Israel Discount Bank of New York v. Higgins

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
ISRAEL DISCOUNT BANK OF )
NEW YORK, )
)
Plaintiff, )
)
v. ) C.A. No. 9817-VCP
)
ROBERT HIGGINS and CERTIFIED )
ASSETS MANAGEMENT, INC., )
)
Defendants/ )
Third-Party Plaintiffs, )
)
v. )
)
REPUBLIC NATIONAL BUSINESS )
CREDIT LLC and NED FENTON, )
)
Third-Party )
Defendants. )
MEMORANDUM OPINION
Submitted: May 28, 2015
Decided: August 31, 2015
Joseph B. Cicero, Esq., Stephanie Habelow, Esq., CHIPMAN, BROWN, CICERO &
COLE, LLP, Wilmington, Delaware; Attorneys for Plaintiff, Israel Discount Bank of New
York.
David A. Felice, Esq., BAILEY & GLASSER, LLP, Wilmington, Delaware; Attorneys
for Defendants, Third-Party Plaintiffs, Robert Higgins and Certified Assets Management,
Inc.
Thad J. Bracegirdle, Esq., Samuel L. Moultrie, Esq., WILKS, LUKOFF &
BRACEGIRDLE, LLC, Wilmington, Delaware; Attorneys for Third-Party Defendants,
Republic National Business Credit LLC and Ned Fenton.
PARSONS, Vice Chancellor.
Before the Court is a motion by the third-party defendants to dismiss the amended
third-party complaint under Court of Chancery Rules 9(b), 12(b)(2), and 12(b)(6). The
third-party defendants advance a litany of arguments as to why the third-party complaint
should be dismissed. For the reasons that follow, I conclude that the third-party
complaint makes out a prima facie case for personal jurisdiction, but that it must be
dismissed because key determinations in a prior case have preclusive effect and the third-
party plaintiffs cannot relitigate those issues here.
I. BACKGROUND
In a prior decision issued May 29, 2013, Israel Discount Bank of New York v. First
State Depository Co., LLC,1 I determined the liability of First State Depository Co., LLC
(“FSD”), and Certified Assets Management, Inc. (“CAMI”), to Israel Discount Bank
(“IDB”). That case, which the parties have referred to as the “Related Action,” involved
the mishandling of collateral—rare coins and bullion—that secured a $10 million loan.
Ultimately, I concluded that FSD and CAMI were liable to IDB in the amount of roughly
$7 million plus interest. In addition, I held that FSD and CAMI had engaged in bad faith
litigation conduct, and ordered that they pay IDB‟s attorneys‟ fees.
To understand the present motion, it is necessary to restate some of the factual
background from the Related Action. IDB is a bank. Republic National Business Credit
LLC (“Republic”) is a limited liability company (“LLC”) organized under the laws of
California. Republic‟s business included providing secured financing to facilitate the
1
2013 WL 2326875 (Del. Ch. May 29, 2013) [hereinafter “IDB”].
1
acquisition and distribution of precious metals and jewelry. Ned Fenton is the managing
director of Republic. One of IDB‟s loans was a revolving credit facility it provided to
Republic. In connection with that loan, IDB acquired an interest in all of Republic‟s
collateral.
Republic, in turn, made a loan to CAMI, a Delaware corporation that offered rare
coin wholesaling and marketing services. That loan was secured by certain coins and
metals (generally, the “Collateral”).2 IDB had imposed upon Republic several lending
restrictions, such as a $5 million cap per client. CAMI sought to evade that cap through
the use of sham borrowers. Here, it is important to understand the ownership of CAMI
and FSD. Robert Higgins (“Higgins”), a non-party to the Related Action and a defendant
in this action, owns both FSD and CAMI. “He is FSD‟s sole member and CAMI‟s
president and sole stockholder.”3 Eric Higgins, Robert‟s son, was the head of customer
service at FSD. Steven Higgins, another son of Robert, worked at CAMI. Vicki Lott
Reid, an employee of FSD and former employee of CAMI, is Higgins‟s sister. Donald
Ketterling was a former business partner of Higgins‟s and employee of CAMI. After
CAMI hit its borrowing cap, Ketterling and Reid entered into borrowing agreements with
Republic. These were sham agreements in that essentially they pertained to loans to
2
IDB at *2.
3
Id.
2
CAMI and Higgins. CAMI pledged the underlying collateral and paid the interest for
both the Ketterling and Reid loans.4
Fenton eventually received permission from IDB to have the Collateral moved to
CAMI‟s affiliate FSD, a Delaware LLC that serves as a private depository and provides
custody, shipping, and accounting services related to precious metals. In connection with
that move, several important documents were signed. FSD, Republic, CAMI, Reid, and
Ketterling entered into a series of Collateral Custody Account Agreements (the
“CCAAs”) governing the deposit of the Collateral at FSD. Additionally, FSD, Republic,
and IDB entered into a separate bailment agreement (the “Bailment Agreement”)
designed to protect IDB‟s rights in Republic‟s Collateral.5 Section 6 of the Bailment
Agreement provides, in pertinent part, that:
6. Return Goods Upon Direction. Until Bailee [FSD] has
received written notification to the contrary from an officer of
Secured Party [IDB], Bailee may continue to release the
Property in accordance with instructions issued by Company
[Republic]. Upon written notice from an officer of Secured
Party, Bailee agrees that it will hold all such Property subject
only to Secured Party‟s written instructions, and that Bailee
will release same to Secured Party on demand, provided that
Secured Party tenders to Bailee payment of any accrued
charges on the Property being released.6
4
Id. at *4.
5
Id. at *3.
6
T-P Defs.‟ Opening Br. Ex. D, at 2.
3
In the Related Action, I found as a fact that, pursuant to Section 6 of the Bailment
Agreement, IDB had provided written instructions to FSD in December 2009 (the
“December 2009 Notice”) not to release Republic‟s Collateral without IDB‟s written
instructions to do so. In September 2011, FSD released the Collateral, without IDB‟s
consent, so that CAMI could display it at coin collectibles shows. After the shows, the
Collateral was not returned to FSD for storage; instead, Higgins deposited it into CAMI‟s
safes.7 What followed next is only tangentially relevant here, but basically involved an
increasingly concerned IDB attempting to inspect the Collateral and encountering
extended stonewalling by FSD. In addition, the FBI ultimately seized some of the coins
FSD was holding as collateral for Republic‟s loans. The Related Action ensued. In April
2012, IDB obtained a consent judgment in New York, which concluded litigation it had
brought against Republic, Fenton, and others. Roughly a year later, I issued the May 29,
2013 decision in the Related Action.
In the Related Action, IDB had asserted claims for breach of contract and
conversion against CAMI and FSD. In the course of ruling on those claims, I made
several determinations of fact that are relevant and binding here. Those factual
determinations were necessary for purposes of deciding some of the large number of
affirmative defenses interposed by CAMI and FSD. With respect to IDB‟s breach of
contract claim, I found that the “December 2009 Notice and the Bailment Agreement . . .
7
Id. at *5.
4
limited FSD‟s ability to release the Collateral absent IDB‟s consent.”8 Thus, I concluded
that by releasing the Collateral in September 2011 without IDB‟s permission, FSD
breached the Bailment Agreement and the obligation imposed by the December 2009
Notice. Much as Higgins and CAMI attempt to do in this action, CAMI and FSD
attempted to make the CCAAs the focus of the Related Action. I concluded, however,
that IDB‟s relationship with FSD was governed by the Bailment Agreement, not the
CCAAs.9
IDB‟s second claim in the Related Action was for conversion against CAMI. As
one of its five defenses, CAMI argued that “Republic authorized CAMI‟s use of the
collateral.”10 I rejected that defense. First, I found that “CAMI‟s conduct on and after
September 12, 2011 . . . was not in accordance with Republic‟s previous authorizations
for CAMI to use the Collateral to be shown at trade shows and thereafter returned to the
depository.”11 Second, I held that: “Defendants failed to prove either that Republic
authorized an open-ended release or relinquishment in September 2011 or that such an
authorization would have complied with the Bailment Agreement. Furthermore, and in
8
Id. at *14.
9
Id. at *16-18.
10
Id. at *20.
11
Id. at *20.
5
any event, the September 2012 [sic: 2011] release had to be authorized by IDB, not just
Republic.”12
After obtaining the judgment against CAMI and FSD, jointly and severally, IDB
brought this action on June 24, 2014, against CAMI and Higgins, primarily in an effort to
attempt to recover from Higgins personally on the damages judgment IDB obtained
against CAMI. Specifically, IDB‟s complaint seeks to pierce CAMI‟s corporate veil or,
alternatively, hold Higgins liable for actual or constructive fraudulent transfers. CAMI
and Higgins (the “Third-Party Plaintiffs”) filed a third-party complaint against Republic
and Fenton (the “Third-Party Defendants”) on September 16, 2014. That complaint
asserted counts for indemnification and contribution. After Republic and Fenton moved
to dismiss, the Third-Party Plaintiffs filed an amended third-party complaint (the
“Complaint”), which contains additional allegations intended to support personal
jurisdiction and adds a count for fraud.
The gist of the Complaint is that Republic and Fenton owe CAMI and Higgins part
or all of the final judgment amount imposed in the Related Action under theories of
common law indemnification, contribution (both at common law and under 10 Del. C.
§ 6301), and fraud. The key factual allegations underlying these claims are quite similar.
Under both Count I, which seeks indemnification, and Count II, which seeks
contribution, the Third-Party Plaintiffs allege that “CAMI (and potentially Higgins)
would not be liable to IDB for conversion or their liability would not have been as much
12
Id. (emphasis added).
6
as it was ultimately adjudicated to be had it not been for Republic and Fenton‟s
conflicting, insufficient, false and misleading authorizations.”13 For the fraud claim in
Count III, the Complaint alleges that these same “unfounded, insufficient, conflicting,
false and misleading authorizations” were provided in an attempt “to induce CAMI to
continue its conduct”14 and that CAMI “relied on Fenton‟s authorizations.”15 As this
overview shows, the purported authorizations by Fenton, presumably as an agent of
Republic, to release the Collateral represent an essential predicate for all three Counts of
the Complaint.
Fenton and Republic have moved to dismiss. Their chief argument is that all of
the claims in the Complaint are barred by collateral estoppel. The Third-Party
Defendants also deny that this Court has personal jurisdiction over them. Fenton is a
California resident, and Republic is a California LLC. Additionally, Fenton and Republic
make several ripeness arguments, and contend that the fraud claim is not pled with
particularity as required by Rule 9(b).
After addressing personal jurisdiction, I turn to the Third-Party Defendants‟
collateral estoppel argument.
13
T-P Compl. ¶¶ 31, 34.
14
Id. ¶ 42.
15
Id. ¶ 40.
7
II. ANALYSIS
A. Personal Jurisdiction
1. Applicable Standard
On a motion to dismiss under Court of Chancery Rule 12(b)(2), the claimant has
the burden of showing a basis for the Court‟s jurisdiction over the non-resident
defendant.16 In resolving the issue of personal jurisdiction over a non-resident, Delaware
courts apply a two-step analysis, determining: (1) whether a statute authorizes service of
process on that defendant; and (2) whether subjecting the non-resident defendant to
jurisdiction in Delaware comports with the Due Process Clause of the Fourteenth
Amendment.17 In conducting this analysis, the Court may consider the pleadings,
affidavits, and any discovery of record.18 If no evidentiary hearing has been held, as is
the case here, the plaintiffs need only make a prima facie showing of personal
jurisdiction, and are entitled to all reasonable inferences that can be drawn from the
record.19
16
AeroGlobal Capital Mgmt., LLC v. Cirrus Indus., Inc., 871 A.2d 428, 437 (Del.
2005); Albert v. Alex. Brown Mgmt. Servs., Inc., 2005 WL 2130607, at *14 (Del.
Ch. Aug. 26, 2005).
17
Hercules Inc. v. Leu Trust & Banking (Bahamas) Ltd., 611 A.2d 476, 480 (Del.
1992).
18
Ryan v. Gifford, 935 A.2d 258, 265 (Del. Ch. 2007).
19
See id.
8
2. A Prima Facie Showing of Personal Jurisdiction Has Been Made
As noted, the Third-Party Plaintiffs must make only a prima facie showing of
personal jurisdiction. Although a more developed factual and legal record ultimately
might show that personal jurisdiction is lacking, I conclude that the Third-Party Plaintiffs
have made a prima facie showing that such jurisdiction exists here as to both Republic
and Fenton. Therefore, I deny their motion to dismiss to the extent it challenges
jurisdiction.
a. There is no general jurisdiction
Higgins and CAMI argue that this Court has general personal jurisdiction over
Republic and Fenton under Delaware‟s long-arm statute, which provides for general
jurisdiction over a person that:
Causes tortious injury in the State or outside of the State by
an act or omission outside the State if the person 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.20
This contention lacks merit.
“General jurisdiction under subsection (c)(4) requires a greater, more continuous
pattern of contacts with the forum than does „single act‟ jurisdiction under subsection
(c)(1), (2), or (3).”21 Establishing general personal jurisdiction requires satisfying a
significantly higher burden than is required for establishing specific personal jurisdiction.
20
10 Del. C. § 3104(c)(4).
21
Computer People, Inc. v. Best Int’l Gp., Inc., 1999 WL 288119, at *5 (Del. Ch.
Apr. 27, 1999).
9
Indeed, the United States Supreme Court has stated that general jurisdiction requires
contacts “with the State [that] are so „continuous and systematic‟ as to render [the
defendants] essentially at home in the forum State.”22 The facts alleged in the Complaint
describe specific contacts with Delaware relating to one ongoing business relationship—
i.e., Republic‟s relationship with CAMI and its affiliates. Fenton and Republic are
citizens of California. There are no allegations that either of them had current contacts
with Delaware when either IDB filed its complaint or the Third-Party Plaintiffs filed their
Complaint, much less the sort of “substantial and continuous activity in Delaware” that
would support a finding of general jurisdiction under Section 3104(c)(4).23 Thus, there is
no basis for a finding of general personal jurisdiction over the Third-Party Defendants.
b. A prima facie showing of specific jurisdiction has been made
Higgins and CAMI also argue that jurisdiction is proper under Section 3104(c)(1),
(2), or (3). These sections of Delaware‟s long-arm statute read as follows:
As to a cause of action brought by any person arising from
any of the acts enumerated in this section, a court may
exercise personal jurisdiction over any nonresident, or a
personal representative, who in person or through an agent:
(1) Transacts any business or performs any character of
work or service in the State;
(2) Contracts to supply services or things in this State; [or]
(3) Causes tortious injury in the State by an act or
omission in this State . . . .24
22
Goodyear Dunlop Tires Operators, S.A. v. Brown, 131 S. Ct. 2846, 2851 (2011)
(quoting Int’l Shoe Co. v. Washington, 326 U.S. 310, 317 (1945)).
23
See HMG/Courtland Props., Inc. v. Gray, 729 A.2d 300, 310 (Del. Ch. 1999).
24
10 Del. C. § 3104(c)(1)-(3).
10
The statute itself makes clear that the cause of action must “aris[e] from” the acts
enumerated in the subsections. Transacting business in Delaware will not create personal
jurisdiction for suits alleging causes of action that do not arise from the relevant
Delaware-centered business transaction(s). In this instance, Fenton and Republic contend
that the Third-Party Plaintiffs‟ causes of action do not arise from any of the contacts
those Third-Party Defendants had with Delaware. Higgins and CAMI counter by
arguing, among other things, that the CCAAs provide a basis for personal jurisdiction.
In my view, the dispute between the parties over jurisdiction centers on how
closely the causes of action must relate to the alleged contacts with Delaware to qualify
as “arising from” those contacts. Here, all of the Third-Party Plaintiffs‟ claims rest upon
the purported authorizations Republic and Fenton gave CAMI and FSD to release the
Collateral. These authorizations seem to have occurred by phone from California. The
Third-Party Plaintiffs‟ position, however, is that those releases occurred only pursuant to
the CCAAs, which were agreements that Republic entered into in Delaware for the
purpose of storing collateral at FSD, a Delaware LLC physically located in Delaware.
The Collateral, in fact, secured a loan from Republic to CAMI, a Delaware corporation
having its principal place of business in Delaware.
The causes of action relate to the Third-Party Defendants‟ release authorizations,
and those release authorizations relate to the business relationships that the Third-Party
Defendants had with CAMI and FSD, via their loan agreements and the CCAAs, in
Delaware. At this stage, the Third-Party Plaintiffs have made a sufficiently strong
11
showing that the authorizations at the heart of their claims against Republic and Fenton
must be viewed within the context of the CCAAs and the actions of FSD. Those
Delaware contacts are sufficient for purposes of, at least, Section 3104(c)(1), and
possibly Section 3104(c)(2) as well. Fenton, as a representative of Republic, entered into
loan agreements and the CCAAs with CAMI while he physically was present in
Delaware. Fenton also was present in Delaware to conduct on-site inspections of the
Collateral.25 Because these actions all related to Republic‟s loans to CAMI and the
Collateral that secured those loans, I find that they constituted the transaction of business
in Delaware, as required under Section 3104(c)(1). In addition, these actions arguably
also constituted “[c]ontract[ing] to supply services” in Delaware under Section
3104(c)(2), in that Republic or Fenton contracted to supply lending services to CAMI or
FSD in Delaware, and provided cash to CAMI via their loan agreements.
Although the contacts in this case may be limited, the Third-Party Plaintiffs at this
stage only need to make a prima facie showing. I conclude that they have made a prima
facie showing of specific jurisdiction under Sections 3104(c)(1) and (2). Because that is
sufficient to justify the exercise of personal jurisdiction over Republic and Fenton under
Delaware‟s long-arm statute, I need not address whether they also have met the
requirements under Section 3104(c)(3).
Furthermore, on the present record, it appears that subjecting the Third-Party
Defendants to personal jurisdiction in this Court would be consistent with due process.
25
T-P Pls.‟ Answer Br. 27-28.
12
The contacts the Third-Party Defendants have had with Delaware “relate to some act[s]
by which the defendant[s] ha[ve] deliberately created obligations between [themselves]
and [this] forum” and are such that Fenton and Republic “should reasonably anticipate
being required to defend [themselves] in Delaware‟s courts.”26 The Complaint alleges,
for example, that Republic has received millions of dollars in interest income from the
loans it has made to CAMI and its affiliated entities in Delaware. Thus, the Third-Party
Plaintiffs have made a sufficient showing to defeat Republic and Fenton‟s motion to
dismiss for lack of personal jurisdiction.
B. Collateral Estoppel
Having concluded that the Third-Party Plaintiffs have made out a prima facie case
for personal jurisdiction, I turn to their collateral estoppel defense. Higgins and CAMI
dispute all three elements of the collateral estoppel test. In addition, Higgins argues that,
because he was not a party to the Related Action, he is not bound by it even if collateral
estoppel applies to CAMI. Taking these arguments in turn, I conclude first that collateral
estoppel bars CAMI from asserting all three of the Counts in the Complaint. Second,
because I find that Higgins is in privity with CAMI, I conclude that he, too, is barred
from pursuing the relief sought in the Complaint.
26
Albert, 2005 WL 2130607, at *15 & n.70 (citing AeroGlobal Capital Mgmt., 871
A.2d at 440; Int’l Shoe Co., 326 U.S. at 316).
13
1. Standard of Review
The Third-Party Defendants have moved to dismiss based on collateral estoppel
under Rule 12(b)(6). Pursuant to Rule 12(b)(6), this Court may grant a motion to dismiss
for failure to state a claim if a complaint does not assert sufficient facts that, if proven,
would entitle the plaintiff to relief. “[T]he governing pleading standard in Delaware to
survive a motion to dismiss is reasonable „conceivability.‟” 27 That is, when considering
such a motion, a court must “accept all well-pleaded factual allegations in the Complaint
as true . . . , draw all reasonable inferences in favor of the plaintiff, and deny the motion
unless the plaintiff could not recover under any reasonably conceivable set of
circumstances susceptible of proof.”28 The court, however, need not “accept conclusory
allegations unsupported by specific facts or . . . draw unreasonable inferences in favor of
the non-moving party.”29
2. The Elements of Collateral Estoppel Are Satisfied
“Collateral estoppel, also known as issue preclusion, prevents a party who litigated
an issue in one forum from later relitigating that issue in another forum.” 30 “Collateral
estoppel applies if: (1) the same issue is presented in both actions; (2) the issue was
27
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 537
(Del. 2011) (footnote omitted).
28
Id. at 536 (citing Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002)).
29
Price v. E.I. duPont de Nemours & Co., Inc., 26 A.3d 162, 166 (Del. 2011) (citing
Clinton v. Enter. Rent-A-Car Co., 977 A.2d 892, 895 (Del. 2009)).
30
Yucaipa Am. Alliance Fund I, LP v. SBDRE LLC, 2014 WL 5509787, at *11 (Del.
Ch. Oct. 31, 2014).
14
litigated and decided in the first action; and (3) the determination was essential to the
prior judgment.”31 “The defendant in the second lawsuit may properly assert the defense
of collateral estoppel to prevent the plaintiff from litigating issues that the plaintiff
previously litigated and lost, even though the defendant himself was not a party to the
first proceeding.”32
The Third-Party Plaintiffs contend that the “material issue raised in the
[Complaint] is whether Republic and Fenton‟s authorizations were conflicting,
insufficient, false or misleading when measured against their duties and obligations
arising under the CCAA and common law.”33 By contrast, they assert that the issue
presented in the Related Action was whether “CAMI could be held liable for conversion
if Republic and Fenton authorized the Collateral‟s release „including removing it from the
depository, marking it for sale, and selling it.‟”34
It is difficult to comprehend Higgins and CAMI‟s argument that the Related
Action did not address the same issue. The decision in the Related Action includes a
subsection that explicitly addresses the issue of “Republic‟s authorization of CAMI‟s use
of the collateral.”35 That portion of the opinion discussed CAMI‟s assertion that
31
Zutrau v. Jansing, 2014 WL 3772859, at *41 (Del. Ch. July 31, 2014), aff’d, __
WL __ (Del. Aug. 26, 2015).
32
Sanders v. Malik, 711 A.2d 32, 34 (Del. 1998).
33
T-P Pls.‟ Answering Br. 15.
34
Id. (quoting IDB at *20).
35
IDB at *20.
15
“Republic authorized CAMI‟s use of the Collateral” and that its authorization constituted
a defense to IDB‟s conversion claim. In rejecting that defense, I found that the evidence
showed that “CAMI‟s conduct . . . was not in accordance with Republic‟s previous
authorizations for CAMI to use the Collateral to be shown at trade shows.” 36 In addition,
I held that the “Defendants [FSD and CAMI] failed to prove either that Republic
authorized an open-ended release or relinquishment in September 2011 or that such an
authorization and release would have complied with the Bailment Agreement.”37
Here, CAMI and Higgins allege that they would not be liable to IDB for
conversion or would not be liable to the same extent “had it not been for Republic and
Fenton‟s conflicting, insufficient, false and misleading authorizations.”38 I squarely
addressed the issue of whether Republic authorized FSD and CAMI to release the
Collateral in the Related Action. The factual findings described above were pivotal to
my rejection of CAMI‟s “Republic consented” defense to conversion. That issue was
litigated and decided in the Related Action; indeed, CAMI raised Republic‟s alleged
authorizations as an affirmative defense there. In addition, those determinations were
36
Id.
37
Id.
38
T-P Compl. ¶¶ 31, 34. The non-specific terms by which the Third-Party Plaintiffs
describe the authorizations challenged in this action are repeated several times in
the Complaint. On other occasions, the Third-Party Plaintiffs also have
characterized the disputed authorizations as “unfounded.” T-P Compl. ¶¶ 13, 38,
40, 41-43. All of these terms are general in nature and vague, and the lack of
specificity makes it more difficult to analyze the Third-Party Plaintiffs‟ claims.
16
necessary to the prior ruling. Had I concluded otherwise and found that Republic‟s
authorizations did provide an affirmative defense, CAMI might not have been found
liable for conversion or might not have been liable in the same amount.
CAMI and Higgins argue that these determinations were not essential because the
IDB opinion “only found that the authorizations had no place in a dispute involving rights
derived from the Bailment Agreement and December 2009 Notice.”39 This argument
reveals the fallacy of the Complaint‟s indemnification and contribution claims. CAMI
and Higgins suggest that this Court must decide the parties‟ respective rights under the
CCAAs because those rights exist independently of the Bailment Agreement. According
to the Complaint, Republic and Fenton gave authorizations under the CCAAs and, but for
those authorizations, Higgins and CAMI would not have been liable for conversion. But
that argument is inconsistent with the holdings and findings I made in the Related Action.
Admittedly, the Related Action focused on the Bailment Agreement and the
December 2009 Notice. At the conclusion of the discussion of Republic‟s consent,
however, I held: “Furthermore, and in any event, the September 2012 [sic: 2011] release
had to be authorized by IDB, not just by Republic.”40 The opinion in the Related Action
discussed repeatedly the fact that IDB‟s consent was required, and that Higgins, CAMI,
and FSD all knew it was required. That is, notwithstanding the CCAAs, IDB‟s consent
was necessary in order to release the Collateral. Absent IDB‟s consent, CAMI was liable
39
T-P Pls.‟ Answering Br. 18.
40
IDB at *20.
17
for conversion regardless of whether, separately under the CCAAs, Republic or Fenton
had authorized CAMI or FSD to release the Collateral. Nevertheless, CAMI and Higgins
assert in this action that, but for Republic and Fenton‟s authorizations, they would not
have been liable or would not have been liable to the same extent. This is incorrect.
CAMI was held liable for conversion because it released the Collateral without IDB‟s
consent. Thus, even assuming the general factual allegations in the Complaint regarding
the authorizations are true, those authorizations are immaterial. No matter how many
unfounded, conflicting, insufficient, false or misleading authorizations Republic and
Fenton may or may not have issued, none of those authorizations would have changed the
fact that IDB‟s consent was required to release the Collateral, and its consent was not
given. I also note that the Complaint does not allege that Republic or Fenton ever
represented to CAMI or Higgins: (1) that IDB had provided its consent; or (2) that IDB‟s
consent was not necessary.41
41
Based on the findings in the Related Action, such an allegation necessarily would
include at least an implicit assertion that Republic or Fenton made false,
fraudulent, or mistaken statements regarding IDB‟s consent. Under Rule 9(b),
“[i]n all averments of fraud or mistake, the circumstances constituting fraud or
mistake shall be stated with particularity.” Ct. Ch. R. 9(b). The Complaint,
however, contains no such specific allegations regarding any explicit
authorization. Indeed, the Complaint fails to meet the more relaxed pleading
standards under Rule 8 because it fails to give the Third-Party Defendants fair
notice of any allegation that Republic or Fenton ever expressly had advised either
CAMI or FSD that IDB had given its consent, or that such consent was
unnecessary.
18
a. The indemnification and contribution claims
Indemnification and contribution are derivative causes of action, in that there
cannot be liability under these causes of action by Party C to Party B until Party B is
found liable and pays money to Party A. In the Related Action, CAMI was found liable
to IDB for conversion. That liability was based on a breach of the Bailment Agreement
and the December 2009 Notice. CAMI now seeks indemnification and contribution from
Republic and Fenton on the grounds that their authorizations—purportedly under the
CCAAs—caused the liability. In the Related Action, however, I held that whether those
authorizations were given or not had no effect on CAMI‟s liability. Thus, based on the
findings in the Related Action—findings that are binding here because of collateral
estoppel—I hold that Counts I and II of the Complaint are based upon a logically flawed
premise and therefore are legally deficient.
In the Related Action, I held that CAMI‟s behavior exceeded Republic‟s
authorizations. Furthermore, and more importantly, I found that IDB‟s consent was
required before the Collateral could be released, and that Higgins, FSD, and CAMI knew
it. CAMI‟s liability for conversion therefore was based on the failure to obtain IDB‟s
consent. Those findings have collateral estoppel effect here. Accordingly, the
Complaint‟s indemnification and contribution counts fail to state a claim.
b. The fraud claim
The fraud claim is barred by collateral estoppel as well. According to the
Complaint, the Third-Party Plaintiffs‟ claim for fraud also stems from the same
19
“unfounded, insufficient, conflicting, false and misleading” authorizations given by
Republic and Fenton.42 Fraud has five elements:
(1) a false representation of material fact; (2) the defendant‟s
knowledge of or belief as to the falsity of the representation
or the defendant‟s reckless indifference to the truth of the
representation; (3) the defendant‟s intent to induce the
plaintiff to act or refrain from acting; (4) the plaintiff‟s action
or inaction taken in justifiable reliance upon the
representation; and (5) damages to the plaintiff as a result of
such reliance.43
As to the first two elements, the Complaint either lacks specificity, and, therefore,
fails to meet the pleading requirements of Rule 9(b), or the alleged authorizations are so
general that the Third-Party Plaintiffs could not meet the justifiable reliance requirement
in the fourth element for proving fraud. Because there does not appear to be any dispute
that the third and fifth elements probably are satisfied, I need not discuss them further.
In terms of “a false representation of a material fact,” the Complaint only alleges
that “Fenton‟s authorizations were statements of fact that he had the right and authority to
authorize the release of collateral.”44 The Third-Party Plaintiffs also claim that the
second element is satisfied because “Fenton knew or should have known that his
authorizations were unfounded, insufficient, conflicting, false and potentially misleading
to CAMI (as it relied upon the CCAA) because Republic and Fenton were aware of
42
T-P Compl. ¶ 42.
43
CSH Theatres, LLC v. Nederlander of S.F. Assocs., 2015 WL 1839684, at *21
(Del. Ch. Apr. 21, 2015) (internal quotations omitted).
44
T-P Compl. ¶ 37.
20
IDB‟s position that no collateral could be released without its approval . . . .”45 Viewing
this allegation in the light most favorable to the Third-Party Plaintiffs, it might mean that
Republic and Fenton implicitly suggested that they either: (1) had already secured IDB‟s
authorization for the release; or (2) had concluded that their authorization was
independently sufficient to release the Collateral. The Third-Party Plaintiffs do not allege
anywhere in the Complaint that Fenton explicitly represented that he had secured IDB‟s
authorization for the release or that IDB‟s authorization was unnecessary. Thus, the
Third-Party Plaintiffs are asserting, at most, that Fenton‟s authorizations were false
because he implied that his was the only authorization needed. Assuming that allegation
is true, however, the question remains whether the Third-Party Plaintiffs justifiably could
have relied on such a false representation.
On the issue of reliance, the Third-Party Defendants first assert that there is an
open question whether there could have been any reliance on the alleged authorizations
by CAMI and Higgins because the authorizations were given to FSD, not CAMI or
Higgins.46 This argument is unpersuasive because I held in the Related Action that FSD
had a close relationship to CAMI, and that Higgins controlled the actions of both FSD
and CAMI.47
45
T-P Compl. ¶ 38.
46
T-P Defs.‟ Opening Br. 32.
47
IDB at *2, *19.
21
Even assuming that CAMI and Higgins could prove reliance, however, they
cannot show justifiable reliance. In the Related Action, I concluded from the evidence
presented that the “most reasonable inference” was that “FSD received the December
2009 Notice and that it was shown to at least Higgins. . . . The December 2009 Notice
and the Bailment Agreement, therefore, limited FSD‟s ability to release the Collateral
absent IDB‟s consent.”48 This finding was bolstered by an earlier finding that, on at least
one occasion, FSD had conformed its conduct to the requirement of needing IDB‟s
consent to release the Collateral.49 I also found that “the evidence show[ed] that Higgins
controlled the actions of both FSD and CAMI as they relate[d] to the Collateral at all
relevant times . . . .”50 Furthermore, these findings were necessary to my conclusion that
CAMI had converted IDB‟s property.
Based on the factual findings in the Related Action, CAMI and FSD needed IDB‟s
consent to release the Collateral. Here, I conclude as a matter of law that it was not
reasonable or justifiable for CAMI or Higgins to rely on Republic and Fenton‟s
authorizations, even if they assumed those authorizations meant Republic and Fenton
considered theirs to be the only authorization necessary, because CAMI and Higgins
48
IDB at *14.
49
Id. at *5.
50
Id. at *19.
22
knew that such authorizations were insufficient without IDB‟s permission.51 Thus, the
fraud claim also is barred by collateral estoppel.
3. Higgins is in Privity with CAMI
The above holdings apply to CAMI because it was a party in the Related Action. I
conclude that Higgins is in privity with CAMI and that the same holdings apply to him.
Therefore, Higgins‟s claims are barred by collateral estoppel as well.
As noted, collateral estoppel can be applied against a plaintiff even though the
defendant was not a party to the original action.52 In this instance, there is an additional
twist in that Fenton and Republic, non-parties to the Related Action, seek to prevent
Higgins, a non-party to the Related Action, from relitigating issues that CAMI litigated
there. In these circumstances, the question is whether Higgins is barred by collateral
estoppel from re-litigating those issues, and that depends upon whether Higgins is in
privity with CAMI such that it is fair and equitable to bind him to the determinations in
the Related Actions.
The relevant case law strongly supports the conclusion that Higgins was in privity
with CAMI for purposes of issue preclusion.53
51
See Ward v. Hildebrand, 1996 WL 422336, at *4 (Del. Ch. July 8, 1996) (“[T]he
recipient of a fraudulent misrepresentation is not justified in relying upon its truth
if he knows that it is false or if its falsity is obvious to him.”).
52
Sanders, 711 A.2d at 34.
53
Indeed, the same facts and arguments support a conclusion that Higgins also is in
privity with FSD, the other defendant in the Related Action.
23
Privity is a legal determination for the trial court with regard
to whether the relationship between the parties is sufficiently
close to support preclusion. . . . The term privity signifies that
the relationship between two or more persons is such that a
judgment involving one of them may justly be conclusive on
the others, although those others were not party to the
lawsuit.54
A recent case by Vice Chancellor Noble, Grunstein v. Silva,55 addressed the issue of
privity at some length. There, the Court surveyed the case law and concluded that the
simplest “test for privity is whether there is a close or significant relationship” between
the relevant entities or persons.56 Important factors in making the privity determination
include “whether their interests were aligned,” whether it would be just that the finding
would be conclusive on the non-party, and whether there is substantial identity between
otherwise superficially separate parties.57
Other cases suggest that privity practically is assumed for sole-owner
corporations. In Orange Bowl Corp. v. Jones,58 the Superior Court found a wholly
owned corporation in privity with the individual defendants. 59 In that case, the individual
54
Higgins v. Walls, 901 A.2d 122, 138 (Del. Super. 2005) (footnotes omitted)
(quoting 18 JAMES WM. MOORE ET AL., MOORE‟S FEDERAL PRACTICE
132.04[1][b] (3d ed. 2004) (quotation marks omitted)).
55
2014 WL 4473641 (Del. Ch. Sept. 5, 2014).
56
Id. at *42.
57
Id. (citing Orloff v. Shulman, 2005 WL 3272355, at *5 (Del. Ch. Nov. 23, 2005)).
58
1986 WL 13095 (Del. Super. Oct. 16, 1986).
59
Id. at *3 (citing In re Gottheiner, 703 F.2d 1136, 1139 (9th Cir. 1983); Martino v.
McDonald’s Sys., Inc., 598 F.2d 1079, 1083 n.7 (7th Cir. 1979)).
24
defendants, who were family members, owned all of the shares of the corporation, acted
as its directors and officers, and exercised control over its day-to-day affairs. The Court
accordingly concluded that there was “no factual or legal dispute that a sufficient
commonality of interest exists between the [individual defendants] and [the corporation]
for the bar of collateral estoppel to apply.”60
Here, Higgins is “CAMI‟s president and sole stockholder.”61 The evidence in the
Related Action supported the conclusion that he controlled both CAMI and FSD. His
interests were aligned with the interests of those entities. Indeed, in the Related Action, I
found that “FSD engaged in a corporate shell game whereby Higgins, as the common
owner of FSD and CAMI, abused the corporate form to avoid the technical requirements
of the Bailment Agreement and the other relevant agreements.”62 Because Higgins
controlled CAMI and had a strong, if not complete, commonality of interest with CAMI,
there is nothing remotely unjust about making the factual findings in the Related Action
applicable to him, as well as CAMI. Accordingly, based on the findings in the Related
Action and the factors considered by Delaware courts in determining whether privity
exists, I conclude that Higgins is in privity with CAMI. Collateral estoppel, therefore,
60
Id. at *3 n.1; see also Restatement (Second) of Judgments § 59(3) (1982) (“If the
corporation is closely held, in that one or a few persons hold substantially the
entire ownership in it, the judgment in an action by or against the corporation or
the holder of ownership in it is conclusive upon the other of them as to issues
determined therein . . . .”).
61
IDB at *2.
62
Id. at *15.
25
applies to Higgins as well, and prevents him from relitigating the issues decided in the
Related Action.
III. CONCLUSION
For the reasons stated in this Memorandum Opinion, I deny the Third-Party
Defendants‟ motion to dismiss the Complaint under Rule 12(b)(2) for lack of personal
jurisdiction over them. I grant the motion to dismiss under Rules 9(b) and 12(b)(6) on
the ground that all of the Counts in the Complaint are barred by collateral estoppel,63 and
therefore dismiss the Complaint with prejudice.64 Each party shall bear its own
attorneys‟ fees and expenses.
IT IS SO ORDERED.
63
Higgins and CAMI have suggested that there is a fourth element to collateral
estoppel, to wit: whether the party against whom the doctrine is asserted had a
“„full and fair opportunity to litigate the issue in the prior action.‟” Betts v.
Townsends, Inc., 765 A.2d 531, 535 (Del. 2000) (quoting State v. Machin, 642
A.2d 1235, 1239 (Del. Super. 1993)). Even assuming such a fourth element does
exist, it does not alter my analysis. CAMI and FSD, both of which are wholly
owned and controlled by Higgins, furiously litigated the Related Action. In
addition, FSD asserted at least six defenses to the breach of contract claim, and
CAMI asserted at least five defenses to the conversion count and contested many
of the underlying elements of IDB‟s claims. Finally, although he was not a party
to the Related Action, Higgins directly participated in the litigation by
“provid[ing] almost nine hours of deposition testimony.” IDB at *30. Thus, I
conclude that CAMI and, by association, Higgins, did have a full and fair
opportunity to litigate the relevant findings in the Related Action.
64
Based on my ruling as to collateral estoppel, I have not addressed the other
grounds advanced for dismissal under Rule 12(b)(6).
26