In re Cadira Group Holdings, LLC Litigation

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE CADIRA GROUP ) Consolidated
HOLDINGS, LLC LITIGATION ) C.A. No. 2018-0616-JRS
MEMORANDUM OPINION
Date Submitted: April 14, 2021
Date Decided: July 12, 2021
John L. Reed, Esquire and Matthew Denn, Esquire of DLA Piper LLP (US),
Wilmington, Delaware and Ardith Bronson, Esquire and Maia Sevilla-Sharon,
Esquire of DLA Piper LLP (US), Miami, Florida, Attorneys for Knights Genesis
Healthcare, LLC.
Raymond W. Cobb, Esquire of Law Offices of Raymond W. Cobb, LLC (formerly
with O’Hagan Meyer LLP), Wilmington, Delaware and Kevin F. Berry, Esquire of
O’Hagan Meyer LLP, Philadelphia, Pennsylvania, Attorneys for Beau Gertz,
Perseverance Med, LLC and Cadira Group Holdings, LLC.
SLIGHTS, Vice Chancellor
The parties to a healthcare joint venture have lost trust in each other and have
brought competing claims that include alleged breach of contract, fraud and breach
of fiduciary duty. In October 2017, Beau Gertz presented a business opportunity to
representatives of Knights Genesis Healthcare, LLC (“KGH”) to partner with his
company, Perseverance Med, LLC (“Perseverance”), in forming a vehicle that
would make targeted investments in the healthcare field. This led to the creation of
Cadira Group Holdings, LLC (“Cadira”), a joint venture operating as the parent
company to a number of already-existing and to-be-formed healthcare-related
companies. According to KGH, Gertz assured KGH that he had already built a
successful healthcare business platform among the operating subsidiaries that were
to be rolled into the joint venture and represented that he had the experience and
business integrity to build on that success. KGH now says those assurances and
representations were false.
Following closing on the joint venture, in July 2018, KGH received word that
Cadira and Gertz had been sued in Missouri by at least 25 health insurance
companies, each of which alleged Gertz and Cadira’s subsidiaries were engaged in
widespread healthcare fraud. Less than a month later, KGH initiated this litigation
in which it seeks rescission of the agreements that created Cadira and damages
resulting from Gertz’s alleged fraudulent inducement, breach of Cadira’s operating
agreement, unjust enrichment and breaches of fiduciary duty. Cadira, Perseverance
1
and Gertz (the “Cadira Parties”) have moved to dismiss those claims under Court of
Chancery Rule 12(b)(6).
Cadira has filed its own complaint against KGH for breaches of the parties’
joint venture agreements in which it seeks declaratory relief and a decree that KGH
must specifically perform its obligation to provide funding to Cadira.1 KGH has
moved to dismiss that complaint, also under Rule 12(b)(6) as well as Rule 12(b)(1).
For reasons explained below, the Cadira Parties’ bid to dismiss KGH’s
complaint fails. KGH has pled fraud with particularity, has well pled that Gertz’s
dissipation of Cadira assets without proper approval breached the operative
agreement governing his conduct as manager of the joint venture and has well pled
unjust enrichment as an alternative to breach of contract.
Cadira’s complaint likewise survives dismissal. Its claims for breach of
contract and related relief sufficiently plead the occurrence of conditions precedent
(albeit barely) and this Court has subject matter jurisdiction to adjudicate its claims.
I. BACKGROUND
I have drawn the facts from well-pled allegations in KGH’s Verified First
Amended Complaint (the “KGH Complaint”) and Cadira’s Verified First Amended
Complaint (the “Cadira Complaint”), as well as documents incorporated by
1
As discussed below, the competing actions have been consolidated by stipulation of the
parties.
2
reference or integral to those pleadings. 2 For purposes of each motion to dismiss,
I accept as true each Complaint’s well-pled factual allegations and draw all
reasonable inferences in favor of the nonmoving party.3
A. Parties
Cadira is a Delaware LLC created on or about February 1, 2018, to serve as
the parent company for multiple healthcare-related entities.4 KGH, a Delaware
LLC, is the 49% owner of Cadira. 5 Beau Gertz is the sole manager of Cadira and
controller of Perseverance.6 Perseverance is a Colorado LLC that controls at least
51% of Cadira. 7
2
KGH’s Verified Am. Compl. (“KGH Compl.”) (D.I. 14) (filed in Consol. Action
No. 2018-0616-JRS); Cadira’s Verified Am. Compl., Cadira Hldgs. Gp., LLC vs. Knight’s
Genesis Healthcare, LLC, C.A. 2018-0877-JRS (“Cadira Compl.”) (D.I. 3); Wal-Mart
Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 (Del. 2004) (noting that on a motion
to dismiss, the Court may consider documents that are “incorporated by reference”
or “integral” to the complaint). Unless specific reference is made to C.A. 2018-0877-JRS,
all case documents can be found in the docket for the consolidated action.
3
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002).
4
KGH Compl. ¶¶ 10, 14, 27.
5
KGH Compl. ¶ 6. I note that this is contested by the Cadira Parties, who argue that the
plain terms of Cadira’s operating agreement establish that KGH never became a member
of Cadira. Cadira Parties’ Opening Br. in Supp. of Mot. to Dismiss KGH’s Compl.
(“Cadira OB”) (D.I. 15) at 30–32; Cadira Compl. ¶¶ 34, 51, 56.
6
KGH Compl. ¶¶ 7, 9; Cadira Compl. ¶ 25.
7
KGH Compl. ¶ 8.
3
B. The Parties Form Their Joint Venture
In October 2017, representatives of KGH, Feng Li and Vincent Xie, were
introduced to Gertz through a mutual acquaintance. 8 The parties held a formal
meeting on October 6, 2017, during which Gertz proposed that the parties form a
joint venture (the “October 6 Meeting”).9 Specifically, Gertz proposed that Li and
Xie, acting through KGH, and Gertz, acting through Perseverance, create a new
entity, Cadira, “in pursuit of lucrative business opportunities in the healthcare
sector.”10 Under this arrangement, Cadira would be the parent entity for several
companies controlled by Perseverance that were already operating in the healthcare
sector, including Serodynamics.11 Gertz made clear through his presentation that
he, Perseverance and Cadira would “always operate with the highest degree of
integrity, in complete compliance with the law, with medical ethics and with respect
to the dignity of all we serve.” 12 He also indicated that the companies under the
8
KGH Compl. ¶ 13; Cadira Compl. ¶ 6.
9
KGH Compl. ¶ 14; Cadira Compl. ¶¶ 7–9.
10
KGH Compl. ¶ 14; Cadira Compl. ¶¶ 8–9.
11
KGH Compl. ¶ 14; Cadira Compl. ¶ 9.
12
KGH Compl. ¶ 16; Cadira Compl. ¶ 11.
4
Perseverance umbrella that were to become Cadira’s subsidiaries (if KGH invested)
had realized net profits exceeding $27 million from 2016 to 2017. 13
In December 2017, Gertz informed KGH of a unique opportunity to acquire a
distressed rural hospital in Cedarville, California called the Surprise Valley Hospital
(“Surprise Valley”).14 This led to the December 22, 2017 “Memorandum of
Understanding” between KGH and Cadira, summarizing the proposal to acquire
Surprise Valley.15
C. The Joint Venture Agreements
To formalize the acquisition of Surprise Valley and KGH’s general interest in
pursuing the joint venture through Cadira, the parties entered into two agreements.16
First, on January 17, 2018, Cadira and KGH executed a “Promissory Note,” under
which KGH loaned $1 million to Cadira to help facilitate Cadira’s acquisition of
Surprise Valley.17 Then, on February 1, 2018, Cadira and KGH executed the
“Subscription Agreement,” effective retroactively as of January 1, 2018, under
which KGH was to receive 49% of the membership interests of Cadira in exchange
13
KGH Compl. ¶ 18.
14
KGH Compl. ¶ 21; Cadira Compl. ¶ 14.
15
KGH Compl. ¶ 22; Cadira Compl. ¶ 15.
16
KGH Compl. ¶¶ 24–28.
17
KGH Compl. ¶ 25; KGH Compl., Ex. C; Cadira Compl. ¶ 22.
5
for: (1) a payment of $2 million to be used to pay down the prior owners (in addition
to $500,000 already transferred by KGH); (2) a separate payment of $1 million to
be used for working capital of Cadira, payable on February 9, 2018; and (3) payment
of an additional $1.5 million “on an as needed basis for working capital of the
Company subject to the unanimous consent of the Members that the amounts so
requested by the Manager are reasonably necessary to the operations of the
Company,” with the understanding that “such consent [was] not to be unreasonably
withheld.” 18
At the same time, also on February 1, 2018, Cadira and Perseverance executed
the Operating Agreement of Cadira Group Holdings, LLC (the “Operating
Agreement”).19 That agreement contains a number of provisions relevant to this
dispute.
Under Section 5.01, Gertz was appointed Manager with responsibility to
“direct, manage and control the business of [Cadira].” 20 Section 5.04 requires Gertz
to perform his duties “in good faith, in a manner [he] reasonably believe[s] to be in
the best interest of the Company, and with such care as an ordinarily prudent person
18
KGH Compl. ¶ 26; KGH Compl., Ex. B (“Subscription Agreement”); Cadira
Compl. ¶ 23.
19
KGH Compl. ¶ 27; Cadira Compl. ¶ 24.
20
KGH Compl. ¶ 27; KGH Compl., Ex. E (“Operating Agreement”) § 5.01.
6
in a like position would use under similar circumstances.” 21 That same provision
also provides for limits on the Manager’s liability:
A Manager [i.e., Gertz] shall not be liable to the Company or to any
Member [i.e., KGH] for any loss or damage sustained by the Company
or any Member so long as such action or omission does not constitute
fraud, gross negligence, willful misconduct or a material breach of this
Agreement by such Manager or is not made in knowing violation of the
provisions of this Agreement.22
And, as a further limitation, Section 13.02(a) provides:
It is the intent of this Section [13.02] to restrict the liability and
fiduciary duties of the Members [i.e., KGH] and the Managers
[i.e., Gertz] to the maximum extent permitted by applicable law.
Neither the Company nor any Member or Manager shall have any claim
against any Member or Manager, provided that such act or omission
was performed by the Member or Manager within the scope of its
authority under this Agreement and that such act or omission did not
involve the Member’s or Manager’s bad faith, gross negligence, willful
misconduct or actual fraud, REGARDLESS OF WHETHER SUCH
ACT OR OMISSION CONSTITUTED THE SOLE, PARTIAL OR
CONCURRENT NEGLIGENCE (WHETHER ACTIVE OR
PASSIVE) OF THE MEMBER OR MANAGER.23
Sections 5.06 and 6.04 required Gertz, as Manager, to obtain unanimous
approval from all Members (as defined) in order to write checks, withdraw funds
from Cadira’s bank accounts, incur debt, enter into, amend, waive or terminate any
related party agreement, enter into or effect any one of a number of transactions or
21
KGH Compl. ¶ 31; Operating Agreement § 5.04.
22
Operating Agreement § 5.04.
23
KGH Compl. ¶ 30; Operating Agreement § 13.02 (capitalization in original).
7
appoint/remove Cadira’s officers and management. 24 The “Members” identified in
the Operating Agreement are KGH and Perseverance.25
Finally, Section 8.02(b) provides that “[u]pon making the Capital
Contributions specified on Exhibit A, each Member shall own the Membership
Interest set forth opposite such Member’s name on Exhibit A.” 26 Exhibit A denotes
KGH’s “membership” and “economic” interests as 49%, reflects a capital
contribution of $5 million and references the terms of KGH’s capital contribution as
set forth in the Subscription Agreement. 27 It denotes Perseverance’s “membership”
and “economic” interests as 51% and reflects its capital contribution as $0.28
D. Gertz’s Alleged Breach of the Operating Agreement
It is alleged that, notwithstanding the bargained-for limits on his authority,
Gertz regularly withdrew funds from Cadira’s bank accounts, wrote checks on
Cadira’s behalf, hired and terminated employees, and incurred company debt, all
without consulting with KGH.29 These acts allegedly violated both express
24
KGH Compl. ¶ 29; Operating Agreement §§ 5.06, 6.04.
25
Operating Agreement, Ex. A.
26
Operating Agreement § 8.02(b).
27
Operating Agreement, Ex. A.
28
Id.
29
KGH Compl. ¶ 32.
8
contractual commitments and the Operating Agreement’s standards of conduct
expected of the Manager, as set forth in Sections 5.06 and 6.04.30
E. Cadira Sends Notice of Default to KGH
As noted, under the Subscription Agreement, KGH committed to a capital
contribution to Cadira of $5 million to fund its operations. According to the Cadira
Parties, KGH has refused to contribute the $1.5 million for working capital that was
to be paid on an “as needed basis,” despite repeated requests. 31 On April 30, 2018,
Cadira’s general counsel sent notice to KGH that it was in violation of its funding
obligations under the Subscription Agreement and demanded the payment of an
additional $1.5 million as a condition precedent to the vesting of KGH’s membership
rights in Cadira.32 Upon evaluation of Cadira’s request, KGH chose not to provide
the $1.5 million because, as it reads the parties’ agreements, this contribution was
subject to the unanimous consent of the Members and, as a Member, it did not
consent. 33 In early July 2018, Gertz seized the operations of Cadira and unilaterally
terminated all employees. 34
30
KGH Compl. ¶¶ 29, 31–32.
31
Cadira Compl. ¶¶ 39, 46; Cadira OB at 31.
32
KGH Compl. ¶ 34; Cadira Compl. ¶¶ 45–46.
33
KGH Compl. ¶ 36.
34
KGH Compl. ¶ 39; Cadira Compl. ¶ 47.
9
F. KGH Discovers Alleged Insurance Fraud and False Accounting
On July 30, 2018, well after the joint venture closed, KGH was alerted to the
existence of a Missouri lawsuit against Gertz and a number of his related entities,
including one of Cadira’s subsidiaries, Serodynamics (the “Missouri Action”).35
In the Missouri Action, 25 insurance companies, each part of the Blue Cross Blue
Shield network, sued Gertz and certain entities he controls alleging insurance
fraud. 36 KGH’s Complaint makes frequent references to the complaint in the
Missouri Action (the “Missouri Complaint”), particularly its allegations that
Serodynamics engaged in a fraudulent billing scheme whereby Serodynamics would
perform laboratory testing but would bill the testing through Putnam County
Memorial Hospital (for higher reimbursements) as if the tests were performed at and
by Putnam.37 KGH’s Complaint also references the Missouri Complaint’s
allegations that Gertz conspired with a variety of other defendants in that action
fraudulently to bill for the tests performed by Serodynamics through Putnam.38
KGH alleges that, had it known about this alleged conduct by Gertz on behalf of all
of his companies, including one of the entities rolled into Cadira as part of the joint
35
KGH Compl. ¶ 41.
36
KGH Compl. ¶ 2; KGH Compl., Ex. A (“Missouri Complaint”).
37
KGH Compl. ¶ 42.
38
KGH Compl. ¶ 43.
10
venture, it never would have done business with Gertz or any of his entities. 39 KGH
also alleges that, contrary to Gertz’s representation at the October 6 Meeting that the
proposed Cadira subsidiaries were highly profitable, the Cadira subsidiaries were, in
fact, not generating any profit at all and were, instead, on the verge of shutting
down. 40
G. Procedural History
KGH filed its initial complaint in this action on August 21, 2018, before filing
the operative KGH Complaint on December 4, 2018.41 On the same day KGH filed
the KGH Complaint, December 4, Cadira filed its own complaint. 42 The operative
Cadira Complaint was filed on December 13, 2018. 43 The Cadira Parties filed their
motion to dismiss the KGH Complaint on December 14, 2018, 44 followed by KGH’s
motion to dismiss the Cadira Complaint on March 25, 2019. 45 In the meantime, on
March 18, 2019, the Court granted the parties motion to consolidate the two
39
KGH Compl. ¶ 45.
40
KGH Compl. ¶ 38.
41
D.I. 1; D.I. 14.
42
Cadira Hldgs. Gp., LLC vs. Knight’s Genesis Healthcare, LLC, C.A. 2018-0877-JRS
(D.I. 1).
43
Id. at D.I. 3.
44
D.I. 15.
45
D.I. 22.
11
actions. 46 The Court heard argument on the two motions on April 14, 2021, and they
were submitted for decision that day.
KGH’s Complaint comprises six counts: (1) common law fraud/fraudulent
concealment against all of the Cadira Parties associated with Gertz’s alleged
insurance fraud scheme; (2) equitable fraud against Gertz regarding the same
conduct; (3) breach of certain provisions of the Operating Agreement resulting from
Gertz’s dissipation of assets, among other things; (4) breach of fiduciary duties,
brought derivatively on behalf of Cadira against Gertz, resulting from the same
conduct underlying the breach of contract claim; (5) breach of fiduciary duties,
brought directly against Gertz, largely aligning with the derivative fiduciary duty
claim; and (6) unjust enrichment resulting from Gertz’s alleged fraudulent and
wrongful conduct. 47
Meanwhile, Cadira’s Complaint, comprises three counts, including a prayer
for a declaratory judgment that KGH has breached its funding obligations under the
Subscription Agreement and Operating Agreement and an injunction to require
KGH to comply with its funding requirements and prevent KGH from asserting its
rights to ownership in Cadira. 48
46
D.I. 19.
47
KGH Compl. ¶¶ 51–86.
48
Cadira Compl. ¶¶ 48–63.
12
II. ANALYSIS
The standard for deciding a motion to dismiss under Court of Chancery
Rule 12(b)(6) is well-settled:
(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. 49
Under Rule 12(b)(1), this court will dismiss a claim “if it appears from the
record that the Court does not have subject matter jurisdiction over the claim.”50
“Unlike the standards employed in [a] Rule 12(b)(6) analysis, . . . [under 12(b)(1)]
[t]he burden is on the Plaintiff[] to prove jurisdiction exists. Further, the Court need
not accept Plaintiff[’s] factual allegations as true and is free to consider facts not
alleged in the complaint.”51
49
Savor, Inc., 812 A.2d at 896–97 (citation omitted).
50
Pitts v. City of Wilm., 2009 WL 1204492, at *5 (Del. Ch. Apr. 27, 2009).
51
Appriva S’holder Litig. Co., LLC v. EV3, Inc., 937 A.2d 1275, 1284 n.14 (Del. 2007)
(cleaned up).
13
I begin by addressing the Cadira Parties’ motion to dismiss the
KGH Complaint under Rule 12(b)(6), and then turn to KGH’s motion to dismiss the
Cadira Complaint under both Rules 12(b)(6) and 12(b)(1).
A. KGH’s Fraud Claims
KGH brings claims for both common law and equitable fraud against the
Cadira Parties alleging Gertz made fraudulent representations that he conducted his
businesses in compliance with the law even though he was engaged in a rampant
insurance fraud scheme. “Whatever amounts to fraud, according to the legal
conception, is also fraud in equitable conception.”52 While equitable fraud is
“separate from, and broader, than common law fraud,” because (1) KGH well pleads
the elements of common law fraud, and (2) the Cadira Parties advance the same
arguments in opposition to both theories of fraud alleged, I need only address the
common law fraud claim.53
To state a claim for common law fraud, a plaintiff must well plead the
following elements:
52
Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126, 143 (Del. Ch. 2009) (citation
omitted).
53
Id. One potential basis the Cadira Parties might have separately attacked KGH’s
equitable fraud claim is for failing to allege the requisite fiduciary relationship. Id. at 144(“Equitable fraud is not available in every case or to every plaintiff. It requires special
equities, typically the existence of some form of fiduciary relationship . . . .”). Neither
party raised that issue, however, so I need not address it. See Emerald P’rs v. Berlin,
726 A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are deemed waived.”).
14
1) a false representation, usually one of fact, made by the defendant;
2) the defendant’s knowledge or belief that the representation was false,
or was made with reckless indifference to the truth; 3) an intent to
induce the plaintiff to act or to refrain from acting; 4) the plaintiff’s
action or inaction taken in justifiable reliance upon the representation;
and 5) damage to the plaintiff as a result of such reliance. 54
Under Chancery Court Rule 9(b), “[i]n all averments of fraud . . . the circumstances
constituting fraud . . . shall be stated with particularity.”55 “The requirements of the
particularity standard are well established: ‘The circumstances which shall be stated
with particularity in Rule 9(b) refer to the time, place and contents of the false
representations, the facts misrepresented, as well as the identity of the person making
the misrepresentation and what he obtained thereby.’”56 “Essentially, the plaintiff is
required to allege the circumstances of the fraud with detail sufficient to apprise the
54
Gaffin v. Teledyne, Inc., 611 A.2d 467, 472 (Del. 1992); Great Hill Equity P’rs IV, LP
v. SIG Growth Equity Fund I, LLLP, 2018 WL 6311829, at *32 (Del. Ch. Dec. 3, 2018)
(citing E.I. DuPont de Nemours & Co. v. Fla. Evergreen Foliage, 744 A.2d 457, 461–62
(Del. 1999)) (same). The first element of common law fraud, a “false representation,” can
take several forms, including an “overt misrepresentation (i.e., a lie), a deliberate
concealment of material facts, or else silence in the face of a duty to speak.” Maverick
Therapeutics, Inc. v. Harpoon Therapeutics, Inc., 2020 WL 1655948, at *26 (Del. Ch.
Apr. 3, 2020) (cleaned up). KGH alleges both overt misrepresentations and deliberate
concealment here.
55
Metro Commc’n Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121, 144
(Del. Ch. 2004) (quoting Ct. Ch. R. 9(b)).
56
Id. (quoting York Linings v. Roach, 1999 WL 608850, at *2 (Del. Ch. July 28, 1999)
(internal quotations and citations omitted)).
15
defendant of the basis for the claim.”57 With that said, “[m]alice, intent, knowledge
and other condition of mind of a person may be averred generally.”58
KGH has cleared Rule 9(b)’s particularity hurdle here. The KGH Complaint
alleges Gertz made two false representations to KGH, by statement or omission, with
the intent to induce KGH into forming the joint venture, and that if KGH knew these
representations were false, it never would have done business with him or his
controlled entities. First, KGH alleges that, at the October 6 Meeting, Gertz told
KGH that “[w]e will always operate with the highest degree of integrity, in complete
compliance with the law, with medical ethics and with respect to the dignity of all
we serve.”59 As it turned out, according to the KGH Complaint, at the time Gertz
made this statement, Gertz was the architect of a massive overbilling scheme that
would soon become the subject of a lawsuit filed by 25 healthcare insurance
companies against Gertz and the entities he controlled.60 When the lawsuit was filed,
the parties had already closed on their joint venture. And yet Gertz never disclosed
57
Abry P’rs V, L.P. v. F & W Acq. LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006).
58
Ct. Ch. R. 9(b). I note that the Cadira Parties have not argued the fraud claims are barred
by contractual anti-reliance provisions or as bootstrapped breach of contract claims. The
only ground for dismissal proffered by the Cadira Parties is a failure to plead fraud with
the requisite particularity. Cadira OB at 17–18.
59
KGH Compl. ¶ 16.
60
KGH Compl. ¶¶ 41–43.
16
the existence of the Missouri Action to KGH; it was left to discover that disturbing
news on its own. 61
The KGH Complaint’s reference to the detailed facts in the Missouri
Complaint, and its allegations of what was said, and not said, at the October 6
Meeting (and after), well pleads the so-called “newspaper facts”62 regarding the
“who, what, where, when and how of the fraud.”63 Stated in Rule 9(b) terms, the
KGH Complaint well pleads that Gertz assured KGH at the October 6 Meeting that
he, Perseverance and his other companies operated “in complete compliance with
the law” (the who, what, when and where), knowing that the assurance was false
because Gertz, Perseverance and other Gertz-controlled entities were, at the time of
the assurance, engaged in a massive insurance overbilling scheme. The KGH
Complaint goes on to allege that Gertz’s motivation for giving the false assurance
was clear: he intended to induce KGH to invest in Cadira. 64
61
KGH Compl. ¶¶ 52–56; see also KGH’s Answering Br. in Opp’n to the Cadira Parties’
Mot. to Dismiss KGH’s Compl. and KGH’s Opening Br. in Supp. of Mot. to Dismiss
Cadira’s Compl. (“KGH AB/OB”) (D.I. 22) at 18 n.11 (“The Missouri Action was
commenced on March 30, 2018 . . . .”).
62
Anschutz Corp. v. Brown Robin Cap., LLC, 2020 WL 3096744, at *16 (Del. Ch. June 11,
2020).
63
Envolve Pharmacy Sols., Inc. v. Rite Aid Hdqtrs. Corp., 2021 WL 140919, at *8
(Del. Super. Ct. Jan. 15, 2021) (cleaned up).
64
KGH Compl. ¶¶ 14, 55.
17
Second, at the same October 6 Meeting, Gertz represented to KGH’s
representatives that the companies he would contribute to the joint venture “had
experienced net profits exceeding $27 million from 2016 to 2017.” 65 Yet,
“[f]inancial statements of Cadira [later] provided by Gertz to KGH revealed that . . .
the Cadira group of companies was not generating any profits and was on the verge
of shutting down.” 66 Again, in Rule 9(b) terms, the KGH Complaint identifies Gertz
as making a specific, knowingly false statement of fact (not a future prediction of
financial performance) at a specific meeting with the intent to induce KGH into
investing into a joint venture, and that KGH, in fact, relied upon the false statement
to its detriment. These well-pled facts state a legally viable claim of fraud. 67
The Cadira Parties’ principal basis for seeking dismissal of all of KGH’s fraud
claims is that the allegations surrounding the underlying insurance fraud are not
stated with particularity.68 Specifically, the Cadira Parties argue that, to state a claim
65
KGH Compl. ¶ 18.
66
KGH Compl. ¶ 38.
67
See, e.g., Surf’s Up Legacy P’rs, LLC v. Virgin Fest, LLC, 2021 WL 117036, at *14
(Del. Super. Ct. Jan. 13, 2021) (finding a well-pled fraud claim related to financials where
they were presented with an incomplete and false picture of past performance for the
purpose of inducing a transaction only to be discovered as false by the buyer post-closing).
68
Cadira OB at 14–16.
18
of fraud with particularity, mere reference to allegations in a complaint filed in
another action will not suffice.69
If the fraud claim brought here was the underlying insurance fraud at issue in
the Missouri Action, I would agree that mere reference to the Missouri Complaint
would likely fall short of satisfying Rule 9(b)’s particularity requirement. As the
Cadira Parties correctly argue, KGH did not separately investigate the Missouri
fraud claims and cannot assert the allegations in the Missouri Complaint as true facts
here.70 But that is not the fraud KGH has alleged in its Complaint. Rather, the KGH
Complaint alleges Gertz committed fraud against KGH by misrepresenting the
prospective companies’ legal compliance and financial fortitude.71 Those fraudulent
statements have been stated with sufficient particularity under our rules. Of course,
if the allegations in the Missouri Action turn out to be unfounded, that may
undermine KGH’s fraud claims here. But, for now, the point of KGH’s fraud claim
is that Gertz represented he was a law abider at a time when he was engaged in
conduct that the later-filed Missouri Action alleged to be illegal, and yet he did not
disclose the existence of that conduct to KGH. The truth (or not) of the allegations
in the Missouri Complaint is beside the point. It is Gertz’s alleged knowledge of the
69
Id. at 17–19.
70
Id. at 14–16.
71
KGH Compl. ¶¶ 16, 18.
19
potential that he and his entities would be subject to claims of fraud, as outlined in
the soon-to-be-filed Missouri Complaint, at the time he gave assurances to KGH that
matters.
On this point, there is an important distinction the Cadira Parties fail to
appreciate. They argue that, under the doctrine of judicial notice, the Court cannot
even consider the Missouri Complaint when making a determination of whether
KGH has sufficiently stated any claim, much less its fraud claim. 72 Our court takes
judicial notice of facts that “(1) [are] generally known within the trial court’s
territorial jurisdiction; or (2) can be accurately and readily determined from sources
whose accuracy cannot reasonably be questioned.”73 The Cadira Parties argue that,
because the allegations in the Missouri Complaint are neither generally known nor
of the sort where their accuracy cannot be questioned, the allegations must be
ignored altogether. This conception of judicial notice fails to recognize that one
document category of which this court frequently takes judicial notice is public
records. 74 In this context, of course, the court cannot take judicial notice of the truth
72
Cadira OB at 14–16.
73
Del. R. Evid. 201(b)(1)–(2).
74
See, e.g., Judy v. Preferred Commc’n Sys., Inc., 2016 WL 4992687, at *2 (Del. Ch.
Sept. 19, 2016) (taking into account “pertinent public records that are subject to judicial
notice”); Aequitas Sols., Inc. v. Anderson, 2012 WL 2903324, at *3 n.17 (Del. Ch. June 25,
2012) (taking judicial notice of a pleading filed in a related action); In re Wheelabrator
Techs., Inc. S’holders Litig., 1992 WL 212595, at *11–12 (Del. Ch. Sept. 1, 1992) (taking
judicial notice, on a motion to dismiss, of documents of public record); Baca v. Insight
20
of the factual matters asserted in those public records, only that they exist, are
authentic and contain the content they purport to contain. 75
Here, to reiterate, the Court is not being asked to take judicial notice of the
truth of allegations in the Missouri Complaint; rather, for purposes of this motion to
dismiss, the Court is asked to take notice that a lawsuit in Missouri was filed soon
after closing of the joint venture in which Gertz and his controlled entities are alleged
to have been engaged in a long-running, widespread insurance fraud scheme.76
Based on the well-pled allegations in the KGH Complaint, the existence of the
Missouri Complaint and the nature of the parties bringing that lawsuit allows a
reasonable inference, at this stage, that Gertz’s statement at the October 6 Meeting
was false.77
Enters., Inc., 2010 WL 2219715, at *1 (Del. Ch. June 3, 2010) (taking judicial notice, on
a motion to dismiss, of filings in pending derivative and securities actions); Nelson v.
Emerson, 2008 WL 1961150, at *2 n.2 (Del. Ch. May 6, 2008) (same); Orloff v. Shulman,
2005 WL 3272355, at *12 (Del. Ch. Nov. 23, 2005) (taking judicial notice of pleadings in
a bankruptcy proceeding).
75
See, e.g., Glaski v. Bank of Am., 218 Cal. App. 4th 1079, 1090 (5th Dist. 2013) (“Courts
can take judicial notice of the existence, content and authenticity of public records and
other specified documents, but do not take judicial notice of the truth of the factual matters
asserted in those documents.”).
76
KGH Compl. ¶ 2; Clifford Paper, Inc. v. WPP Invs., LLC, 2021 WL 2211694, at *5
(Del. Ch. June 1, 2021) (“Chancery Rule 12(b)(6) requires dismissal of a complaint if the
plaintiff cannot recover under ‘any reasonably conceivable set of circumstances susceptible
of proof’ based on the complaint’s pled facts.” (citation omitted)).
77
In the same vein, the Cadira Parties argue that res judicata does not permit the Court to
take all of the allegations in the Missouri Complaint as true. Cadira OB at 15–16.
Here, I agree. One key purpose of res judicata is to use a prior action to “bar [a party in]
21
Finally, the KGH Complaint well pleads that Gertz knew his statements were
false when made, that he intended to induce KGH to enter into the joint venture
through the statements and that KGH reasonably relied on the statements when
making its investments. As mentioned, knowledge and intent need only be averred
generally.78 The KGH Complaint allows a reasonable inference that Gertz was
willfully engaging in wrongful and illegal conduct at the time of the transaction, and
yet made a conscious choice to avoid mention of any potential noncompliance
throughout the negotiations.79 As for reliance, “the reasonableness of a plaintiff’s
reliance is a factual inquiry that is typically resolved with the benefit of discovery
rather than at the pleadings stage.”80 Here, KGH lacked knowledge about Gertz’s
improper billing practices at the time of contracting and had no reason to doubt
a subsequent action” from bringing the same claims. Bailey v. City of Wilm., 766 A.2d
477, 481 (Del. 2001). Of course, for res judicata to apply, “the prior adjudication must be
final.” Id. The Missouri Action is pending. With this all said, to reiterate, KGH is not
asking this Court to take the allegations in the Missouri Complaint as true, as res judicata
would suggest, but rather is asking the Court to draw an inference from the existence of
such allegations that Gertz was not truthful about his past compliance with the law in his
healthcare businesses. That inference, at least at this stage, is appropriate and does not
implicate the doctrine of res judicata.
78
Abry P’rs, 891 A.2d at 1050.
79
KGH Compl. ¶¶ 16, 23, 42–43.
80
McDonald’s Corp. v. Easterbrook, 2021 WL 351967, at *9 (Del. Ch. Feb. 2, 2021)
(quoting Forman v. CentrifyHealth, Inc., 2019 WL 1810947, at *12 (Del. Ch. Apr. 25,
2019)).
22
Gertz’s representations.81 KGH was made up of foreign investors with limited
experience with the American legal system; a fact (well appreciated by Gertz) that
may have contributed to their willingness to trust Gertz and not question his bold
representations. 82 While the Cadira Parties may be correct that KGH’s reliance was
not reasonable, this is not the time to make that determination.
B. KGH’s Breach of the Operating Agreement Claim
KGH alleges that, in addition to committing fraud, Gertz breached the
Operating Agreement in several material respects. Under Delaware law, to recover
for breach of contract, a plaintiff must prove “a contractual obligation, whether
express or implied, a breach of that obligation by the defendant, and resulting
damage to the plaintiff.” 83 Breach of contract claims are susceptible to disposition
on a motion to dismiss “[w]hen the language of [the] contract is plain and
unambiguous.”84 Contract language is ambiguous “only when the provisions in
controversy are reasonably or fairly susceptible of different interpretations or may
81
KGH Compl. ¶ 44.
82
KGH Compl. ¶ 13.
83
Moore Bus. Forms, Inc. v. Cordant Hldgs. Corp., 1995 WL 662685, at *7 (Del. Ch.
Nov. 2, 1995).
84
Allied Cap. Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1030 (Del. Ch. 2006).
23
have two or more different meanings.”85 If the plaintiff has proffered a reasonable
construction upon which its claim of breach rests, the motion to dismiss must be
denied.86
The KGH Complaint alleges Gertz violated a number of the Operating
Agreement’s provisions. In contravention to Section 6.04, when purporting to act
for Cadira, Gertz wrote checks, withdrew funds, incurred debt, entered into
transactions and hired and fired management personnel “without the unanimous
signatures or approval of all Members.”87 Because Gertz did not obtain approval
from KGH, a 49% owner, he did not obtain unanimous consent to engage in these
actions and therefore violated the Operating Agreement.
The Cadira Parties argue KGH’s alleged breaches of the Operating Agreement
fail as a matter of law on two grounds. First, they invoke their stalwart argument
that KGH’s breach of contract claims must rest on a showing of fraud. In this regard,
the plain language of Section 5.04 of the Operating Agreement states, “[a] manager
shall not be liable to the Company or to any Member for any loss or damage
sustained by the Company or any Member so long as such action or omission does
85
AT&T Corp. v. Lillis, 953 A.2d 241, 252 (Del. 2008) (citation omitted).
86
Caspian Alpha Long Credit Fund, L.P. v. GS Mezzanine P’rs 2006, L.P., 93 A.3d 1203,
1205 (Del. 2014); Kahn v. Portnoy, 2008 WL 5197164, at *3 (Del. Ch. Dec. 11, 2008).
87
KGH Compl. ¶¶ 29, 32; Operating Agreement § 6.04.
24
not constitute fraud, gross negligence, willful misconduct or a material breach of this
Agreement. . . .” 88 While fraud is certainly one way to attach liability to Gertz, as
Manager of Cadira, for breach of the Operating Agreement, a showing of “gross
negligence, willful misconduct or a material breach” will also suffice.89 Here, KGH
well pleads that Gertz willfully declined to obtain KGH’s consent on a number of
issues as contractually required, and as a result, Cadira became a mere shell of its
former self and unjustifiably burned through KGH’s prior investment. 90 This well
pleads breach of contract within the parameters prescribed by the Operating
Agreement.
Second, the Cadira Parties argue that KGH has no standing to prosecute a
claim for breach of the Operating Agreement because its 49% voting interest in
Cadira has not yet vested, and as a result, Perseverance was, and still is, Cadira’s
only voting member.91 If true, the Cadira Parties argue that any “unanimous
88
Operating Agreement § 5.05.
89
Id.
90
KGH Compl. ¶¶ 29, 32, 39. The KGH Complaint also well pleads that Gertz’s breaches
were “material,” implicating a fact-intensive inquiry not suitable for pleading-stage
resolution. See Chester Cty. Emps.’ Ret. Fund v. KCG Hldgs., Inc., 2019 WL 2564093,
at *10 (Del. Ch. June 21, 2019); McMullin v. Beran, 765 A.2d 910, 926 (Del. 2000).
91
Cadira OB 30–32.
25
consent” requirement was met because Gertz approved all actions identified in the
KGH Complaint as the controller of Perseverance.
Again, while the Cadira Parties’ argument may ultimately carry the day,
I cannot conclude, as a matter of law, that KGH’s voting interest has yet to vest.
Section 8.02(b) of the Operating Agreement provides, “[u]pon making the Capital
Contributions specified in Exhibit A, each Member shall own the Membership
Interest set forth opposite such Member’s name on Exhibit A.” 92 Section 8.02(c)
follows by noting that, “[u]pon making the Capital Contributions specified in
Exhibit A, each Member shall have the Voting Interest set forth opposite such
Member’s name on Exhibit A.”93 Exhibit A provides that KGH’s “membership”
and “economic” interests amount to 49%, and directly refers to the Subscription
Agreement as the avenue through which KGH made its capital contribution.94 The
Subscription Agreement, in turn, provides the amounts that KGH was to invest, and
the parties do not dispute that all but $1.5 million has been paid. 95 The $1.5 million
in dispute, per the terms of the Subscription Agreement, was to “be made available
to the Company on an as needed basis for working capital of the Company subject
92
Operating Agreement § 8.02(b).
93
Operating Agreement § 8.02(c).
94
Operating Agreement, Ex. A.
95
Cadira OB at 31; KGH Compl. ¶¶ 34–35.
26
to the unanimous consent of the Members that the amounts so requested by the
Manager are reasonably necessary to the operations of the Company, such consent
not to be unreasonably withheld.”96
According to KGH, it did not make these funds available to Cadira because it
believed there had not been a proper showing that the funds were reasonably
necessary to sustain the operations of the Company.97 On the other hand, the Cadira
Parties argue that, “[b]ecause such funds have been requested, and because such
funds have been unreasonably withheld, KGH has voided whatever voting rights it
might have had based on its initial payments to Cadira.” 98 Whether the $1.5 million
was “reasonably necessary to the operations of the Company,” or whether KGH’s
consent was “unreasonably withheld,” are fact-intensive inquiries not appropriate
for resolution on the pleadings. 99 For now, KGH has well pled that it has standing
to pursue its breach of contract claims as a Member of Cadira.
96
Subscription Agreement § 1(b)(ii).
97
KGH Compl. ¶¶ 35–36.
98
Cadira OB at 31–32.
99
Edinburgh Hldgs., Inc. v. Educ. Affiliates, Inc., 2018 WL 2727542, at *14 (Del. Ch.
June 6, 2018) (declining to resolve on the pleadings “[t]he question of whether ASPE’s
post-closing management conducted the ASPE Business Unit ‘in a reasonable manner
consistent with its past practices’”) (citing Victaulic Co. v. Tieman, 499 F.3d 227, 227
(3d Cir. 2007) (“Because reasonableness is a fact-intensive inquiry, we hold that it should
not have been determined on the pleadings.”)); see also Chapter 7 Tr. Constantino Flores
v. Strauss Water Ltd., 2016 WL 5243950, at *1 (Del. Ch. Sept. 22, 2016) (holding that
“fact intensive” inquiries are “not appropriate for disposition on a motion to dismiss”).
27
C. KGH’s Breach of Fiduciary Duty Claims
KGH has invoked the Operating Agreement’s contractual standards of
conduct to allege Gertz breached his fiduciary duties owing to KGH as a Member.
The Cadira Parties argue in response that the Operating Agreement replaces
traditional fiduciary duties with contractual duties, and KGH has failed to state a
claim for breach of those duties. Delaware law says otherwise.
The Delaware Limited Liability Company Act (the “LLC Act”) provides that
“the fiduciary duties of a member, manager, or other person that is a party to or
bound by a limited liability company agreement may be expanded or restricted or
eliminated by provisions in the limited liability company agreement.”100 If the
operating agreement is silent with respect to standards of conduct, then, “[b]y
default, the traditional fiduciary duties applicable to corporations [will]
apply . . . .” 101
100
Zimmerman v. Crothall, 62 A.3d 676, 702 (Del. Ch. 2013) (cleaned up); 6 Del. C. § 18–
1101(c) (“To the extent that, at law or in equity, a member or manager . . . has duties
(including fiduciary duties) to a limited liability company or to another member or
manager . . . , the member’s or manager’s . . . duties may be expanded or restricted or
eliminated by provisions in the limited liability company agreement . . . .”).
101
Ross Hldg. & Mgmt. Co. v. Advance Realty Gp., LLC, 2014 WL 4374261, at *12
(Del. Ch. Sept. 4, 2014); see also Auriga Cap. Corp. v. Gatz Props., 40 A.3d 839, 852
(Del. Ch. 2012), aff’d, 59 A.3d 1206 (Del. 2012) (“[T]he [LLC] statute allows the parties
to an LLC agreement to entirely supplant those default [fiduciary duty] principles or to
modify them in part. Where the parties have clearly supplanted default principles in full,
we give effect to the parties’ contract choice. Where the parties have clearly supplanted
default principles in part, we give effect to their contract choice.” (citations omitted)).
28
“Drafters of a limited liability company agreement ‘must make their intent to
eliminate fiduciary duties plain and unambiguous.’” 102 Where an LLC agreement
purports to replace traditional fiduciary duties with duties not to engage in bad faith,
willful misconduct, or gross negligence, that agreement essentially “replaces”
traditional fiduciary duties with identical contractual duties. 103 For example, in CMS
Investment Holdings, LLC v. Castle, the court analyzed breach of contract claims
under traditional fiduciary duty jurisprudence where the “replacement” contractual
duties were to avoid “gross negligence, willful misconduct or knowing violation of
law.” 104 As the court noted, those duties directly correspond with the “default
standards of care and loyalty under Delaware law.” 105 In other words, a contractual
duty to refrain from “willful misconduct” or “bad faith” corresponds with the
102
Ross Hldg., 2014 WL 4374261, at *12 (quoting Feeley v. NHAOCG, LLC, 62 A.3d 649,
664 (Del. Ch. 2012)).
103
CMS Inv. Hldgs., LLC v. Castle, 2015 WL 3894021, at *18 (Del. Ch. June 23, 2015);
see also Smith v. Scott, 2021 WL 1592463, at *10 (Del. Ch. Apr. 23, 2021) (recognizing
the traditional duty of loyalty is implicated by contractual language prohibiting “bad faith”
and “willful misconduct” and the traditional duty of care is implicated by contractual
language prohibiting “gross negligence”).
104
2015 WL 3894021, at *18.
105
Id.
29traditional duty of loyalty,106 and a contractual duty to refrain from “gross
negligence” corresponds with the traditional duty of care.107
Section 13.02 of the Operating Agreement begins with a statement that, at first
glance, evinces an intent to replace traditional fiduciary duties: “[i]t is the intent of
this Section [13.02] to restrict the liability and fiduciary duties of the Members and
the Managers to the maximum extent permitted by applicable law.” 108 But, as in
CMS, Section 13.02 then green-lights claims against the Manager arising from the
“Manager’s bad faith, gross negligence, willful misconduct or actual fraud.”109
Given this language, it cannot be said the drafters of the Operating Agreement
evinced a “plain and unambiguous” intent fully to displace traditional fiduciary
106
United Bhd. of Carpenters Pension Plan v. Fellner, 2015 WL 894810, at *4 (Del. Ch.
Feb. 26, 2015) (“Willful misconduct is one standard for evaluating whether a fiduciary
breached the duty of loyalty by acting in bad faith.”); Feeley, 62 A.3d at 664 (same);
Zimmerman v. Crothall, 2012 WL 707238, at *6 (Del. Ch. Mar. 5, 2012), as revised
(Mar. 27, 2012) (concluding that “self-dealing” and “willful misconduct” correspond with
the duty of loyalty). “Bad faith” is another index for the fiduciary duty of loyalty.
Stewart v. BF Bolthouse Holdco, LLC, 2013 WL 5210220, at *11 (Del. Ch. Aug. 30, 2013)
(“[T]he duty of loyalty encompasses . . . director actions taken in bad faith.”).
107
Feeley, 62 A.3d at 664 (“Gross negligence is the standard for evaluating a breach of the
duty of care.”).
108
Operating Agreement § 13.02.
109
Id.
30
duties.110 Accordingly, as pled, Gertz owes the default traditional fiduciary duties
of care and loyalty to KGH.111
The KGH Complaint alleges Gertz violated his duty of loyalty by knowingly
declining to obtain KGH’s consent when required, including when writing checks,
withdrawing Company funds, incurring debt and hiring/firing employees.112 The
KGH Complaint well pleads that Gertz committed these acts for self-interested
reasons to, among other things, enrich himself and facilitate his insurance fraud
scam.113 An inference of bad faith is well supported here; the KGH Complaint’s
factual allegations create a reasonable inference that Gertz knew KGH’s consent was
required and yet willfully chose to ignore his contractual obligations as he ran Cadira
110
Ross Hldg., 2014 WL 4374261, at *12.
111
Other provisions in the Operating Agreement support this conclusion. Section 5.04
requires “Managers” to “perform their Managerial duties in good faith, in a manner they
reasonably believe to be in the best interest of the Company, and with such care as an
ordinarily prudent person in a like position would use. . . .” This tracks the language of the
business judgment rule, which, all else being equal, is rebutted by proof of a duty of loyalty
or care violation. In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 52 (Del. 2006)
(“Our law presumes that ‘in making a business decision the directors of a corporation acted
on an informed basis, in good faith, and in the honest belief that the action taken was in the
best interests of the company.’ Those presumptions can be rebutted if the plaintiff shows
that the directors breached their fiduciary duty of care or of loyalty or acted in bad faith.”
(citation omitted)). Likewise, the latter part of Section 5.04, similar to Section 13.02,
prevents a “Manager” from taking actions constituting “fraud, gross negligence, willful
misconduct or a material breach of this Agreement.”
112
KGH Compl. ¶¶ 32, 75.
113
KGH Compl. ¶¶ 32, 75, 79.
31
for his sole benefit in the manner he saw fit. 114 This type of deliberate action is the
definition of bad faith and, at this stage, more than satisfies KGH’s low pleading
burden.115
D. KGH’s Unjust Enrichment Claim
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.” 116 “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.”117
114
See, e.g., Anglo Am. Sec. Fund, L.P. v. S.R. Glob. Int’l Fund, L.P., 829 A.2d 143, 157
(Del. Ch. 2003) (inferring bad faith from circumstances surrounding manager’s decision
not to promptly disclose certain cash withdrawals from the company).
115
I note that the fiduciary duty and contract claims are at least related if not overlapping.
Because the Cadira Parties have failed to argue that the fiduciary duty claims are
improperly duplicative of the breach of contract claim, any such argument is waived.
Emerald P’rs, 726 A.2d at 1224 (“Issues not briefed are deemed waived.”). Likewise, the
Cadira Parties have not argued that KGH failed to plead demand futility under Rule 23.1
with respect to its derivative claim for breach of fiduciary duty (Count V). Again, that
argument is waived. Id. For what it is worth, KGH does plead that demand upon Gertz,
as Cadira’s sole Manager, would be futile. KGH Compl. ¶¶ 48–50.
116
Fleer Corp. v. Topps Chewing Gum, Inc., 539 A.2d 1060, 1062 (Del. 1988) (citation
omitted).
117
Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010).
32
KGH claims that, in the event the Court finds that its 49% membership interest
in Cadira did not vest, the Cadira Parties have unjustifiably retained $4.5 million that
KGH provided, in part, as consideration for its equity interest in Cadira.118 The
enrichment to the Cadira Parties resulted, according to KGH, from Gertz
fraudulently inducing KGH to invest.
The Cadira Parties only argument for dismissal of the unjust enrichment claim
is that the fraud component of this claim is not pled with particularity.119 That
argument assumes, incorrectly, that fraud is a prima facie element of unjust
enrichment. It is not. 120 In any event, even if KGH were obliged to plead fraud in
support of its unjust enrichment claim, as explained above, it has done so here.
118
KGH Compl. ¶¶ 81–86.
119
Cadira OB at 29. Here again, the Cadira Parties did not advance an argument they might
have made, namely, that the Operating Agreement displaces the unjust enrichment claim.
I suspect the Cadira Parties elected not to make the duplication argument because the unjust
enrichment claim rests on the predicate that the Court determines KGH lacks standing to
assert a breach of the Operating Agreement. If that was the reason the Cadira Parties
elected not to make the argument, the decision was well-founded. See Weik, Nitsche &
Dougherty LLC v. Pratcher, 2020 WL 5036096, at *4–5 (Del. Ch. Aug. 26, 2020) (holding
that an unjust enrichment claim may proceed as an alternative to a breach of contract claim
where questions remain regarding whether a valid contract exists or whether plaintiff may
pursue a claim on the contract).
120
Nemec, 991 A.2d at 1130.
33
E. Cadira’s Declaratory Judgment and Injunctive Relief Claims
As Cadira readily acknowledges, “the heart of [all of] its claims is that KGH
breached its contractual obligation to provide funding it agreed to provide.”121
As already mentioned, that funding obligation arises from the Subscription
Agreement, and requires the payment of $1.5 million “on an as needed basis for
working capital of the Company subject to the unanimous consent of the Members
that the amounts so requested by the Manager are reasonably necessary to the
operations of the Company” and where “such consent [was] not to be unreasonably
withheld.” 122 The Cadira Complaint seeks declarations that KGH violated its
funding obligations by failing to pay the $1.5 million, in breach of the Subscription
Agreement, and an order compelling KGH to pay the $1.5 million and enjoining
KGH from asserting its rights as an owner of Cadira given its failure to meet those
funding obligations.
KGH argues for dismissal on two grounds: (1) the Cadira Complaint fails to
plead satisfaction of certain conditions precedent necessary to invoke KGH’s
funding obligations, and (2) Count III impermissibly seeks injunctive relief to force
the payment of money. For reasons explained below, the Cadira Complaint meets
121
Cadira Parties’ Reply Br. in Supp. of Mot. to Dismiss KGH’s Compl. and Cadira’s
Answering Br. in Opp’n to KGH’s Mot. to Dismiss Cadira’s Compl. (D.I. 24) at 15 n.3.
122
Subscription Agreement § 1(b)(ii).
34
the minimal notice pleading standard with respect to its allegations that it has
satisfied conditions precedent, although barely. As for the jurisdictional argument,
the result is a mixed bag.
The Cadira Complaint Well Pleads the Satisfaction of Conditions
Precedent
In well-pleading a claim for breach of contract, a complaint need only contain
“a short and plain statement of the claim showing that the pleader is entitled to
relief.”123 “Such a statement must only give the defendant fair notice of a claim and
is to be liberally construed.”124 In an action to enforce a contract obligation, it is a
general rule that “the plaintiff must allege [the occurrence] . . . of conditions
precedent. Thus, where the benefit of a clause in a contract will inure to the plaintiff
only on the [occurrence] of certain [conditions], he must allege . . . that [those
conditions existed].” 125 In this regard, Chancery Rule 9(c) explains that, “[i]n the
123
Ct. Ch. R. 8(a)(1).
124
VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 611 (Del. 2003); see also
Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000) (recognizing Rule 8(a)’s notice pleading
requirement as “permissive”); Mooney v. Geriatric Servs. of Del., Inc., 2020 WL 7695643,
at *3 (Del. Ch. Dec. 28, 2020) (noting the “low threshold to meet” Rule 8(a)’s general
notice requirement); Hindlin v. Gottwald, 2020 WL 4206570, at *3 (Del. Ch. July 22, 2020)
(“This so-called ‘notice pleading’ standard sets a low bar.”).
125
Pobst v. Nanticoke Mem’l Hosp., 1991 WL 166073, at *5 (Del. Super. Ct. July 30, 1991)
(quoting 61A Am.Jur.2d., Pleading § 95) (alterations in original).
35
performance or occurrence of conditions precedent, it is sufficient to aver generally
that all conditions have been performed or have occurred.”126
While the Cadira Complaint lacks any direct statement regarding its
satisfaction of conditions precedent, it does seek judicial declarations to that effect.
In its bid to avoid dismissal, Cadira points first to paragraph 57 of the Cadira
Complaint, which provides, “[b]ased on the allegations set forth in this First
Amended Complaint, the Company is entitled to a judicial declaration that it has
completed all conditions precedent to funding by KGH.” 127 Cadira then points to
the Cadira Complaint’s prayer for relief, where Cadira seeks “a judicial declaration
that it has completed all conditions precedent to funding by KGH.”128 While these
statements do not expressly plead that Cadira has met all conditions precedent
necessary to invoke KGH’s funding obligations, at a minimum, they place KGH on
notice that Cadira will attempt to prove that all conditions precedent were satisfied.
Contrary to KGH’s assertions, reference to specific conditions precedent is
not necessary at the pleading stage.129 KGH places special emphasis on the Cadira
126
Ct. Ch. R. 9(c); see also Eisenmann Corp. v. Gen. Motors Corp., 2000 WL 140781,
at *18 (Del. Super. Ct. Jan. 28, 2000) (“Alleging general occurrence of the conditions
precedent, at the pleading stage, is sufficient.”).
127
Cadira Compl. ¶ 57.
128
Cadira Compl., Prayer for Relief.
129
See Eisenmann, 2000 WL 140781, at *18 (Del. Super. Ct. Jan. 28, 2000) (declining to
dismiss for failure to plead that specific conditions precedent were satisfied because
36
Complaint’s lack of “any statement that Cadira’s Members unanimously consented
to the sums requested by Gertz.”130 While that is true, the failure to identify the
consent condition specifically does not warrant dismissal. It is enough that the
pleading “allege complete performance generally.”131 The Cadira Complaint does
just that, albeit barely. 132
plaintiff “certainly alleges complete performance generally”); Cent. Mortg. Co. v. Morgan
Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 538 (Del. 2011) (holding that the existence
of a general statement that plaintiff met conditions precedent was sufficient to avoid
dismissal).
130
KGH’s Reply Br. in Supp. of Mot. to Dismiss the Cadira Compl. (“KGH RB”) (D.I. 26)
at 4.
131
Eisenmann, 2000 WL 140781, at *17–18; id. at *17 (“[I]t is axiomatic that the task of
narrowing and clarifying the basic issues and ascertaining the facts relative to the other
issues [including satisfaction of conditions precedent] is the role of the deposition and
discovery process.”).
132
Compl. ¶ 57; Compl., Prayer for Relief. To be sure, Cadira could have been clearer in
its pleading by alleging the facts relating to satisfaction of conditions precedent as facts
rather than as prayers for relief. The imprecise pleading invited the argument that the
pleading falls short. But, as stated, the pleading burden is to give notice and Cadira has
met that burden by notifying KGH of its contention that conditions precedent were
satisfied. For now, that is enough. In this regard, I note that the cases KGH cites to support
dismissal are inapposite. In each instance, either the court was not asked to engage on the
requirements for pleading conditions precedent or the complaint failed to make any
reference to conditions precedent, generally or specifically. See, e.g., AIU Ins. Co. v.
Philips Elecs. N. Am. Corp., 2018 WL 367849, at *10 (Del. Ch. Jan. 11, 2018)
(not addressing the notice pleading requirements); Pobst, 1991 WL 166073, at *5 (noting
the complaint made no mention of conditions precedent); L&L Broad. LLC v. Triad Broad.
Co., LLC, 2014 WL 1724769, at *3 (Del. Super. July 30, 1991) (same); RBC Cap. Mkts.,
LLC v. Educ. Loan Tr. IV, 2011 WL 6152282, at *2 (Del. Ch. Dec. 6, 2011) (same).
37
Cadira’s Remedy
KGH argues that Count III of the Cadira Complaint must be dismissed
because it seeks an injunction to compel the payment of money. 133 KGH points
specifically to paragraph 62 of Count III, which “seeks an order compelling [KGH]
to comply with its funding requirements as called for in the [Subscription
Agreement] and the Company’s [Operating Agreement].”134 It is a general rule of
equity that “[i]njunctive orders are not designed to be invoked when the payment of
money would accomplish the same result . . . .” 135 To the extent Count III sought
only an injunction in aid of an order compelling the payment of $1.5 million, I would
agree that this would be nothing more than a thinly veiled request for money
damages that falls beyond this court’s limited subject matter jurisdiction.136 But
there is more to Count III than meets KGH’s eye.
First, Count III “seeks an order enjoining KGH from (i) asserting any rights
of ownership in Cadira, or (ii) taking any action in furtherance of the purported role
133
KGH AB/OB at 37–38.
134
Cadira Compl. ¶ 62.
135
Wortz v. Patterson, 1981 WL 15139, at *1 (Del. Ch. June 5, 1981).
136
Anderson v. New Castle Cty. Sch. Dist., 1980 WL 267627, at *1 (Del. Ch. Feb. 14,
1980).
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as a member of Cadira.”137 Neither of these prayers for relief implicate money
damages. There is no doubt, then, that this component of Count III must survive.
Second, even if Count III seeks an impermissible injunction to collect money owed,
that does not mean Cadira is without a remedy in this court. While its jurisdiction is
limited, this court obtains subject matter jurisdiction when “(1) the complaint states
a claim for relief that is equitable in character, (2) the complaint requests an equitable
remedy when there is no adequate remedy at law or (3) Chancery is vested with
jurisdiction by statute.” 138 The court can also acquire subject matter jurisdiction over
claims under the “clean-up doctrine.”139 Because this court, at a minimum, has
jurisdiction over Cadira’s ownership-related claim for injunctive relief, and KGH’s
claims for rescission of various agreements with Cadira and Gertz, in an effort to
avoid piecemeal litigation, the court may also exercise jurisdiction over Cadira’s
137
Cadira Compl. ¶ 63.
138
Perlman v. Vox Media, Inc., 2019 WL 2647520, at *4 (Del. Ch. June 27, 2019), aff’d,
2021 WL 1042985 (Del. Mar. 18, 2021); see also 10 Del. C. § 342 (“The Court of Chancery
shall not have jurisdiction to determine any matter wherein sufficient remedy may be had
by common law, or statute, before any other court or jurisdiction of this State.”).
139
Smith, 2021 WL 1592463, at *14 (explaining that the clean-up doctrine extends this
court’s jurisdiction “to resolve purely legal causes of action that are before it as part of the
same controversy over which the Court originally had subject matter jurisdiction in order
to avoid piecemeal litigation”).
39
claim for the payment of $1.5 million in connection with Cadira’s prayer for specific
performance (also an equitable remedy).140
For the reasons explained, the Court will not issue the injunction Cadira seeks
for the explicit purpose of compelling KGH to meet its alleged funding obligations.
That is not a proper use of the injunctive remedy. The Court will, however, entertain
Cadira’s request for other injunctive relief and its request for a decree of specific
performance and will, alternatively, entertain its prayer for money damages under
the clean up doctrine. 141
140
While the end result if Cadira prevails on its prayer for specific performance would be
a declaration that KGH owes money, in this instance, that is not enough to prevent Cadira
from obtaining equitable relief. As noted, Cadira seeks a declaration that it has performed
conditions precedent and that Cadira, therefore, must not unreasonably withhold its consent
to make the additional $1.5 million investment. The follow-on decree to those declarations,
should Cadira prevail, would be a decree that KGH must make the investment as promised.
Given that the Court has a basis to exercise clean-up jurisdiction in any event, it is
appropriate for the Court to take up the request for specific performance even if it might
otherwise cross over the line into a legal remedy. Cf. Brinckerhoff v. Enbridge Energy
Co., Inc., 159 A.3d 242, 262 (Del. 2017), as revised (Mar. 28, 2017) (noting “the Court of
Chancery has broad discretion to craft a remedy to address the wrong”); IMO A.N.,
2020 WL 7040079, at *15 (Del. Ch. Nov. 30, 2020) (same). In this regard, I note that KGH
does not contest the Court’s ability to adjudicate all claims presented in this consolidated
case. KGH RB at 8 (“KGH’s argument is not that the claim should be heard in another
forum, but that injunctive relief is simply unavailable because an adequate legal remedy
exists.”). For reasons stated, I disagree.
141
I note that, while not raised by the Cadira Parties, this Court also likely has subject
matter jurisdiction over Cadira’s claims under Section 18-111 of the LLC Act. Reed v.
Brady, 2002 WL 1402238, at *3 (Del. Ch. June 21, 2002), aff’d, 818 A.2d 150 (Del. 2003)
(“[Q]uestions of subject matter jurisdiction may be raised sua sponte by the Court.”).
Under Section 18-111, the Court of Chancery may adjudicate “[a]ny action to interpret,
apply or enforce . . . the duties, obligations or liabilities among members or managers and
of members or managers to the limited liability company.” 6 Del. C. § 18-111. Because
Cadira’s funding claim seeks to enforce the contractual duties and obligations of KGH, as
40
III. CONCLUSION
For the reasons explained, the Cadira Parties’ Motion to Dismiss all counts in
the KGH Complaint is DENIED. KGH’s Motion to Dismiss all counts in the Cadira
Complaint is also DENIED.
IT IS SO ORDERED.
a purported member of the LLC, the jurisdictional allowance in Section 18-111 is
implicated and serves as another basis for this Court to exercise subject matter jurisdiction
over the claim.
41