, Defendants have pled that ARG made the aforementioned false
representations to induce Defendants to execute the Second Amended Note and
Guaranty and induce Defendants to execute the Agreement to Terminate Obligations
under the SPA, which they did in justifiable reliance on the false representations.22
Defendants specifically allege that “[i]n justifiable reliance” of ARG’s false
representations, Defendants were “induced to execute” the disputed documents.23
Fourth, defendants specifically allege that they were injured by their reliance
on ARG’s false representations, which included paying $188,000 under the
fraudulent Second Amended Note.24
Defendants have alleged the circumstances of fraud with detail sufficient to
apprise ARG of the basis of the claim. Defendants have pled the time, place and
contents of the false representation. Defendants have also plead the identity of the
person making the false representation and what the person intended to gain by
21
Id. at ¶ 21.
22
Id. at ¶¶ 22, 37.
23
Id. ¶ 22. “The question of whether one’s reliance was reasonable generally is a question of fact…. The
reasonableness of one’s reliance on false information depends on all of the circumstances. As such, whether a
party’s reliance was reasonable is not generally suitable for resolution on a motion to dismiss.” TrueBlue Inc. v.
Leeds Equity Partners IV, LP, 2015 WL 5967826, at *7 (Del. Super. Ct., Sept. 25, 2015).
24
Id. at ¶ 38.
11
making the representation. Defendants have more than satisfied the particularity
requirement of Rule 9(b). Therefore, Plaintiff’s Motion to Dismiss is DENIED.
MOTION TO STAY DISCOVERY
Plaintiffs have moved to stay discovery pending resolution of its Motion to
Dismiss. Having denied Plaintiff’s Motion to Dismiss, the Motion to Stay Discovery
is now moot. Discovery may commence.
DEFENDANT’S MOTION FOR SUMMARY JUDGMENT
Defendants have moved for summary judgment on Count V of Defendants’
SAC. Count V of Defendants’ SAC is a breach of contract claim. Defendants allege
that the Counterclaim Defendant (Plaintiff) placed purchase orders with Defendants
and that the orders were fulfilled by Defendants and accepted without any
complaints and invoiced by the Counterclaim Defendant (Plaintiff). The net amount
of the invoices is $108,488.52 and remains unpaid and overdue. Defendants have
submitted the affidavit of Ellen Hoil verifying these facts.
Under Superior Court Civil Rule 56, a party is entitled to summary judgment
if there is no genuine issue as to any material fact and the moving party is entitled to
a judgment as a matter of law.25 A material issue of fact exists if “a rational finder
of fact could find some material fact that would favor the nonmoving party in a
25
Super. Ct. Civ. R. 56(c).
12
determining way[.]”26 The factual record on a summary judgment motion must be
viewed in the light most favorable to the non-moving party.27
The initial burden is on the moving party to demonstrate that there is no
genuine dispute as to any material fact and that the movant is entitled to judgment
as a matter of law.28 If the moving party meets the initial burden, the burden shifts
to the non-moving party to show that a genuine issue of material fact exists.29 “It is
not enough for the opposing party merely to assert the existence of such a disputed
issue of fact… [i]f the facts permit reasonable persons to draw from them but one
inference, the question is ripe for summary judgment.”30 Where a moving party
submits an affidavit in support of a motion for summary judgement, the opposing
party must submit a countervailing affidavit or other evidence, or the moving party’s
affidavit will be presumed to be true.31
In response to the Motion for Summary Judgment, ARG maintains that the
motion is premature and discovery is needed. An affidavit of Corona Cox, the
Director of Finance and Accounting of ARG, has been filed in support of this
position. In the affidavit, Ms. Cox lays out what discovery is needed to determine
the accuracy of Defendants’ Count V in its counterclaim which is based on the
26
Deloitte LLP v. Flanagan, 2009 WL 5200657 at *3 (Del. Ch. Dec. 29, 2009).
27
Gruwell v. Allstate Ins. Co., 988 A.2d 945, 947 (Del. Super. Ct. 2009).
28
Brzoska v. Olson, 668 A.2d 1355, 1364 (Del. 1995).
29
Id. (citing Moore v. Sizemore, 405 A.2d 679, 680 (Del. 1979)).
30
Id. (citing Wootten v. Kiger, 226 A.2d 238, 239 (Del. 1967)).
31
Highline Financial Services, Inc., v. Rooney, 1996 WL 663100, at *1 (Del. Super. Ct. 1996).
13
invoices. I will treat this affidavit as an affidavit under Superior Court Rule 56(f).
As such I am refusing the application for summary judgment at this time without
prejudice. I will permit ARG to engage in the discovery outlined in Ms. Cox’s
affidavit. At the conclusion of discovery the Court will entertain another motion on
this point if the Defendants determine to refile it.
IT IS SO ORDERED this 25th day of April, 2022.
/s/ Francis J. Jones, Jr.
Francis J. Jones, Jr., Esquire
/jb
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