LVI Group Investments, LLC v. NCM Group Holdings, LLC

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
LVI GROUP INVESTMENTS, LLC )
)
Plaintiff, )
)
v. ) C.A. No. 12067-VCG
)
NCM GROUP HOLDINGS, LLC, )
SUBHAS KHARA, EVERGREEN )
PACIFIC PARTNERS, L.P., )
EVERGREEN PACIFIC PARTNERS )
GP, LLC, EVERGREEN PACIFIC )
PARTNERS II, L.P., EVERGREEN )
PACIFIC PARTNERS II GP, L.P., )
EVERGREEN PACIFIC PARTNERS II )
GP, LLC, EVERGREEN PACIFIC )
PARTNERS MANAGEMENT )
COMPANY, INC., TIMOTHY )
BRILLON, MICHAEL NIBARGER, and )
TIMOTHY BERNARDEZ, )
)
Defendants. )
_________________________________ )
)
NCM GROUP HOLDINGS, LLC, )
)
Counter-Plaintiff, )
)
v. )
)
LVI GROUP INVESTMENTS, LLC, )
SCOTT STATE, PAUL CUTRONE, and )
NORTHSTAR GROUP HOLDINGS, )
LLC, )
)
Counter-Defendants. )
MEMORANDUM OPINION
Date Submitted: February 23, 2018
Date Decided: March 28, 2018
Rudolf Koch, Matthew W. Murphy, and Matthew D. Perri, of RICHARDS,
LAYTON & FINGER, P.A., Wilmington, Delaware; OF COUNSEL: Steven C.
Florsheim, Greg Shinall, Daniel A. Shmikler, Michael G. Dickler, and Trevor K.
Scheetz, of SPERLING & SLATER, P.C., Chicago, Illinois, Attorneys for
Plaintiff/Counter-Defendant LVI Group Investments, LLC.
Richard D. Heins, Philip Trainer, Jr., and Hayley M. Lenahan, of ASHBY &
GEDDES, Wilmington, Delaware; OF COUNSEL: Stephen Novack, Donald A.
Tarkington, Andrew D. Campbell, Elizabeth C. Wolicki, and Yvette V. Mishev, of
NOVACK AND MACEY LLP, Chicago, Illinois, Attorneys for Defendant/Counter-
Plaintiff NCM Group Holdings, LLC, and Defendants Evergreen Pacific Partners,
L.P., Evergreen Pacific Partners II, L.P., Evergreen Pacific Partners GP, LLC,
Evergreen Pacific Partners II GP, L.P., Evergreen Pacific Partners II GP, LLC,
Evergreen Pacific Partners Management Company, Inc., Timothy Brillon, Michael
Nibarger, and Timothy Bernardez.
GLASSCOCK, Vice Chancellor
This Memorandum Opinion is the latest incarnation of the protracted litigation
over the combination of two large demolition firms—LVI Group Investments, LLC
and NCM Group Holdings, LLC—into a single entity, NorthStar Group Holdings,
LLC. Each of the combining entities accuses the other of fraudulently misstating
financial statements in the inducement of the transaction. Here, I address claims
raised in LVI’s amended complaint against third parties associated with NCM.
These defendants have moved to dismiss; for the reasons that follow, that Motion is
largely denied.
I. BACKGROUND1
A. The Parties
Plaintiff LVI Group Investments, LLC is a Delaware limited liability
company that combined with Defendant NCM Group Holdings, LLC in 2014 to
form NorthStar Group Holdings, LLC.2 Like LVI, both NCM and NorthStar are
Delaware limited liability companies. 3 LVI owns 62.5% of NorthStar, while NCM
owns 37.5%.4 Before the merger, LVI and NCM were two of the largest demolition
companies in the United States.5
1
The facts, drawn from the Complaint and from documents incorporated by reference therein, are
presumed true for purposes of evaluating the Motion to Dismiss.
2
Compl. ¶¶ 1, 6–7.
3
Id. ¶¶ 6–7.
4
Id.
5
Id. ¶ 18.
1
Defendant Subhas Khara was the President and CEO of NCM in addition to
serving on its Board of Managers. 6 After the merger, Khara served as NorthStar’s
President until NorthStar’s Board of Managers put him on administrative leave. 7
Khara continues to serve on NorthStar’s Board. 8
Defendants Evergreen Pacific Partners, L.P. and Evergreen Pacific Partners
II, L.P. (collectively, the “EPP Funds”) are Delaware limited partnership funds that
together owned the vast majority of NCM’s outstanding units.9
Defendants Evergreen Pacific Partners GP, LLC, Evergreen Pacific Partners
II GP, L.P., and Evergreen Pacific Partners II GP, LLC (collectively, the “EPP GPs”)
are Delaware entities that serve as the EPP Funds’ general partners. 10
Defendant Evergreen Pacific Partners Management Company, Inc. (“EPP
Management”) is a Delaware corporation that managed the EPP Funds’ investments
in NCM.11 I sometimes refer to all of the EPP entities collectively as “EPP.”
Defendant Michael Nibarger is one of EPP’s founders. 12 He also serves as a
Managing Partner, Member, or Principal of the EPP GPs, and he is the Secretary and
Vice President of EPP Management in addition to serving on its Board. 13 During
6
Id. ¶ 8.
7
Id.
8
Id.
9
Id. ¶ 9.
10
Id.
11
Id.
12
Id. ¶ 10.
13
Id.; Perri Aff. Ex. 2.
2
the relevant time period, Nibarger served on NCM’s Board, and he continues to serve
on NorthStar’s Board. 14 Nibarger lives in the state of Washington. 15
Like Nibarger, Defendant Timothy D. Bernardez helped found EPP and
serves as a Managing Partner, Member, or Principal of the EPP GPs. 16 Bernardez is
a co-President and director of EPP Management.17 During the relevant time period,
he served on NCM’s Board, and he is currently a member of the NorthStar Board.18
Bernardez resides in the state of Washington. 19
Defendant Timothy Brillon is the CFO of EPP and a Member of the EPP
GPs.20 He also serves as CFO and Chief Compliance Officer of EPP Management.21
During the relevant time period, Brillon was NCM’s de facto CFO. 22 Like Nibarger
and Bernardez, Brillon lives in the state of Washington. 23 I refer to Nibarger,
Bernardez, and Brillon as the “Individual Defendants”; I refer to the EPP entities
and the Individual Defendants as the “EPP Defendants.”
14
Compl. ¶ 10.
15
Id.
16
Id. ¶ 11.
17
Id.; Perri Aff. Ex. 2.
18
Compl. ¶ 11.
19
Id.
20
Id. ¶ 12.
21
Id.
22
Id.
23
Id.
3
B. Factual Background
1. The Merger
LVI and NCM, two demolition companies, began merger discussions in
October 2013.24 After executing a non-disclosure agreement, the parties started to
share information, including financial statements and forecasts. 25 The resulting
letter of intent fixed a merger price based on each party’s representation of its
EBITDA.26 EBITDA also served as the basis of the parties’ division of NorthStar’s
equity; NCM ultimately received 37.5% of that equity based on its trailing twelve
month EBITDA minus pre-closing debt.27 The parties negotiated deal structure and
performed due diligence throughout the latter part of 2013 and in 2014.28 The
merger closed in April 2014.29
The parties merged pursuant to a Contribution Agreement,30 several
provisions of which bear mentioning. In Section 2.4(b), NCM represented and
warranted that the financial statements attached to the Contribution Agreement
fairly present, in all material respects, the consolidated financial
position of NCM Holdings and the NCM Subsidiaries as of their
respective dates, and the consolidated results of operations and cash
flows of NCM Holdings and each NCM Subsidiary for the respective
24
Id. ¶ 18.
25
Id.
26
Id. ¶ 19.
27
Id.
28
Id.
29
Id.
30
Id. ¶ 1.
4
periods covered thereby, in conformity with GAAP consistently
applied throughout the periods covered thereby. 31
Section 5.4(f) provides that neither NCM nor LVI “has relied on any statements,
representations or warranties whatsoever, other than the representations and
warranties of the other Party expressly set forth in the Agreement.” 32 The
Contribution Agreement also contains an integration clause:
This Agreement, including the Schedules and Ancillary Documents,
constitute the entire Agreement between the Parties pertaining to the
subject matter herein and supersede any prior representation, warranty,
covenant, or agreement of any Party regarding such subject matter. No
supplement, modification, or amendment hereof will be binding unless
expressed as such and executed in writing by LVI Holdings and NCM
Holdings.33
The Contribution Agreement additionally contains an exclusive
remedies clause. There, NCM, LVI, and NorthStar agreed that their
sole and exclusive remedies . . . arising out of, relating to or resulting
from this Agreement (including the representations and warranties set
forth herein . . .) and the transactions contemplated herein will be
strictly limited to (i) the indemnification provisions contained in this
Article 5, (ii) the provisions of Section 5.6 [relating to specific
performance,] and (iii) claims for fraud against the Person who
committed such fraud.34
Finally, Section 5.2(a) provides that NCM
will indemnify and hold harmless [NorthStar] and each of its
Subsidiaries from and against all Losses arising out of, relating to or
31
Compl. Ex. A, § 2.4(b).
32
Id. § 5.4(f).
33
Id. § 6.6
34
Id. § 5.4(e).
5
resulting from (i) any failure of any Surviving NCM Representation to
be true or (ii) any breach of any covenant or agreement of NCM
Holdings herein. 35
2. The Fraud
LVI alleges that NCM and its affiliates intentionally inflated NCM’s EBITDA
to induce LVI to agree to the merger and give NCM an unjustifiably large stake in
NorthStar.36 The Complaint describes several of the improper accounting practices
used to make NCM’s financial performance appear stronger than it was. I recite
only some of these practices; interested readers may turn to the Complaint for a more
complete description.
NCM accounted for certain projects as if it expected to achieve its typical
profit margin when it knew that project costs would offset most or all of the projected
profits.37 As the profits from older projects faded, NCM masked the inflated profits
by booking new projects in the same misleading manner. 38 Another improper
accounting practice involved NCM’s use of percentage-of-completion accounting.
Under that accounting methodology, “a company calculates its percentage of
completion based on the ratio of its actual costs incurred to date to its total
anticipated costs for the entire project (including appropriate change orders), and
35
Id. § 5.2(a).
36
Compl. ¶ 20.
37
Id. ¶ 20(a).
38
Id.
6
books any associated profits accordingly.”39 By intentionally understating its
projected costs, however, NCM overstated the total potential profits from its projects
and recognized those profits too quickly. 40 As projects neared completion and actual
costs started to exceed projected costs, NCM was forced to reduce projected profits
and, in certain cases, reverse profits that had already been booked. 41 These
reductions and reversals were referred to as “fade” within NCM.42 NCM concealed
the “fade” in its projects by making adjustments gradually over several months rather
than correcting the accounting immediately, and by booking inflated profits on new
projects.43
NCM’s improper accounting practices were reflected in the financial
statements it provided to LVI in connection with the Contribution Agreement. 44
Those financial statements covered the two-month period ending February 28, 2014,
and the 2012 and 2013 fiscal years.45 According to NCM, the statements failed to
accurately describe NCM’s assets, liabilities, revenue, and EBITDA, among other
things.46
39
Id. ¶ 20(b).
40
Id.
41
Id.
42
Id.
43
Id. ¶ 20(c)–(d).
44
Id. ¶ 40.
45
Id. ¶ 42(a)–(e), (g).
46
Id.
7
3. The EPP Defendants’ Role in the Fraud
The Complaint describes in some detail Khara’s role in the fraud, but because
this Motion concerns the EPP Defendants, I recite only the allegations relevant to
their conduct. As noted above, the EPP Funds held the vast majority of NCM’s
equity, and the Individual Defendants held high-level positions at EPP and NCM.
According to the Complaint, the Individual Defendants “knew of, actively
participated in, and directed the manipulation of NCM’s financial statements, to
deceive both NCM’s lenders and LVI.”47 Brillon, NCM’s de facto CFO, took
instructions from Nibarger and Bernardez as to the manipulation of NCM’s financial
statements.48
As early as 2011, the Individual Defendants knew that NCM’s financial
statements contained significant inaccuracies.49 Nibarger and Bernardez told Khara
about their concerns regarding these inaccuracies, but NCM was unable to improve
its performance or correct the issues that caused the misleading accounting. 50 The
Individual Defendants therefore pushed NCM to manipulate its financial statements
by recognizing fictitious revenue, delaying the recognition of “fade,” and altering
financial reporting documents.51
47
Id. ¶ 46.
48
Id. ¶ 47.
49
Id. ¶ 48.
50
Id. ¶¶ 48–49.
51
Id. ¶ 49.
8
The Individual Defendants themselves played an important role in this
process, making monthly accounting decisions for NCM. 52 For instance, in
December 2011, NCM asked EPP for help in deciding how to book expected losses
from NCM’s Byron Rogers project. 53 Under GAAP, these losses should have been
immediately recognized, but Nibarger’s instruction, as relayed by Brillon, was to
defer the “fade.”54 Later, in January 2012, NCM officer Dave Whitley informed
Khara that, having followed Nibarger’s instructions, he could not “‘stand’ on the
integrity of the November financials.”55
The Individual Defendants also told NCM to manipulate financial reports and
projections to meet revenue targets. 56 In August 2011, as NCM was negotiating with
its lenders, Brillon urged it to “keep in mind that we are forecasting $24M of
EBITDA for 2011 so it needs to be higher than that since 2012 revenue should
increase.”57 Brillon also said that “the lenders are going to want to see something in
the $30M and up range.”58 Duane Kerr, NCM’s CFO at the time, obliged, sending
52
Id. ¶ 50.
53
Id.
54
Id.
55
Id. The EPP Defendants have provided a copy of the January 2012 email. As the EPP
Defendants point out, Whitley wrote in the email that “AP & Payroll issues coupled with the Asst
Controller change (Allen to Ryan) have led to GL integrity issues.” Defs.’ Opening Br. Ex. B.
Not mentioned by the EPP Defendants is that the same email also describes “[l]arge plugs to branch
GM to tie WIP to GL (I’m still very concerned about the accuracy and legitimacy of these
entries).” Id. (emphasis added).
56
Compl. ¶ 51.
57
Id.
58
Id.
9
Brillon a forecast for $34 million the very next day. 59 The forecast was later reduced
to $31 million, but LVI alleges that the Individual Defendants knew that both
projections were designed to mislead outsiders about NCM’s financial prospects. 60
The Individual Defendants continued to push NCM to recognize fictitious
revenue and delay recognition of fade in 2012 and 2013. 61 For instance, in the
summer of 2013, as NCM was in the midst of refinancing its debt, EPP learned that
NCM planned on reporting $1.2 million in EBITDA for its May financial
statements.62 NCM had told its lenders that it would achieve $2.1 million in
EBITDA, so this financial report could hurt the refinancing effort. 63 Nibarger
explained to Brillon and Bernardez that “[t]his cannot stand,” and Bernardez told
Brillon to “go through the W[ork In Progress (“WIP”)] today job by job with Duane
[Kerr] and Sage [Khara] to see where we can go up.” 64 Kerr cooperated by agreeing
that NCM would report EBITDA of $2,004,773, a figure the Individual Defendants
knew was false.65 Kerr also wrote in an email to Brillon that “‘per our discussions,’
NCM had instructed its branch managers to make a ‘departure’ from the financial
reporting approach that NCM had ‘preach[ed] to our managers.’”66 Kerr told Brillon
59
Id.
60
Id.
61
Id. ¶ 53.
62
Id. ¶ 54.
63
Id.
64
Id. (second and third alterations in original).
65
Id. ¶ 55.
66
Id. ¶ 56 (alteration in original).
10
that NCM would start taking “an aggressive approach to [its] WIP schedules,” as a
result of which NCM “may have some level WIP fade as those jobs come to
completion.” 67
On September 5, 2013—one month before NCM and LVI executed a non-
disclosure agreement—Brillon and Nibarger spoke about “‘pushing some losses
back into 2012,’ so as to preserve the fraudulent bottom line on NCM’s financial
statements for 2013.”68 Around this time, Bernardez reached out to LVI board
member Brian Simmons to discuss “potential combinations.” 69 Later, on October 1,
Brillon expressed concern that NCM’s financial reports for August were “lower than
what we were guiding the lenders to on the last lender call,” and he instructed NCM
to improve the numbers. 70 Kerr responded that he could increase EBITDA by,
among other things, booking an additional $107,000 in income on several projects. 71
Kerr noted that “if the final results on those jobs prove not to be as positive as what
we are expecting there will be fade experienced at the tail end of those jobs.”72
Brillon forwarded this email to Nibarger and Bernardez. 73 According to the
Complaint, EPP knew that this fictitious income would be reversed through fade;
67
Id.
68
Id. ¶ 58.
69
Id. ¶ 59.
70
Id. ¶ 60.
71
Defs.’ Opening Br. Ex. G, at 1.
72
Id.
73
Compl. ¶ 60.
11
nevertheless, EPP pushed for its inclusion in NCM’s financial reports in order to
mislead its lenders and LVI.74
The next month, on November 25, 2013, Kerr told Brillon that while NCM’s
“initial numbers were much lower,” it would report $1.1 million in EBIDTA for
October.75 Kerr reported that “[w]e went back to the branch managers to have them
go over their WIPs with a fine tooth comb for revenues and cost savings that they
may not have considered.”76 The Complaint alleges that EPP knew the $1.1 million
figure was false because, again, some of it would inevitably be reversed through
fade. 77 A few days later, Kerr sent NCM’s revised 2014 budget to Khara, Bernardez,
and Brillon.78 Kerr wrote that, after receiving feedback from Brillon, “we went back
to some of our larger branches . . . we were able to increase our projected revenues
. . . (total $1.5M). We slightly increased margins . . . (total .3%). This resulted in an
increase to EBITDA of $1.0M.”79 LVI alleges that both EPP and NCM knew the
budget did not reflect a good-faith attempt at forecasting. 80
74
Id.
75
Id. ¶ 61.
76
Defs.’ Opening Br. Ex. H.
77
Compl. ¶ 61. The Complaint also alleges that “[d]espite the EPP Defendants’ knowledge of,
participation in, and direction of NCM’s falsification of its financial statements, Bernardez falsely
informed LVI on December 3, 2013 that NCM had ‘cleaned up our WIPs’ in connection with its
recent bank refinancing.” Id. ¶ 63.
78
Id. ¶ 62.
79
Id. (alterations in original).
80
Id.
12
As merger negotiations continued, the Individual Defendants kept working
with NCM to misrepresent its financial reports.81 On January 28, 2014, for instance,
Brillon told NCM not to “send over the WIP to LVI” until everyone could “agree on
the December number for Byron.”82 As noted above, the merged closed in April
2014, and LVI and NCM combined to form NorthStar, in which LVI was to have a
62.5% interest, while NCM would obtain a 37.5% stake. 83
4. Post-Merger Events
NorthStar began to encounter serious financial difficulty after the merger
closed. 84 Specifically, NCM’s projects were experiencing fade and thus not meeting
NCM’s projections. 85 LVI investigated the projects and found that NCM’s pre-
merger financials had been falsified. 86 Accordingly, on April 22, 2015, LVI sent
NCM a Notice of Claim in accordance with Section 5.5(a) of the Contribution
Agreement.87 In the Notice of Claim, LVI identified NCM’s “improper and
undisclosed pattern and practice of understating estimated contract costs, overstating
estimated profit, overstating job completion percentage, overstating earned profit,
81
Id. ¶ 65.
82
Id.
83
Id. ¶¶ 6–7, 34.
84
Id. ¶ 35.
85
Id. ¶ 36.
86
Id.
87
Id. ¶ 43.
13
and overstating earned revenues – and in certain cases, overstating anticipated
contract revenues.”88 Almost a year later, this litigation commenced.
5. EPP Management
As noted above, the Complaint alleges that EPP Management, a Delaware
corporation, managed the EPP Funds’ investments in NCM.89 Nibarger is EPP
Management’s Secretary and Vice President, Bernardez is its co-President, and
Brillon is its CFO and Chief Compliance Officer. 90 Moreover, Nibarger and
Bernardez serve on EPP Management’s Board. 91 In August 2013, NCM retained
EPP Management pursuant to a written services agreement. 92 In that agreement,
NCM agreed to “engage[] [EPP Management] as a financial and management
consultant,” and EPP Management “agree[d] to provide financial and management
consulting services” to NCM.93 EPP Management was also retained to consult with
NCM’s managers “in such manner and on such business and financial matters as
may be reasonably requested from time to time by the Board, including (a) corporate
strategy, (b) budgeting of future corporate investments, (c) acquisition and
88
Id.
89
Id. ¶ 9.
90
Id. ¶¶ 10–12.
91
Perri Aff. Ex. 2.
92
Perri Aff. Ex. 4.
93
Id. at NORTHSTAR14307035.
14
divestiture strategies, and (d) debt and equity financings.” 94 Under the services
agreement, EPP Management would receive an annual fee of $1 million. 95
Other documents support this description of EPP Management’s role. Under
a management agreement between one of the EPP GPs and EPP Management, the
latter was tasked with “manag[ing] [one of the EPP Funds’] portfolio of Investments
on an ongoing basis, including monitoring and oversight of the Fund’s portfolio
companies.”96 The agreement provided, however, that EPP Management’s authority
was “[s]ubject to the direction and control of the General Partner.”97 In its latest
Form ADV, filed on March 29, 2017, EPP Management represented that it provided
“the day to day advisory services for the” EPP Funds. 98 That same SEC filing reveals
that the EPP GPs “operate as a single advisory business together with” EPP
Management.99
Nevertheless, at their depositions, the Individual Defendants testified that EPP
Management in fact performed a purely administrative function, handling issues
such as bills, payroll, and leases. For example, Nibarger stated that EPP
Management “doesn’t have any role in NCM, it’s an administrative conduit . . . .
[EPP Management] doesn’t do anything but provide administration, arms and legs
94
Id. at NORTHSTAR14307035–36.
95
Id. at NORTHSTAR14307036.
96
Perri Aff. Ex. 7, § 2(c).
97
Id. § 2.
98
Perri Aff. Ex. 3, at 1.
99
Id.
15
for the general partner to make and manage its investments.”100 For his part,
Bernardez testified that EPP Management “do[es] things administratively; like sign
the lease, pay the bills, those types of things.”101 And Brillon averred that EPP
Management simply handles “our bills, our payroll, our offices.”102
C. This Litigation
On March 3, 2016, LVI filed its initial complaint against NCM and Khara,
alleging that the financial statements provided to LVI in connection with the
Contribution Agreement were false and misleading. NCM filed its answer and
counterclaim on April 4, 2016, making similar allegations about LVI’s financial
statements. NCM then amended its counterclaim, and on March 29, 2017, I
dismissed some, but not all, of the counts in that pleading. 103 I did not dismiss the
fraud-related counts.104 Later, on May 3, 2017, after the parties had engaged in
extensive discovery, LVI filed its amended complaint, adding the EPP Defendants
as parties.
The Complaint contains eight counts. Count I alleges fraud against NCM and
Khara for their role in making false representations about NCM’s financial condition
100
Resp. to Suppl. Mem. Ex. 2, at 56:11–12, 57:3–5.
101
Resp. to Suppl. Mem. Ex. 3, at 77:6–8.
102
Resp. to Suppl. Mem. Ex. 4, at 55:1.
103
LVI Grp. Invs., LLC v. NCM Grp. Holdings, LLC, 2017 WL 1174438, at *10 (Del. Ch. Mar.
29, 2017).
104
Id. at *4–5.
16
to LVI.105 Count II is also brought against NCM and Khara, and it alleges fraudulent
inducement based on the same facts supporting Count I.106 Count III seeks
indemnification against NCM for breaches of the representations and warranties
contained in Section 2.4 of the Contribution Agreement. 107 Count IV alleges that
the EPP Defendants committed fraud by causing NCM to prepare false financial
statements with the intent of inducing LVI to enter the Contribution Agreement.108
Count V, also brought against the EPP Defendants, alleges that they fraudulently
induced LVI to, among other things, merge with NCM. 109 In Count VI, LVI alleges
that the EPP Defendants conspired with (or aided and abetted) NCM and Khara in a
fraudulent scheme designed to induce LVI to enter the Contribution Agreement. 110
Count VII alleges that the EPP Defendants were unjustly enriched by the fraudulent
scheme,111 and Count VIII is brought against the Individual Defendants for negligent
misrepresentation. 112
On May 23, 2017, the EPP Defendants moved to dismiss the claims directed
against them under Court of Chancery Rules 9(b), 12(b)(2) and 12(b)(6), and I heard
105
Compl. ¶¶ 68–78.
106
Id. ¶¶ 79–90.
107
Id. ¶¶ 91–101.
108
Id. ¶¶ 102–10.
109
Id. ¶¶ 111–21.
110
Id. ¶¶ 122–36.
111
Id. ¶¶ 137–45.
112
Id. ¶¶ 146–52.
17
argument on the Motion on October 17, 2017.113 At oral argument, I requested
supplemental briefing on some of the personal jurisdiction arguments raised in the
initial round of briefing. The parties then submitted supplemental briefs informed
by the discovery that has taken place since the October argument.
II. ANALYSIS
A. Rule 12(b)(2)
When a defendant moves for dismissal under Court of Chancery Rule
12(b)(2), “the plaintiff bears the burden of showing a basis for the court’s exercise
of jurisdiction over the defendant.”114 Before any jurisdictional discovery has taken
place, the plaintiff “need only make a prima facie showing, in the allegations of the
complaint, of personal jurisdiction and the record is construed in the light most
favorable to the plaintiff.” 115 Where, as here, the parties have conducted discovery
relating to personal jurisdiction, but the Court has not held an evidentiary hearing,
the plaintiff’s burden is heavier: she “must allege specific facts supporting [her]
position.”116 Nevertheless, the plaintiff in such a situation still gets the benefit of all
reasonable inferences drawn from the record. 117
113
Khara and NCM answered the Complaint on May 17, 2017.
114
Ryan v. Gifford, 935 A.2d 258, 265 (Del. Ch. 2007).
115
Sprint Nextel Corp. v. iPCS, Inc., 2008 WL 2737409, at *5 (Del. Ch. July 14, 2008).
116
Medi-Tec of Egypt Corp. v. Bausch & Lomb Surgical, 2004 WL 415251, at *2 (Del. Ch. Mar.
4, 2004) (quoting Sears, Roebuck & Co. v. Sears plc, 744 F. Supp. 1297, 1301 (D. Del. 1990)).
117
See Reid v. Siniscalchi, 2014 WL 6589342, at *5, *13 (Del. Ch. Nov. 20, 2014) (noting that
jurisdictional discovery had been taken and finding that “[a]t this stage in the proceedings, the
Court is required to draw all reasonable inferences in [the plaintiff’s] favor, even if other inferences
18
This Court engages in a two-step analysis to determine whether it has personal
jurisdiction over a nonresident defendant. 118 First, the Court must evaluate “whether
‘Delaware statutory law offers a means of exercising personal jurisdiction’ over the
nonresident defendant.”119 Second, the Court “must determine whether exercising
personal jurisdiction over the defendant passes muster under the Due Process Clause
of the United States Constitution.”120 The Court’s exercise of personal jurisdiction
over a nonresident defendant will satisfy due process “so long as there are ‘minimum
contacts’ between the defendant and the forum.”121
The Individual Defendants, all of whom reside in the state of Washington and
have never spent time in Delaware,122 argue that this Court lacks personal
jurisdiction over them. LVI responds with three theories of personal jurisdiction.
First, LVI argues that the Individual Defendants consented to jurisdiction in this state
by serving as directors or officers of EPP Management, a Delaware corporation.
Second, according to LVI, the Individual Defendants consented to jurisdiction in
Delaware by serving as Managers of the EPP GPs (two of which are Delaware
appear more probable”); Vichi v. Koninklijke Philips Elecs. N.V., 2009 WL 4345724, at *4 (Del.
Ch. Dec. 1, 2009) (same).
118
Werner v. Miller Tech. Mgmt., L.P., 831 A.2d 318, 326 (Del. Ch. 2003).
119
Ruggiero v. FuturaGene, plc., 948 A.2d 1124, 1132 (Del. Ch. 2008) (quoting Amaysing Techs.
Corp. v. Cyberair Commc’ns, Inc., 2005 WL 578972, at *3 (Del. Ch. Mar. 3, 2005)).
120
Terramar Retail Ctrs., LLC v. Marion #2-Seaport Trust U/A/D/ June 21, 2002, 2017 WL
3575712, at *5 (Del. Ch. Aug. 18, 2017).
121
In re Silver Leaf, L.L.C., 2004 WL 1517127, at *3 (Del. Ch. June 29, 2004) (quoting Int’l Shoe
Co. v. Washington, 326 U.S. 310, 316 (1945)).
122
Defs.’ Reply Br. Ex. 1, ¶ 6; Defs.’ Reply Br. Ex. 2, ¶ 6; Defs.’ Reply Br. Ex. 3, ¶ 6.
19
limited liability companies) or NCM itself (another Delaware limited liability
company). Third, LVI suggests that the Individual Defendants are subject to
personal jurisdiction by virtue of their participation in a conspiracy to defraud LVI.
I find that LVI has met its burden of establishing personal jurisdiction over the
Individual Defendants under Section 3114, the director consent statute. 123 Thus, I
need not address LVI’s other arguments for personal jurisdiction.
Section 3114 provides that a nonresident officer or director of a Delaware
corporation consents to the exercise of personal jurisdiction over her “in all civil
actions or proceedings brought in this State, by or on behalf of, or against such
corporation, in which [she] is a necessary or proper party, or in any action or
proceeding against [her] for violation of a duty in such capacity.”124 Until the
Delaware Supreme Court’s decision in Hazout v. Tsang Mun Ting,125 this Court had
interpreted Section 3114 to allow personal jurisdiction over a nonresident director
or officer only if she was alleged to have breached a fiduciary duty to the corporation
she served.126 In effect, the Court had read the “necessary or proper party” language
123
10 Del C. § 3114(a), (b).
124
Id.
125
134 A.3d 274 (Del. 2016).
126
See, e.g., Microsoft Corp. v. Amphus, Inc., 2013 WL 5899003, at *9 (Del. Ch. Oct. 31, 2013)
(“[F]or a nonresident director or officer of a Delaware corporation to be subject to personal
jurisdiction in Delaware under Section 3114, the plaintiff must allege that the director or officer,
acting in that capacity, breached a fiduciary duty to the Delaware corporation that they serve.”).
20
out of the statute. 127 The concern was that, if given literal effect, the “necessary or
proper party” clause “could be susceptible to an overbroad reach that could endanger
the constitutionality of § 3114.”128
Hazout rejected this line of precedent and embraced the plain meaning of
Section 3114. 129 Under Hazout, this Court may exercise personal jurisdiction over
a nonresident director or officer where the corporation is a named party and the
corporate fiduciary is “a necessary or proper party” to the action. 130 A director or
officer is a “proper party” where she “has a tangible legal interest in the matter that
is separate from” the corporation’s.131 She is a “necessary party” if her rights “must
be ascertained and settled before the rights of the parties to the suit can be
determined.”132 In either case, there must “be a close nexus between the claims
involving the corporation which made it a party to the suit, and the conduct of the
nonresident fiduciary.”133 Thus, “only claims that involve conduct by the
nonresident fiduciary using his corporate power will make him a necessary or proper
127
See In re USACafes, L.P. Litig., 600 A.2d 43, 53 (Del. Ch. June 7, 1991) (“Because the first
clause of Section 3114 so plainly is susceptible to unconstitutional application, this court in Hana
Ranch construed the word ‘or’ to mean ‘and,’ in effect reading this clause out of the statute.”
(citing Hana Ranch, Inc. v. Lent, 424 A.2d 28, 30 (Del. Ch. 1980), abrogated by Hazout, 134 A.3d
274)).
128
Hazout, 134 A.3d at 285.
129
Id. at 286–92.
130
Id. at 289.
131
Id. at 292.
132
Id. at 289 (quoting 67A C.J.S. Parties § 3 (2015)).
133
Id.
21
party.”134 The Supreme Court recognized the potential for overbroad application of
Section 3114, but found that the way to address that possibility is to “use the
minimum contacts analysis required by [the due process clause] to ensure that the
statute is not used in a situationally inappropriate manner.”135
The facts in Hazout illustrate the breadth of its interpretation of Section 3114.
The individual defendant, Marc Hazout, lived in Canada. 136 He was a director of
Silver Dragon Resources, Inc., a Delaware corporation headquartered in Toronto; he
also held several high-level executive positions at the company.137 The plaintiff,
Tsang Mun Ting, resided in Hong Kong. 138 In 2012, Silver Dragon needed cash,
and Hazout began negotiating on behalf of the company with Tsang and other Hong
Kong investors over the terms of a potential capital infusion.139 By December 2013,
the parties had reached an agreement under which Tsang and the other investors
would lend Silver Dragon $3,417,265 in exchange for a security interest in the
company’s assets and control over its board. 140 Once the terms were finalized,
Hazout told Tsang and his colleagues that all of Silver Dragon’s directors would sign
134
Id.
135
Id. at 291. The Supreme Court also pointed to forum non conveniens doctrine as “a viable tool”
for “address[ing] the burden to nonresident fiduciaries of addressing litigation in our state.” Id.
136
Id. at 280.
137
Id.
138
Id.
139
Id. at 280–81.
140
Id. at 281.
22
the relevant agreement and resign from the board. 141 Based on that representation,
and before all of the signatures came in, Tsang wired the first installment of
$1,014,140 to Silver Dragon. 142 It soon became clear that one of Silver Dragon’s
directors would not sign the agreement. 143 Hazout nevertheless refused to give the
money back.144 Tsang eventually sued Hazout (and affiliated entities) in Delaware
for fraud, unjust enrichment, and fraudulent transfer. 145 Notably, Tsang did not sue
Hazout for breach of fiduciary duty. 146
The Supreme Court held that Hazout was subject to personal jurisdiction in
Delaware under Section 3114’s “necessary or proper party” provision.147 Hazout
was a proper party
because he ha[d] a tangible legal interest in the matter that [wa]s
separate from Silver Dragon’s interest, and because the claims against
him ar[ose] out of the same facts and occurrences as the claims against
Silver Dragon—alleged wrongs that Hazout committed in his capacity
as the company’s President and CEO.148
The Supreme Court then analyzed whether this exercise of statutory personal
jurisdiction violated due process.149 The Court held that it did not.150 Indeed, it was
141
Id. at 282.
142
Id.
143
Id.
144
Id.
145
Id.
146
Id.
147
Id. at 292.
148
Id.
149
Id. at 292–94.
150
Id. at 294.
23
“not . . . a close question.”151 First, Hazout had purposely availed himself of
Delaware law by becoming the director and officer of a Delaware corporation. 152
“More important, the claims against Hazout involve[d] his actions in his official
capacity of negotiating contracts that involved the change of control of a Delaware
public corporation.”153 Those contracts contained Delaware choice-of-law
provisions, reflecting the parties’ understanding that “the jurisdiction that was their
focus” was Delaware. 154 Thus, Hazout could not claim surprise at being haled into
court in this state, and exercising personal jurisdiction over him posed no due process
problem.155
At this stage of the litigation, Hazout permits me to exercise personal
jurisdiction over the Individual Defendants under the “necessary or property party”
clause of Section 3114. Bernardez and Nibarger are both officers and directors of
EPP Management, a Delaware corporation that is a party to this suit. Brillon is EPP
Management’s CFO and Chief Compliance Officer. Bernardez, Nibarger, and
Brillon are proper parties because they have legal interests separate from those of
the entities with which they are affiliated. 156 And LVI has “allege[d] specific facts
151
Id. at 292.
152
Id.
153
Id. at 293.
154
Id.
155
Id. at 293–94.
156
See, e.g., Prairie Capital III, L.P. v. Double E Holding Corp., 132 A.3d 35, 60 (Del. Ch. Nov.
24, 2015) (“As the human through which the corporate principal acts, ‘[a] corporate officer can be
held personally liable for the torts he commits and cannot shield himself behind a corporation
24
supporting its position” that the Individual Defendants were acting in their capacities
as officers or directors of EPP Management when they engaged in their scheme to
defraud LVI.157 Specifically, the Complaint alleges that EPP Management managed
the EPP Funds’ investment in NCM, an allegation supported by contemporaneous
documents. For example, in August 2013, NCM and EPP Management entered into
a written services agreement in which NCM agreed to “engage[] [EPP Management]
as a financial and management consultant,” and EPP Management “agree[d] to
provide financial and management consulting services” to NCM.158 EPP
Management was also retained to advise NCM’s managers “in such manner and on
such business and financial matters as may be reasonably requested from time to
time by the Board, including (a) corporate strategy, (b) budgeting of future corporate
investments, (c) acquisition and divestiture strategies, and (d) debt and equity
financings.”159 These agreements are reflected in a recent EPP Management SEC
filing, in which it represented that it provided “the day to day advisory services for
the” EPP Funds.160 It is reasonable to infer from these documents and the allegations
in the Complaint that the Individual Defendants were acting as officers or directors
when he is a participant.’” (alteration in original) (quoting Bay Ctr. Apartments Owner, LLC v.
Emery Bay PKI, LLC, 2009 WL 1124451, at *12 (Del. Ch. Apr. 20, 2009))).
157
Medi-Tec of Egypt Corp., 2004 WL 415251, at *2 (quoting Sears, Roebuck & Co., 744 F. Supp.
at 1301).
158
Perri Aff. Ex. 4, at NORTHSTAR14307035.
159
Id. at NORTHSTAR14307035–36.
160
Perri Aff. Ex. 3, at 1.
25
of EPP Management when they helped NCM defraud its lenders and, eventually,
LVI.
The Individual Defendants’ primary response is that they have all testified at
their depositions that EPP Management did not actually provide the advisory
services described in the written agreements. Instead, according to the Individual
Defendants, EPP Management performed a purely administrative function—paying
the bills, signing the leases, and handling payroll. That may turn out to be true. But
at this stage of the litigation, my task is not to weigh conflicting evidence. 161 Instead,
I must determine whether LVI has met its burden of setting forth specific facts
supporting the exercise of personal jurisdiction over the Individual Defendants.162
Moreover, in making this determination, I give LVI the benefit of all reasonable
inferences drawn from the record. With the proper standard in mind, I have no
trouble concluding that LVI has established a statutory basis for personal jurisdiction
over the Individual Defendants. 163
161
See Dow Chem. Co. v. Organik Kimya Holding A.S., 2017 WL 4711931, at *10 (Del. Ch. Oct.
19, 2017) (“At this procedural stage, I need not weigh . . . conflicting evidence or determine
whether the Plaintiffs have proven that Organik Kimya US was integral to Organik’s
misappropriation scheme.”).
162
See id. (“[M]y task is only to decide whether the Plaintiffs have satisfied their burden of
‘alleg[ing] specific facts supporting [their] position’ that this Court may exercise long-arm
jurisdiction over the Foreign Defendants.” (second alteration in original) (quoting Medi-Tec of
Egypt Corp., 2004 WL 415251, at *2)).
163
The Individual Defendants seek, in the alternative, a pretrial evidentiary hearing on the factual
disputes related to personal jurisdiction. The more efficient procedure, it seems to me, is to defer
resolution of these issues until trial. I therefore decline the Individual Defendants’ invitation. See
Hart Holding Co. Inc. v. Drexel Burnham Lambert Inc., 593 A.2d 535, 539 (Del. Ch. 1991) (“The
26
That does not end the inquiry, however. I still must determine whether
exercising personal jurisdiction over the Individual Defendants would offend due
process. “To satisfy due process, the exercise of personal jurisdiction must comport
with traditional notions of fair play and substantial justice.”164 The question is
whether the nonresident defendant “engaged in sufficient ‘minimum contacts’ with
Delaware to require it to defend itself in the courts of this State.”165 “In order to
establish jurisdiction over a nonresident defendant, the nonresident defendant’s
contacts with the forum must rise to such a level that it should ‘reasonably anticipate’
being required to defend itself in Delaware’s courts.”166
In my view, exercising personal jurisdiction over the Individual Defendants
in this case is consistent with due process. Like the individual defendant in Hazout,
Nibarger, Bernardez, and Brillon all agreed to serve as directors or officers of a
Delaware corporation, EPP Management.167 They have therefore “purposefully
availed [themselves] of certain duties and protections under our law.”168 And there
are several other connections between the Individual Defendants’ conduct and this
state. EPP Management allegedly managed the EPP Funds’ investment in NCM, a
trial court is vested with a certain discretion in shaping the procedure by which a motion under
Rule 12(b)(2) is resolved.”).
164
Vichi, 2009 WL 4345724, at *10.
165
AeroGlobal Capital Mgmt., LLC v. Cirrus Indus., Inc., 871 A.2d 428, 440 (Del. 2005).
166
Id. (quoting World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297 (1980)).
167
Hazout, 134 A.3d at 292.
168
Id.
27
Delaware limited liability company. The Complaint alleges that the Individual
Defendants, acting in part as officers or directors of EPP Management, assisted
NCM in defrauding LVI, another Delaware limited liability company. As a result
of that fraud, LVI agreed to combine with NCM to form NorthStar, yet another
Delaware limited liability company. Given these contacts between the fraudulent
scheme and this state, the Individual Defendants should not be surprised to find
themselves subject to litigation in Delaware.169
B. Rule 12(b)(6)
The EPP Defendants have moved to dismiss the counts in the Complaint
directed against them under Court of Chancery Rule 12(b)(6) for failure to state a
claim. When reviewing a Rule 12(b)(6) motion,
(i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are well-pleaded if they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the non-moving party; and (iv) dismissal is inappropriate
unless the plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof.170
169
Cf. id. at 291 n.60 (“For example, if plaintiffs attempted to drag corporate officers and directors
into Delaware by naming them as defendants in a products liability case where the products had
been designed and distributed from a state other than Delaware to diverse consumers, most of
whom were in states other than Delaware, the minimum contacts test would provide substantial
protection. It would be constitutionally questionable, to say the least, for Delaware to exercise
personal jurisdiction when Delaware’s status as the state of incorporation had no rational
connection to the cause of action, where the conduct is governed by the laws of other states, and
where there is no reason why a corporate fiduciary should expect to be named as a party at all,
much less in a suit where the underlying conduct and claims have no rational connection to
Delaware and provide no rational basis for Delaware to apply its own law.”).
170
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (footnotes and internal quotation
marks omitted).
28
I need not, however, “accept conclusory allegations unsupported by specific facts or
. . . draw unreasonable inferences in favor of the non-moving party.”171
LVI alleges that the EPP Defendants are liable for fraud, fraudulent
inducement, conspiracy to commit (or aiding and abetting) fraud and fraudulent
inducement, and unjust enrichment. LVI also brings a claim for negligent
misrepresentation against the Individual Defendants. I discuss each of these claims
in turn.
1. Fraud and Fraudulent Inducement
The EPP Defendants argue that LVI has failed to state a claim for fraud or
fraudulent inducement against them. “The elements of fraudulent inducement are
the same [as] those of common law fraud.” 172 To plead a claim for fraud, a plaintiff
must allege “(i) a false representation, (ii) the defendant’s knowledge of or belief in
its falsity or the defendant’s reckless indifference to its truth, (iii) the defendant’s
intention to induce action based on the representation, (iv) reasonable reliance by
the plaintiff on the representation, and (v) causally related damages.”173
Court of Chancery Rule 9(b) requires a plaintiff to plead fraud with
particularity. 174 To satisfy Rule 9(b), the plaintiff must allege “(1) the time, place,
171
Price v. E.I. DuPont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011).
172
Smith v. Mattia, 2010 WL 412030, at *5 n.37 (Del. Ch. Feb. 1, 2010).
173
Prairie Capital III, L.P., 132 A.3d at 49 (citing Stephenson v. Capano Dev., Inc., 462 A.2d
1069, 1074 (Del. 1983)).
174
Ct. Ch. R. 9(b) (“In all averments of fraud or mistake, the circumstances constituting fraud or
mistake shall be stated with particularity.”).
29
and contents of the false representation; (2) the identity of the person making the
representation; and (3) what the person intended to gain by making the
representations.”175 A plaintiff need not plead knowledge or state of mind with
particularity, because “any attempt to require specificity in pleading a condition of
mind would be unworkable and undesirable.”176 The purpose of Rule 9(b) is to
provide the defendant with “detail sufficient to apprise [her] of the basis for the
claim.”177
Where, as here, a plaintiff premises her fraud claim on written contractual
representations, “it is relatively easy to plead a particularized claim.”178 “The
plaintiff can readily identify who made what representations where and when,
because the specific representations appear in the contract. The plaintiff likewise can
readily identify what the defendant gained, which was to induce the plaintiff to enter
into the contract.”179 In this situation, “the plaintiff need only allege facts sufficient
to support a reasonable inference that the representations were knowingly false.”180
Put differently, the plaintiff “need only point to factual allegations making it
reasonably conceivable that the defendants charged with fraud knew the statement
175
Abry Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006).
176
Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199, 1208
(Del. 1993) (citation omitted).
177
Abry Partners V, L.P., 891 A.2d at 1050.
178
Prairie Capital III, L.P., 132 A.3d at 62.
179
Id.
180
Id.
30
was false.”181 More specifically, “where a plaintiff is pleading a claim of fraud ‘that
has at its core the charge that the defendant knew something, there must, at least, be
sufficient well-pleaded facts from which it can reasonably be inferred that this
‘something’ was knowable and that the defendant was in a position to know it.’”182
LVI alleges that the EPP Defendants, including Nibarger, Bernardez, and
Brillon, intentionally falsified NCM’s financial statements to induce LVI to enter
into the Contribution Agreement. As a result, LVI claims, the financial statements
attached to the Contribution Agreement contained misrepresentations in violation of
Section 2.4(b). In that section, NCM represented that the financial statements it
provided in connection with the Contribution Agreement
fairly present, in all material respects, the consolidated financial
position of NCM Holdings and the NCM Subsidiaries as of their
respective dates, and the consolidated results of operations and cash
flows of NCM Holdings and each NCM Subsidiary for the respective
periods covered thereby, in conformity with GAAP consistently
applied throughout the periods covered thereby. 183
LVI acknowledges that its fraud claims rest solely on the false representations
contained in the Contribution Agreement.184 The reason is that the agreement
181
Id.
182
LVI Grp. Invs., LLC, 2017 WL 1174438, at *4 (quoting Metro Commc’n Corp. BVI v. Advanced
Mobilecomm Techs. Inc., 854 A.2d 121, 147 (Del. Ch. 2004)).
183
Compl. Ex. A, § 2.4(b).
184
Pl.’s Answering Br. 31 (“Even assuming the EPP Defendants have the right to enforce the non-
reliance provision, that provision does not support dismissal of LVI’s claims because the false
representations underlying LVI’s claims for fraud are those made in the Contribution
Agreement.”); see also Prairie Capital III, L.P., 132 A.3d at 50 (“Delaware law enforces clauses
that identify the specific information on which a party has relied and which foreclose reliance on
31
includes an enforceable anti-reliance provision. There, LVI disclaims reliance “on
any statements, representations or warranties whatsoever, other than the
representations and warranties of the other Party expressly set forth in the
Agreement.”185 Thus, the first question is whether LVI has adequately alleged the
falsity of the representations contained in the financial statements NCM attached to
the Contribution Agreement.
LVI points to eight separate categories of allegedly false information found in
NCM’s financial statements. I need not elaborate on each category, but I note that
the financial statements attached to the Contribution Agreement covered the two-
month period ending February 28, 2014, and the 2012 and 2013 fiscal years. For
example, LVI pleads that NCM provided “the unaudited statements of operations,
members’ equity and cash flows of NCM Holdings and each NCM Subsidiary, on a
consolidated basis, for the fiscal year ending December 31, 2013.”186 According to
LVI, “[t]his information did not accurately or fairly state the Revenue, Gross
Margin, Gross Margin %, EBITDA, and EBITDA Margin of NCM Holdings and
other information.” (citing RAA Mgmt., LLC v. Savage Sports Holdings, Inc., 45 A.3d 107, 118–
19 (Del. 2012))).
185
Id. § 5.4(f). As noted above, the Contribution Agreement also contains an integration clause.
Id. § 6.6 (“This Agreement, including the Schedules and Ancillary Documents, constitute the entire
Agreement between the Parties pertaining to the subject matter herein and supersede any prior
representation, warranty, covenant, or agreement of any Party regarding such subject matter. No
supplement, modification, or amendment hereof will be binding unless expressed as such and
executed in writing by LVI Holdings and NCM Holdings.”).
186
Compl. ¶ 42(c).
32
NCM Subsidiaries.”187 These allegations are supported by a detailed recitation of
NCM’s fraudulent accounting practices. For instance, NCM booked certain projects
as if it would achieve its usual profit margin despite knowing that project costs would
offset most of the projected profits. When profits from these projects declined (as
they inevitably did), NCM concealed the issue by booking new projects in the same
improper manner. And when the merger closed, LVI learned that “many NCM
projects were not meeting NCM’s projections,” a direct result of the Defendants’
fraud.188 Taken together, these allegations support a reasonable inference that the
improper accounting practices described in the Complaint caused NCM’s attached
financial statements to be materially misleading. Thus, LVI has adequately pleaded
falsity.189
Next, I must determine whether LVI has successfully alleged that the EPP
Defendants knew the financial statements contained in the Contribution Agreement
were false. In my view, the Complaint easily clears this bar. As just noted, the
financial statements at issue covered fiscal years 2012 and 2013, and the two-month
period ending February 28, 2014. The Complaint contains detailed allegations about
187
Id.
188
Id. ¶ 36.
189
See, e.g., LVI Grp. Invs., LLC, 2017 WL 1174438, at *5 (“The LVI Financial Statements stated
certain amounts of profits and losses for particular jobs. After the Merger, profits and losses on
those jobs proved lesser and greater, respectively. As a result, the assets contributed by LVI to
NorthStar appeared misleadingly more valuable, affecting the allocation of equity in NorthStar
between LVI and NCM. At this stage, these allegations are enough for me to infer a
misrepresentation in the Contribution Agreement.”).
33
the Individual Defendants’ role in helping NCM commit accounting fraud both
before and during the periods covered by the purportedly misleading financial
statements. Beginning in 2011, the Individual Defendants were aware of significant
irregularities in NCM’s books. Nevertheless, because NCM was unable to improve
its performance, the Individual Defendants encouraged it to conceal its financial
difficulties by, among other things, recognizing fictitious revenue. For example, in
December 2011, Nibarger, through Brillon, instructed NCM to violate GAAP by
delaying the recognition of expected losses from the Byron Rogers project. Later,
in the summer of 2013, after learning that NCM was planning on reporting a lower-
than-projected EBITDA, Nibarger explained to Brillon and Bernardez that “[t]his
cannot stand.”190 Bernardez then instructed Brillon to “go through the WIP today
job by job with Duane [Kerr] and Sage [Khara] to see where we can go up.” 191 Kerr
eventually agreed that NCM would report an EBITDA figure that the Individual
Defendants understood was false.
The Individual Defendants continued to play a role in manipulating NCM’s
financial statements as merger negotiations with LVI got underway. In November
2013, for example, Brillon learned from Kerr that NCM planned on reporting $1.1
million in EBIDTA for October. Brillon was also informed that NCM had gone
190
Compl. ¶ 54.
191
Id. (alterations in original).
34
“back to the branch managers to have them go over their WIPs with a fine tooth
comb for revenues and cost savings that they may not have considered.” 192
According to LVI, EPP was aware that the $1.1 million figure was misleading.
Nonetheless, Bernardez falsely represented to LVI that NCM had “cleaned up our
WIPs.”193 Several months later, in January 2014, Brillon instructed NCM to refrain
from “send[ing] over the WIP to LVI” until everybody could “agree on the
December number for Byron.” 194
Of course, these allegations remain susceptible to proof. But at the pleading
stage, they collectively support a reasonable inference that the Individual Defendants
knew NCM’s financial statements, including those attached to the Contribution
Agreement, were false. As the EPP Defendants point out, the representations and
warranties in the agreement were made by NCM, not the Individual Defendants. But
that is not fatal to LVI’s fraud claims. 195 The question is whether LVI has pleaded
192
Defs.’ Opening Br. Ex. H.
193
Compl. ¶ 63.
194
Id. ¶ 65.
195
See Abry Partners V, L.P., 891 A.2d at 1064 (“To the extent that the Stock Purchase Agreement
purports to limit the Seller’s exposure for its own conscious participation in the communication of
lies to the Buyer, it is invalid under the public policy of this State. That is, I find that the public
policy of this State will not permit the Seller to insulate itself from the possibility that the sale
would be rescinded if the Buyer can show either: 1) that the Seller knew that the Company’s
contractual representations and warranties were false; or 2) that the Seller itself lied to the Buyer
about a contractual representation and warranty.” (emphasis added)); see also Prairie Capital III,
L.P., 132 A.3d at 61 (“At the pleadings stage, it is . . . reasonably conceivable that the Prairie Funds
and the Prairie Fund Manager can be held liable for fraudulent contractual representations made
by the Company. The Counterclaim sufficiently alleges that the Prairie Capital Directors knew that
the Company’s representations were false.”).
35
facts suggesting that the falsity of the financial statements “was knowable and that
the defendant[s] w[ere] in a position to know it.”196 It is reasonably inferable that
the financial statements contained in the Contribution Agreement reflected the
improper accounting practices engaged in by NCM and the Individual Defendants.
Indeed, those practices continued during the merger negotiations between LVI and
NCM. The Complaint therefore supports a rational inference that the Individual
Defendants knew (or were in a position to know) that the financial statements
contained in the Contribution Agreement were materially misleading. The
Complaint also supports a plausible inference that the Individual Defendants were
acting on behalf of the EPP entities during the fraudulent scheme, making it
reasonably conceivable that those entities could be held liable for the fraud. 197 Thus,
I decline to dismiss the fraud and fraudulent inducement counts. 198
196
LVI Grp. Invs., LLC, 2017 WL 1174438, at *4 (quoting Metro Commc’n Corp. BVI, 854 A.2d
at 147)
197
See, e.g., Gassis v. Corkery, 2014 WL 3565418, at *5 (Del. Ch. July 21, 2014) (“Under agency
principles, a corporation is liable for the acts of its officers and directors . . . .”), aff’d, 113 A.3d
1080 (Del. 2015).
198
As noted above, the remaining elements of fraud—intent to induce action based on the
misrepresentations, reasonable reliance, and damages—are easily met here because the false
statements at issue are contained in a written agreement. Specifically, it is reasonable to infer that
the Defendants wanted LVI to rely on the representations because they are found in the
Contribution Agreement. It is also reasonably inferable that LVI relied on those representations
and suffered damages because of that reliance.
36
2. Conspiracy to Commit (or Aiding and Abetting) Fraud and
Fraudulent Inducement
LVI alleges that the EPP Defendants conspired with NCM and Khara to
defraud LVI and induce it to enter into the Contribution Agreement. Alternatively,
LVI pleads that the EPP Defendants aided and abetted the other Defendants’ fraud.
To state a claim for civil conspiracy, a plaintiff must allege “(1) the existence of a
confederation or combination of two or more persons; (2) that an unlawful act was
done in furtherance of the conspiracy; and (3) that the conspirators caused actual
damage to the plaintiff.”199 Like fraud, conspiracy to commit fraud must be pled
with particularity, though knowledge may be averred generally. 200 To plead a claim
for aiding and abetting, a plaintiff must allege “(i) underlying tortious conduct, (ii)
knowledge, and (iii) substantial assistance.”201
The EPP Defendants advance three arguments for dismissing the conspiracy
count. First, they argue that the Contribution Agreement’s exclusive remedies
clause precludes a claim for conspiracy. Second, according to the EPP Defendants,
LVI impermissibly attempts to allege a conspiracy among a parent, a subsidiary, and
agents of the parent and subsidiary. Third, the EPP Defendants suggest that LVI has
199
Allied Capital Corp. v. GC-Sun Holdings, L.P., 910 A.2d 1020, 1036 (Del. Ch. 2006).
200
Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 2014 WL 6703980, at
*20 (Del. Ch. Nov. 26, 2014).
201
Id. at *23.
37
failed to plead conspiracy to commit fraud with particularity. In my view, none of
these arguments compels dismissal.
The Contribution Agreement’s exclusive remedies clause provides that the
sole and exclusive remedies of the Parties arising out of, relating to or
resulting from this Agreement (including the representations and
warranties set forth herein . . .) and the transactions contemplated herein
will be strictly limited to (i) the indemnification provisions contained
in this Article 5, (ii) the provisions of Section 5.6 [relating to specific
performance,] and (iii) claims for fraud against the Person who
committed such fraud.202
The Contribution Agreement further defines “Party” as “NCM Holdings, LVI
Holdings or Holdco [that is, NorthStar].”203 And it defines “Person” as “any
individual, sole proprietorship, partnership, corporation, limited liability company .
. . or any other business entity or association or any Government Authority.” 204 The
EPP Defendants read these provisions as preventing LVI from bringing a claim
against them for conspiracy to defraud.
“Questions involving contract interpretation can be answered as a matter of
law on a motion to dismiss ‘[w]hen the language of a contract is plain and
unambiguous.’”205 Thus, “a trial court may not, on a Rule 12(b)(6) motion to
dismiss, ‘choose between two differing reasonable interpretations of ambiguous
202
Compl. Ex. A, § 5.4(e).
203
Id. at 46.
204
Id. at 47.
205
Fortis Advisors LLC v. Shire US Holdings, Inc., 2017 WL 3420751, at *5 (Del. Ch. Aug. 9,
2017) (alteration in original) (quoting Allied Capital Corp., 910 A.2d at 1030).
38
provisions.’”206 Here, the exclusive remedies clause is ambiguous in two respects.
First, it is unclear whether the EPP Defendants, as non-parties to the Contribution
Agreement, have standing to enforce its provisions.207 NCM, as LVI’s contractual
counterparty, clearly has the right to invoke the exclusive remedies clause, but it is
the EPP Defendants that rely on the clause in seeking dismissal of several counts of
the Complaint. And even if the EPP Defendants could enforce the exclusive
remedies clause, there is another ambiguity that requires further factual
development. The clause in question allows LVI to pursue “claims for fraud against
the Person who committed such fraud.”208 It is a settled principle of conspiracy law
that “where a conspiracy exists, the acts of each co-conspirator with respect to the
aim of the conspiracy are attributable to the acts of the other co-conspirators under
a theory of agency.”209 In a sense, then, all members of a conspiracy to commit fraud
have “committed such fraud,” as the Contribution Agreement requires. 210 If that is
correct, LVI may pursue a claim for conspiracy to defraud against the EPP
206
Seidensticker v. Gasparilla Inn, Inc., 2007 WL 4054473, at *3 (Del. Ch. Nov. 8, 2007) (quoting
Appriva S’holder Litig. Co., LLC v. EV3, Inc., 937 A.2d 1275, 1289 (Del. 2007)).
207
See Great Hill Equity Partners IV, LP, 2014 WL 6703980, at *27–28 (upholding an unjust
enrichment claim against the sellers of a company despite the existence of an exclusive remedies
clause). Related Westpac LLC v. JER Snowmass LLC, 2010 WL 2929708 (Del. Ch. July 23, 2010),
relied on by the EPP Defendants, is not to the contrary. There, the Court applied the principle that
an unjust enrichment claim cannot stand where an enforceable contract governs the parties’ rights.
Id. at *7. But, for the reasons discussed below, that principle does not apply here.
208
Compl. Ex. A, § 5.4(e).
209
Matthew v. Laudamiel, 2012 WL 605589, at *6 (Del. Ch. Feb. 21, 2012) (internal quotation
marks and citation omitted).
210
Compl. Ex. A, § 5.4(e).
39
Defendants without running afoul of the exclusive remedies clause. In sum,
contractual ambiguities make it inappropriate to rule on the correct interpretation of
the exclusive remedies provision at the pleading stage.
Next, the EPP Defendants argue that LVI’s conspiracy claim ignores the
principle that an entity cannot conspire with itself. As the EPP Defendants point out,
this Court has held that “a corporation generally cannot be deemed to have conspired
with its wholly owned subsidiary.”211 That rule “ensure[s] that the first element of
civil conspiracy is met: the requirement that there be two or more persons or entities
in a conspiracy.”212 The problem for the EPP Defendants is that NCM is not a wholly
owned subsidiary of any of the EPP entities. Instead, according to the Complaint,
“NCM is principally owned by the EPP Funds.”213 The EPP Defendants have cited
no authority from this state for the proposition that a non-wholly owned subsidiary
cannot conspire with its parent. Indeed, this Court has sustained conspiracy and
aiding and abetting claims against a private equity firm alleged to have conspired
with a company it controlled but did not wholly own.214
211
In re Transamerica Airlines, Inc., 2006 WL 587846, at *6 (Del. Ch. Feb. 28, 2006). But see
Allied Capital Corp., 910 A.2d at 1037 (“I refuse to use this motion as a basis for holding that, as
a per se matter, commonly-controlled or even owned business entities cannot conspire with one
another and be held liable for acting in concert to pursue unlawful activity that causes damage.”).
212
Metro. Life Ins. Co. v. Tremont Grp. Holdings, Inc., 2012 WL 6632681, at *19 (Del. Ch. Dec.
20, 2012).
213
Compl. ¶ 7 (emphasis added).
214
See Prairie Capital III, L.P., 132 A.3d at 64–65 (upholding, on a Rule 12(b)(6) motion to
dismiss, a conspiracy claim premised on a conspiracy among a private equity firm, its principals,
and a company controlled by the private equity firm). It is unclear whether the defendants in
40
The EPP Defendants also argue that LVI is improperly attempting to allege a
conspiracy between a company and its officers or agents. They cite Amaysing
Technologies Corp. for the proposition that “a corporation cannot conspire with its
officers and agents.”215 Amaysing involved a corporation that allegedly engaged in
an unlawful scheme with two of its officers and one of its agents.216 Since there was
no indication that these three individuals “were motivated by personal motives
divergent from those of the corporation,” the Court applied the general rule that a
corporation cannot conspire with its officers and agents.217 Here, however, it is
reasonably conceivable that the Individual Defendants, acting on behalf of the EPP
entities, conspired with Khara—NCM’s former CEO—and NCM itself. In that case,
the conspiracy would not be within a single entity, as was the case in Amaysing.
True, the Individual Defendants also held positions at NCM, and if it were beyond
dispute that they were wearing only their NCM hats when engaged in the conspiracy,
dismissal might be appropriate. But at the pleading stage, I cannot exclude the
Prairie Capital sought dismissal based on the purported inability of a parent to conspire with its
subsidiary. In any event, the EPP Defendants have pointed to no Delaware authority in support of
a per se rule that a private equity firm and its principals cannot conspire with a company controlled
(but not wholly owned) by them.
215
Defs.’ Opening Br. 9.
216
2005 WL 578972, at *7.
217
Id. at *8; see also LVI Grp. Invs., LLC v. NCM Grp. Holdings, LLC, 2017 WL 3912632, at *2
(Del. Ch. Sept. 7, 2017) (“NCM’s attempt to establish personal jurisdiction via a conspiracy theory
fails because a corporation cannot conspire with itself. NCM alleges a conspiracy between LVI,
LVI’s CFO (Cutrone), LVI’s CEO (State), and LVI board members.” (footnote, internal quotation
marks, and citation omitted)).
41
possibility that the Individual Defendants were acting solely as agents of the EPP
entities when they purportedly conspired with Khara and NCM.218 Thus, I decline
to dismiss the conspiracy count on this ground.
Finally, the EPP Defendants accuse LVI of failing to plead conspiracy to
defraud with particularity. Specifically, the EPP Defendants assert that the
Complaint lacks facts suggesting “a meeting of the minds between the alleged
defendants.”219 I disagree. As this Court has pointed out, “[e]ven to prevail at trial
the [plaintiffs alleging a conspiracy] do not need to prove the existence of an explicit
agreement; a conspiracy can be inferred from the pled behavior of the alleged
conspirators.”220 The Complaint pleads in abundant detail that the Individual
Defendants worked with Kerr and Khara to manipulate NCM’s financial statements
both before and during merger negotiations between NCM and LVI. Moreover, the
Individual Defendants, as principals of the private equity firm that held most of
NCM’s equity, had an obvious incentive to make the company’s financials appear
stronger than they actually were. It is thus reasonably conceivable that the Individual
Defendants, acting on behalf of the EPP entities, had “an agreement or common
218
See, e.g., In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 168 (Del. 2006) (“In
deciding a motion to dismiss under Rule 12(b)(6), a trial court must accept as true all of the well-
pleaded allegations of fact and draw reasonable inferences in the plaintiff’s favor.”).
219
Defs.’ Opening Br. 37.
220
In re Am. Int’l Grp., Inc., 965 A.2d 763, 806 (Del. Ch. 2009).
42
design” with NCM and its officers to defraud LVI. 221 The Complaint states a claim
for conspiracy. 222
3. Unjust Enrichment
LVI avers that the EPP Defendants were unjustly enriched by the value they
received from the fraudulently induced merger between NCM and LVI. “Unjust
enrichment is ‘the unjust retention of a benefit to the loss of another, or the retention
of money or property of another against the fundamental principles of justice or
equity and good conscience.’”223 “The elements of unjust enrichment are: (1) an
enrichment, (2) an impoverishment, (3) a relation between the enrichment and
impoverishment, (4) the absence of justification, and (5) the absence of a remedy
provided by law.”224 In evaluating an unjust enrichment claim, I must first determine
“whether a contract already governs the relevant relationship between the parties.”225
“If a contract comprehensively governs the parties’ relationship, then it alone must
provide the measure of the plaintiff’s rights and any claim of unjust enrichment will
221
Prairie Capital III, L.P., 132 A.3d at 63.
222
LVI does not discuss aiding and abetting in its brief, but the Complaint adequately alleges
“concerted action by substantial assistance” and thus states an aiding-and-abetting claim.
Anderson v. Airco, Inc., 2004 WL 2827887, at *2 (Del. Super. Nov. 30, 2004). Specifically, the
Complaint makes it reasonably conceivable that the Individual Defendants, acting on behalf of the
EPP entities, provided significant assistance to NCM and its officers in perpetrating a fraud on
LVI.
223
Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010) (quoting Fleer Corp. v. Topps Chewing
Gum, Inc., 539 A.2d 1060, 1062 (Del. 1988)).
224
Id.
225
BAE Sys. Info. & Elec. Sys. Integration, Inc. v. Lockheed Martin Corp., 2009 WL 264088, at
*7 (Del. Ch. Feb. 3, 2009).
43
be denied.”226 But when a plaintiff alleges that “it is the [contract], itself, that is the
unjust enrichment,” the existence of the contract does not bar the unjust enrichment
claim. 227 In other words, “[t]he contract itself is not necessarily the measure of [the]
plaintiff’s right where the claim is premised on an allegation that the contract arose
from wrongdoing (such as breach of fiduciary duty or fraud) or mistake and the
[defendant] has been unjustly enriched by the benefits flowing from the contract.” 228
The EPP Defendants argue that the unjust enrichment claim should be
dismissed for three reasons. First, they point to the Contribution Agreement’s
exclusive remedies provision, which purportedly bars LVI from pursuing an unjust
enrichment claim. But, for the reasons discussed above, the exclusive remedies
clause does not unambiguously apply to claims brought against the EPP Defendants,
226
Id.
227
McPadden v. Sidhu, 964 A.2d 1262, 1276 (Del. Ch. 2008); accord Great Hill Equity Partners
IV, LP, 2014 WL 6703980, at *27.
228
Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial Practice in the
Delaware Court of Chancery § 12.01[b] (2016) (citing McPadden, 964 A.2d at 1276). Courts in
other jurisdictions have held that a claim for unjust enrichment is not barred by an express contract
where the contract was procured by fraud. See, e.g., Pramer S.C.A. v. Abaplus Int’l Corp., 907
N.Y.S.2d 154, 161 (App. Div. 2010) (“[A] claim for unjust enrichment is not duplicative of a
breach of contract claim where the plaintiff alleges that the contracts were induced by fraud.”);
Advanced Thermal Sci. Corp. v. Applied Materials Inc., 2009 WL 10671186, at *8 (C.D. Cal. Oct.
2, 2009) (“[I]f [a] contract was procured by fraud, is unenforceable, or is otherwise ineffective,
then an unjust enrichment claim may lie.”); see also Novipax Holdings LLC v. Sealed Air Corp.,
2017 WL 5713307, at *15 (Del. Super. Nov. 28, 2017) (“Sealed Air argues that Novipax cannot
recover for unjust enrichment because the APA governs the relationship between the parties. In
other words, Sealed Air argues that Novipax cannot maintain both a cause of action for breach of
contract and unjust enrichment. Sealed Air is correct; however, Novipax is asserting the two claims
as alternative, not parallel, claims for relief. The principle [sic] claim in this case is for fraud and
fraudulent inducement. Sealed Air argues that this fraudulent inducement renders the APA void.
A claim for unjust enrichment may thus proceed under the theory that no valid contract exists.”
(footnote omitted)).
44
which were not parties to the Contribution Agreement. Thus, that clause does not
defeat LVI’s unjust enrichment claim at this stage.
Second, the EPP Defendants suggest that the Contribution Agreement
exclusively governs LVI’s rights in this action and thus precludes any claim for
unjust enrichment. As just noted, “[w]hen the complaint alleges an express,
enforceable contract that controls the parties’ relationship, . . . a claim for unjust
enrichment will be dismissed.”229 But that principle is inapplicable here, because
LVI alleges that the execution of the Contribution Agreement itself enabled the EPP
Defendants to obtain benefits to which they were not entitled. Indeed, LVI says that
it would never have entered into the agreement but for the Defendants’ falsification
of NCM’s financial statements.230 LVI also avers that the Contribution Agreement
gave NCM an unjustifiably high share of the equity in NorthStar based on NCM’s
manipulated financials. Thus, because the Complaint adequately alleges that the
Contribution Agreement itself arose from the Defendants’ fraud, the existence of
that contract does not bar the unjust enrichment claim. 231
229
Bakerman v. Sidney Frank Importing Co., Inc., 2006 WL 3927242, at *18 (Del. Ch. Oct. 10,
2006).
230
Compl. ¶ 142.
231
See McPadden, 964 A.2d at 1276 (declining to dismiss an unjust enrichment claim because the
“Plaintiff alleges that it is the letter of intent, itself, that is the unjust enrichment; that is,
Dubreville’s manipulative conduct (which defendants concede) unjustly enriched him in the form
of the contract for the sale of TSC to TSH” (footnote omitted)).
45
Third, the EPP Defendants argue that LVI has failed to plead either an
enrichment or the lack of an adequate remedy at law. LVI attempts to plead
enrichment by alleging that “[a]ll of the EPP Defendants unjustly received value
from the NorthStar transaction based upon false or misleading reported financial
results, and other compensation.”232 According to LVI, “[e]ach EPP Defendant
received upstream benefit when its interest in the insolvent NCM was converted into
an interest in NorthStar, which had value from the interests contributed by LVI.”233
It is true that these allegations do not identify the precise value received by each of
the EPP Defendants in connection with the merger. At this stage of the litigation,
however, I must “accept even vague allegations . . . as ‘well-pleaded’ if they provide
the defendant notice of the claim.”234 LVI has alleged enough facts to apprise the
EPP Defendants of how it believes they have been enriched.
LVI has also met its burden of alleging the absence of an adequate remedy at
law. LVI’s claim for unjust enrichment is an alternative pleading. If LVI were to
succeed in establishing that the EPP Defendants committed (or conspired to commit)
fraud, it would have an adequate remedy at law and unjust enrichment would be
232
Compl. ¶ 143; cf. Great Hill Equity Partners IV, LP, 2014 WL 6703980, at *28 (“Because the
Plaintiffs have not alleged that SIG Management, Goldman or Klahr received funds resulting from
the fraud, restitution, as opposed to damages at law, is unavailable from those parties, and Count
VI [alleging unjust enrichment] is dismissed as to them.”).
233
Pl.’s Answering Br. 42–43.
234
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d 531, 536 (Del.
2011).
46
unnecessary. But LVI may be unable to prove those claims. In that case, unjust
enrichment might be invoked. For example, LVI may be able to show that the EPP
Defendants, though not liable for fraud themselves, profited from the fraud
committed by the other Defendants. This Court has previously sustained an
alternatively pleaded unjust enrichment claim on this basis.235 I decline to dismiss
LVI’s claim for unjust enrichment.
4. Negligent Misrepresentation
LVI argues that, if the Individual Defendants are not entitled to the protections
of the exclusive remedies clause, they may be held liable for negligent
misrepresentation. “A claim for negligent misrepresentation is often referred to
interchangeably as equitable fraud.” 236 “To state a prima facie case for equitable
fraud, [a] plaintiff must . . . satisfy all the elements of common-law fraud with the
exception that [the] plaintiff need not demonstrate that the misstatement or omission
was made knowingly or recklessly.”237 “While certain requirements are relaxed, a
235
Great Hill Equity Partners IV, LP, 2014 WL 6703980, at *28 (“Here, if the Plaintiffs prevail
on their tort claims, unjust enrichment is unavailable, because an element of unjust enrichment is
lack of a remedy at law, and should the Plaintiffs otherwise prevail, that element would be lacking.
Seen in this way, unjust enrichment is an alternative pleading: assuming the Plaintiffs can prove
that the Moving Defendants profited, and the Plaintiffs were impoverished, as the result of the
non-moving Defendants’ fraud; and assuming that Plaintiffs are unable to implicate the Moving
Defendants in that fraud, unjust enrichment would be invoked.”).
236
Fortis Advisors LLC v. Dialog Semiconductor PLC, 2015 WL 401371, at *9 (Del. Ch. Jan. 30,
2015). Indeed, at oral argument, LVI’s counsel agreed that a claim for negligent misrepresentation
“is effectively an equitable fraud claim.” Oct. 17, 2017 Oral Arg. Tr. 82:17.
237
Zirn v. VLI Corp., 681 A.2d 1050, 1061 (Del. 1996).
47
plaintiff claiming equitable fraud must sufficiently plead a special relationship
between the parties or other special equities, such as some form of fiduciary
relationship or other similar circumstances, which common law fraud does not
require.”238 Thus, “[s]ophisticated contractual parties who bargain at arm’s length
generally do not qualify for the kind of equitable protection that the negligent
misrepresentation [or equitable fraud] doctrine envisions.” 239
LVI’s equitable fraud claim fails because “[t]his case does not involve a
special circumstance that would merit exercising this Court’s equitable power to go
beyond the traditional framework of common law fraud.”240 The Defendants did not
have a fiduciary relationship with LVI. Instead, “[t]he parties involved . . . were
counterparties who negotiated at arms’ length.”241 By all appearances, the
Contribution Agreement was a carefully drafted document, and LVI and NCM, as
two of the largest demolition companies in the United States, were presumably
represented by competent counsel during the merger negotiations. This Court has
238
Narrowstep, Inc. v. Onstream Media Corp., 2010 WL 5422405, at *13 (Del. Ch. Dec. 22, 2010).
But see, e.g., Corporate Prop. Assocs. 14 Inc. v. CHR Holding Corp., 2008 WL 963048, at *8–9
(Del. Ch. Apr. 10, 2008) (noting that the elements of a negligent misrepresentation claim are “(1)
the defendant had a pecuniary duty to provide accurate information, (2) the defendant supplied
false information, (3) the defendant failed to exercise reasonable care in obtaining or
communicating the information, and (4) the plaintiff suffered a pecuniary loss caused by justifiable
reliance upon the false information,” and holding that the “pecuniary duty requirement” is satisfied
“where the defendant information provider expects to profit from the course of conduct in which
he provides the information” (internal quotation marks and citation omitted)).
239
Doberstein v. G-P Indus., Inc., 2015 WL 6606484, at *5 (Del. Ch. Oct. 30, 2015) (footnote
omitted).
240
Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126, 144 (Del. Ch. 2009).
241
Id.
48
regularly dismissed equitable fraud claims premised on similar circumstances. 242
Thus, because LVI has failed to point to any “special equities” warranting a
departure from common law fraud, I dismiss LVI’s claim for equitable fraud. 243
III. CONCLUSION
For the foregoing reasons, the EPP Defendants’ Motion to Dismiss is granted
in part and denied in part. The parties should submit an appropriate form of order.
242
See, e.g., Fortis Advisors LLC, 2015 WL 401371, at *9 (dismissing a claim for equitable fraud
where “the gravamen of the present dispute ar[ose] from a transaction that ostensibly was the
product of arms-length negotiation between sophisticated parties”); Osrma Sylvania Inc. v.
Townsend Ventures, LLC, 2013 WL 6199554, at *15 (Del. Ch. Nov. 19, 2013) (“[T]his case
involves counterparties to a purchase agreement that was negotiated at arm's length. OSI has failed
to allege any special relationship of trust or confidence between itself and Sellers, and both OSI
and Sellers are sophisticated parties who had access to competent counsel during the transaction.
Thus, . . . I find that OSI has failed to plead the existence of any special equities in this case that
would merit application of the doctrine of equitable fraud.”).
243
LVI tries to save its equitable fraud claim by pointing out that it is seeking restitution, an
equitable remedy. This Court has previously held that a claim for equitable fraud may lie “where
equity affords its special remedies, e.g., ‘rescission, or cancellation; where it is sought to reform a
contract . . . or to have a constructive trust decreed.’” U.S. West, Inc. v. Time Warner Inc., 1996
WL 307445, at *26 (Del. Ch. June 6, 1996) (alteration in original) (citation omitted); accord
Grzybowski v. Tracy, 2013 WL 4053515, at *6 (Del. Ch. Aug. 9, 2013). In my view, however,
equitable fraud cannot be asserted simply by alleging common law fraud minus scienter and
tacking on a request for restitution. As then-Vice Chancellor Strine put it, “[t]he use of a relaxed
‘equitable’ fraud standard, applying to all speakers, regardless of their arms-length relationship
with the listener, arguably has greater societal costs than societal benefits, and undercuts the policy
justification undergirding the scienter requirement of common law fraud. That is, if equitable fraud
claims that do not require the plaintiff to prove scienter can be brought against any defendant,
regardless of the relationship between the parties, then there would be no reason to ever assert a
fraud claim under the more rigorous common law standard.” Homan v. Turoczy, 2005 WL
5756927, at *13 n.40 (Del. Ch. Aug. 12, 2005).
49