Nicholas Goureau v. Marcus Lemonis

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
NICHOLAS GOUREAU and )
STEPHANIE MENKIN, individually and )
derivatively on behalf of ML FASHION, )
LLC, a Delaware limited liability )
company, )
)
Plaintiffs, )
)
v. ) C.A. No. 2020-0486-MTZ
)
MARCUS LEMONIS, an individual, ML )
RETAIL, LLC, a Delaware limited )
liability company, MARCUS LEMONIS )
LLC, a Delaware limited liability )
company, ROBERTA RAFFEL aka Bobbi )
Lemonis, an individual, and MLG )
RETAIL, LLC, a Delaware limited )
liability company, )
)
Defendants, )
)
and )
)
ML Fashion, LLC, a Delaware limited )
liability company, )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: December 4, 2020
Date Decided: March 30, 2021
Sean J. Bellew, BELLEW LLP, Wilmington, Delaware; Gerard P. Fox and Lauren
M. Greene, GERARD FOX LAW P.C., Los Angeles, California; Attorneys for
Plaintiffs Nicholas Goureau and Stephanie Menkin.
Brian E. Farnan and Michael J. Farnan, FARNAN LLP, Wilmington, Delaware;
Michael D. Wexler, SEYFARTH SHAW LLP, Chicago, Illinois; Jesse M. Coleman,
SEYFARTH SHAW LLP, Houston, Texas; Attorneys for Defendants Marcus
Lemonis, ML Retail, LLC, Marcus Lemonis, LLC, Roberta Raffel and MLG Retail,
LLC.
ZURN, Vice Chancellor.
The Profit is a business-themed reality television series. It stars defendant
Marcus Lemonis, a well-known entrepreneur and CEO. In each episode, Lemonis
offers his own money, as well as his experience as an entrepreneur and executive, in
exchange for an equity stake in the featured struggling business. Plaintiffs and their
business, a women’s clothing store, were featured on a 2014 episode. During
filming, Lemonis agreed to invest in plaintiffs’ business and substantially renovated
one of plaintiffs’ retail stores.
Before the ink dried on Lemonis’ investment, he allegedly began a scheme to
take over plaintiffs’ business and use it for his own benefit. Unbeknownst to
plaintiffs, during the show’s production, Lemonis saddled their company with
millions of dollars in debt owed to Lemonis and his entities. When plaintiffs
protested, Lemonis told them they could only back out of the deal if they paid him
back. Unable to do so, plaintiffs agreed to Lemonis’ terms. Thereafter, Lemonis
continued to cause plaintiffs’ company to borrow money from Lemonis’ other
entities, threatening to foreclose if they defaulted. Meanwhile, he drove down
profits, forcing plaintiffs to incur even more debt just to stay afloat.
According to plaintiffs, their extensive debt and lack of foreseeable profit left
them with no choice but to acquiesce when Lemonis proposed they expand their
business relationship. The parties formed a new entity for their expanded venture
and began investing in other fashion brands that appeared on The Profit. As alleged,
1
Lemonis continued his pattern, saddling the new entity with debt owed to Lemonis’
other entities. With plaintiffs under his thumb, Lemonis leveraged their businesses
for his personal gain, enriching himself and boosting his personal brand at plaintiffs’
expense. Eventually, Lemonis removed plaintiffs from their salaried employment
positions and looted their businesses.
To stop Lemonis and recover their losses, plaintiffs filed two complaints on
the same day: one in the United States District Court for the Southern District of
New York, asserting derivative claims on behalf of plaintiffs’ original entity, and
one in this Court, asserting derivative claims on behalf of the parties’ new holding
company. Both complaints describe Lemonis’ alleged scheme of overloading
plaintiffs with debt, and then using that leverage to mismanage their businesses for
his benefit. They both describe allegations across the same time period, and point
to many of the same underlying instances of misconduct.
Defendants moved to dismiss on several grounds, including that plaintiffs’
overlapping complaints violate the rule against claim splitting. They do. To remedy
that violation, this action is stayed pending resolution of the proceeding in federal
court. Defendants’ other grounds for dismissal, as well as the parties’ other disputes,
are held in abeyance while this matter is stayed.
2
I. BACKGROUND
On this motion to dismiss, I draw the facts from the first amended complaint
in this action, as well as the documents integral to it.1 Because the motion to dismiss
presents the question of whether plaintiffs engaged in improper claim splitting, I
present their allegations with perhaps some unnecessary detail for the purpose of
parsing their claims.
A. Plaintiffs Appear On The Profit.
In 2008, plaintiffs Nicholas Goureau and Stephanie Menkin (together,
“Plaintiffs”), along with their mother, Neomi Goureau,2 founded Courage.B, a high-
end women’s clothing store. Plaintiffs owned Courage.B through a New York
entity, Gooberry Corporation (“Gooberry”). Over the next six years, the family
business expanded to seven retail stores throughout the United States.
Plaintiffs first learned of Lemonis by watching an episode of The Profit on
CNBC. The show portrays Lemonis as a savior for struggling small businesses who
offers his personal investment and expertise in exchange for a share of the featured
company. According to CNBC’s website, “In each one-hour episode of The Profit,
Lemonis makes an offer that’s impossible to refuse; his cash for a piece of the
1
See Docket Item (“D.I.”) 17 [hereinafter “FAC”].
2
This opinion refers to Neomi Goureau by her first name to distinguish her from Plaintiff
Nicholas Goureau. I intend no familiarity or disrespect.
3
business and a percentage of the profits.”3 During commercial breaks, Lemonis
invites struggling business owners to apply to appear on the show through a casting
website. That website states:
[Lemonis] has been called America’s number one business turnaround
artist. He will do whatever it takes to fix YOUR failing business. When
Marcus Lemonis isn’t running his multi-billion[-]dollar company,
Camping World, he is on the hunt for struggling businesses that are
desperate for cash and ripe for a deal. In the past 10 years, he’s
successfully turned around over 100 companies.4
Generally, featured businesses are family-owned, and their owners are less
sophisticated than Lemonis.
Courage.B was no exception. Goureau applied to appear on The Profit and in
the spring of 2014, representatives from the show’s production company, Machete
Corporation (“Machete”), reached out to Goureau for an interview. During that
interview, a Machete producer explained to Plaintiffs that the successes portrayed in
the show are real; she also explained that if Lemonis decided to invest, they would
strike a deal during filming, and that deal would be real. Plaintiffs were selected for
the show and filmed their episode in June 2014 (the “Episode”).
On the Episode, Lemonis offered Plaintiffs $800,000 in exchange for full
control of Courage.B and 50% of Gooberry’s stock, with a warning: “before you
3
FAC ¶ 48 (italics added).
4
Id. ¶ 47.
4
answer, just know that if you don’t do a deal with me, you may not make it.”5
Plaintiffs and Lemonis agreed to a deal wherein Lemonis would invest $800,000 in
exchange for a 30% stake in Gooberry.6 They also agreed on how that cash would
be spent: $200,000 to renovate the Courage.B stores; $300,000 for new inventory;
$150,000 as new working capital; $50,000 to build a new e-commerce site; $40,000
to eliminate high interest debt; and the final $60,000 for a yet-undetermined use.
Lemonis’ investment was not formalized until several months after the Episode’s
filming ended.
Plaintiffs’ relationship with their new business partner was fraught from the
outset. As part of filming the Episode, Lemonis and his team renovated Gooberry’s
Greenwich, Connecticut store. Lemonis led Plaintiffs to believe that the work on
the Greenwich store would be covered by the $200,000 of his investment set aside
for renovations. When Plaintiffs asked about the renovations’ costs, Lemonis
demurred with “I got it,” and stated that Plaintiffs “didn’t have to deal with it” and
should “trust the process.”7 Despite the $200,000 renovation budget, Lemonis
caused Gooberry to incur over $2 million in debt renovating Courage.B stores.
5
Id. ¶ 59.
6
For reasons Plaintiffs do not explain, Lemonis ultimately purchased 32% of Gooberry’s
shares.
7
FAC ¶ 62.
5
Plaintiffs learned of these excessive costs before their deal was finalized.
When they confronted Lemonis, he berated them and told them that if they wanted
to back out of the deal, they would need to repay the $2 million renovation debt.
“Feeling entrapped and like they had no other choice,” Plaintiffs ultimately went
through with the deal.8 Lemonis’ investment was finalized on November 18.
Lemonis invested in Gooberry through his investment vehicle, ML Retail,
LLC (“Investment Vehicle”). Gooberry, Plaintiffs, Neomi, and Investment Vehicle
executed a shareholder agreement (the “Gooberry Shareholder Agreement”), which
gave Investment Vehicle, and by extension Lemonis, extensive control over
Gooberry’s operations. In particular, Investment Vehicle’s affirmative vote was
required to: “(1) enter into any contract outside of the normal course of business,
(2) make any distributions to shareholders, (3) make any expenditure over $50,000,
and (4) hire or replace any member of Gooberry’s executive team.”9 The Gooberry
Shareholder Agreement also gave Investment Vehicle sole control over Gooberry’s
bank account and its revolving line of credit with Lemonis’ other entities, which was
Gooberry’s main source of cash.
8
Id. ¶ 68.
9
Id. ¶ 70. Plaintiffs did not attach the Gooberry Shareholder Agreement to their complaint,
so I cannot cite the particular provisions involved.
6
Plaintiffs allege that they had no choice but to accept Lemonis’ structure.
According to Plaintiffs, “Lemonis made clear that if Plaintiffs objected to the
Gooberry documents that he would force them to repay the money that he had put
into the renovations—which would wipe them out—and take their business from
them.”10
Going forward, Lemonis used his considerable leverage and governance
authority to keep Plaintiffs indebted to him. In 2015, Lemonis caused Gooberry to
purchase a retail concept featured on The Profit called Blues Jean Bar. He rebranded
Blues Jean Bar and two Courage.B stores as Denim & Soul, incurring more debt for
Gooberry along the way. Once the rebrand was complete, Lemonis continued to
drain Gooberry’s resources and increase its debt by ordering further renovations and
inventory purchases. According to Plaintiffs, Lemonis’ changes only made their
business less profitable. Faced with growing debt and declining profits, Gooberry
became increasingly reliant on its line of credit with Lemonis’ entities to meet its
basic operating expenses. Lemonis threatened to foreclose on Gooberry’s mounting
debt to “keep Plaintiffs in line” and control the business.11
10
Id. ¶ 72.
11
Id. ¶ 81.
7
B. The Parties Expand Their Relationship, And Lemonis
Continues To Exploit Plaintiffs.
Using his superior leverage, Lemonis encouraged Plaintiffs to expand their
investments with him, telling them that doing so was the only way they would be
able to turn a profit. Plaintiffs agreed to do so and formed a new entity with Lemonis
called ML Fashion, LLC (“Holdings”) for their continuing ventures. Goureau and
Menkin each owned 33.33% of Holdings, and Lemonis, through Investment Vehicle,
owned the remaining 33.34%.12
Holdings was formed on March 29, 2016. Lemonis became its chairman and
CEO, and Menkin became its president. Pursuant to Holdings’ limited liability
company operating agreement (the “Holdings LLC Agreement”),13 Investment
Vehicle is the company’s sole manager, and has the “full, exclusive and unilateral
power and authority to make all decisions affecting the business and affairs of
[Holdings].”14 Contemporaneously with the Holdings LLC Agreement, Holdings
entered into a credit agreement with Investment Vehicle, under which it could
borrow up to $30,000,000 at a 6% interest rate,15 as well as a security agreement that
12
While Neomi appears to have owned a stake in Gooberry, she did not own a stake in
Holdings. Plaintiffs allege that “Lemonis removed Neomi’s equity and placed it with
Menkin. Lemonis told Plaintiffs that their mother’s equity laid with them, her children.”
Id. ¶ 86.
13
D.I. 22 [hereinafter “Holdings LLC Agr.”].
14
FAC ¶ 98 (quoting Holdings LLC Agr. § 6.1(a)).
15
D.I. 23.
8
granted Investment Vehicle a security interest in essentially all of Holdings’ assets.16
Investment Vehicle, in turn, was funded by a similar credit agreement with Marcus
Lemonis, LLC (“Funding Vehicle”), another Lemonis-owned entity. Plaintiffs
allege that both Investment Vehicle and Funding Vehicle are Lemonis’ alter egos.
Holdings’ documents were prepared by Lemonis’ attorneys, though Lemonis told
Plaintiffs that the attorneys represented all three of them.
To secure their participation in Holdings, Lemonis told Plaintiffs that the three
would split Holdings’ profits evenly once Lemonis’ debts were repaid. This turned
out to be an empty promise. Lemonis drowned Holdings in debt to his entities, such
that it never turned a profit and Plaintiffs’ equity was worthless. And because at
least Neomi and Menkin drew salaries from Gooberry and Holdings, Plaintiffs were
forced to continue working for Lemonis to be able to support their families.
Around the time the parties formed Holdings, Lemonis met defendant Roberta
Raffel at a trade show in New York City. Raffel owned a boutique called Runway.
After Lemonis became romantically interested in Raffel, he decided Gooberry
should purchase her store. Gooberry purchased the store on March 23, days before
Holdings was formed. By May, Gooberry and Holdings had paid to completely
renovate Raffel’s store and add new inventory, with funds borrowed from Lemonis’
entities. After revamping Runway, Lemonis and Raffel purchased unnecessary
16
D.I. 24.
9
inventory, driving Holdings and Gooberry into more debt. The pair married in
February 2017.
After the parties formed Holdings, Lemonis transferred all of Gooberry’s
assets—except Runway—into a new entity called MLG Retail, LLC (“Retail Sub”).
Holdings owns Retail Sub and is its manager. In October 2016, Lemonis made
Retail Sub dependent on Holdings via the same credit structure that made Holdings
dependent on Investment Vehicle. Under a credit agreement, Retail Sub could
borrow up to $10 million from Holdings at a 7.5% interest rate. Because Holdings
funded these loans by borrowing from Investment Vehicle, which in turn borrowed
from Funding Vehicle, Retail Sub was effectively funded by borrowing from
Lemonis. Plaintiffs allege that this series of credit agreements allowed Lemonis to
continue his predatory lending practices and allowed him to foreclose on the
operating entities at any time.17
17
Lemonis also contributed to the cash crunch by using funds from Holdings and Retail
Sub to pay off his personal credit card. To make up for these deficiencies, those entities
would need to borrow more money from Lemonis to pay vendors.
10
The chart below summarizes the ownership and debt structures of the relevant
entities after the parties formed Retail Sub. Solid lines denote ownership, and dotted
lines indicate the flow of credit.
Plaintiffs were employed at these various entities. Menkin was Holdings’
president and collected a salary in that role. Goureau had a position at Holdings
until Lemonis moved him to Funding Vehicle; Plaintiffs do not specify what his
roles were, when he started, or whether he was paid. Neomi had an undefined role
at Holdings, earning a “management fee.”18
18
FAC ¶ 162.
11
Lemonis used Holdings to house his many other ventures, incurring
substantial debt along the way. In fall 2017, Lemonis and Raffel opened a store
branded MARCUS. Eventually, Lemonis rebranded several stores owned by
Holdings, including Courage.B, Runway, and Denim & Soul locations, as MARCUS
stores.19 Predictably, Holdings financed these changes by borrowing from Lemonis
and his entities.20
Lemonis also used Holdings to invest in many of the floundering businesses
featured on The Profit. In doing so, Lemonis caused Holdings to incur more debt by
purchasing these businesses’ inventory and hiring their employees. These
businesses included Flex Watches, from a September 2016 episode of The Profit;
Susan Monaco, from a November 2016 episode; Swim by Chuck Handy, from a
June 2017 episode; Ellison Eyewear, from a June 2018 episode; and Ben’s Garden,
from a January 2019 episode. These ventures all resulted in substantial losses to
Holdings. The mounting losses forced Holdings to take on more loans from Lemonis
19
While Plaintiffs describe Courage.B, Denim & Soul, and Runway as “[Holdings’] other
retail locations,” id. ¶ 159, it appears that, as of fall 2017, Courage.B and Denim & Soul
were owned by Retail Sub. Plaintiffs also allege that Gooberry owned the Runway brand,
and retained it even after the asset transfer from Gooberry to Retail Sub.
Despite the parties’ apparent joint venture, Lemonis applied for the trademark for the
20
MARCUS name under a separate entity that does not involve Plaintiffs.
12
and his entities. Plaintiffs allege Lemonis intentionally kept these losses high so that
he could secure a personal tax write-off.
Lemonis also used Investment Vehicle to buy stakes in businesses from The
Profit and presented those stakes as sham contributions to Holdings. As part of a
deal negotiated on the show, Gooberry purchased the assets of a shoe company
called Inkkas. Inkkas’ assets were transferred to an entity called Inkkas, LLC.
Investment Vehicle purchased these assets from Inkkas, LLC on June 6, 2017. Later
that same day, Investment Vehicle transferred those assets to Holdings as a
membership contribution. In a third transaction that day, Holdings then transferred
those assets into a Lemonis-owned entity called ML Footwear LLC. Effectively,
Lemonis took assets from Gooberry, which were already part of the parties’ joint
venture; transferred them to Holdings as a membership contribution from Investment
Vehicle; and then transferred them back out to one of his own entities. Lemonis also
used promissory notes to make sham contributions. Because the Holdings LLC
Agreement prioritized distributions to those members who had made “Unreturned
Capital Contributions,” these contributions ensured that Investment Vehicle was
first in line for distributions.21
Ultimately, Lemonis’ many projects saddled the parties’ jointly-owned
entities with substantial debt owed to Lemonis and his entities. As of February 2020,
21
Id. ¶ 131 (quoting Holdings LLC Agr. § 5.1(b)(i)).
13
Holdings owed nearly $12 million to Investment Vehicle, despite owning assets
worth only $5 million. Plaintiffs allege that this substantial debt, and Lemonis’
threats to foreclose on it, kept them under his control.
C. Lemonis Removes Plaintiffs And Continues His Abuses.
Lemonis wielded his considerable leverage against Plaintiffs personally.
Lemonis repeatedly threatened to remove Neomi from the business. Allegedly to
create a “rift” between Plaintiffs, Lemonis prohibited Goureau from entering stores
owned by Holdings.22 Goureau did not resist, fearing that Lemonis would fire
Menkin and Neomi, both of whom relied on salaries from their roles at Holdings and
Gooberry to make a living.
In May 2017, Lemonis moved Goureau’s employment from Funding Vehicle
to Camping World, where Lemonis was the CEO. Lemonis then fired Goureau in
December 2018. Lemonis fired Neomi from her role at Holdings in September 2019.
Menkin was in discussions with Lemonis about how to separate from their joint
venture. Once the COVID-19 pandemic hit, those talks stopped and Lemonis
22
Id. ¶ 167.
14
“abruptly cut off Menkin” from her role as Holdings president, removing her
electronic access and ceasing her bi-weekly paychecks.23
Lemonis also put pressure on Goureau by manipulating the company credit
card. Retail Sub used an American Express card (the “AMEX Card”) to pay its
expenses. Retail Sub paid against the AMEX Card’s substantial balance via
automatic $18,696 monthly withdrawals from Retail Sub’s bank account. Goureau
was personally liable for the debts on the AMEX Card if Retail Sub did not pay.
Aware of this fact, Lemonis would threaten to stop the automatic payments as part
of his plan to “keep [Plaintiffs] in line.”24
With Plaintiffs sidelined, Lemonis set out to “loot” Holdings.25 Starting in
April 2020, he directed his employees to remove inventory, fixtures, furniture, and
equipment from Holdings’ brands’ various stores across the country. He held “fire
sales” of Holdings inventory, including private liquidation events at Holdings’
Deerfield, Illinois store.26 And he misappropriated funds Holdings received under
the federal Paycheck Protection Program in May 2020. Meanwhile, Lemonis
depleted Retail Sub’s bank account so that it could not make the AMEX Card
23
Id. ¶ 169.
24
Id. ¶ 181.
25
Id. ¶ 172.
26
Id. ¶ 187. Plaintiffs also allege that these gatherings violated local stay-at-home orders
then in effect.
15
payments, again to put pressure on Goureau. After Plaintiffs filed suit, Defendants
reversed roughly $94,000 in payments on the AMEX Card. American Express has
threatened collections proceedings against Goureau personally.
D. Plaintiffs File Lawsuits In This Court And Federal Court.
On June 18, 2020, Plaintiffs filed their initial complaint in this action against
Lemonis, Investment Vehicle, Funding Vehicle, Retail Sub, and Raffel (together,
“Defendants”).27 Holdings is the nominal defendant for the derivative claims. The
complaint was accompanied by a motion to expedite28 and a proposed status quo
order.29 On July 14, Defendants removed this action to the United States District
Court for the District of Delaware.30 On August 21, the case was remanded due to
lack of subject matter jurisdiction over Plaintiffs’ claims.31 The remand order left
pending a motion to dismiss Defendants had filed in the District of Delaware.32
Upon return to this Court, Plaintiffs filed their first amended complaint (the
“Delaware Complaint”) on August 25.33
27
D.I. 1.
28
D.I. 2.
29
D.I. 3.
30
D.I. 15. While in federal court, this case was identified by the case number 1:20-cv-
00940-MN. The docket sheet and some relevant entries for the removal action were filed
in this action. See D.I. 39.
31
See D.I. 39, Ex. F [hereinafter “Remand Order”].
32
See id. at 4.
33
See generally FAC.
16
The Delaware Complaint sets forth fifteen counts:
• Count I alleges Lemonis, Investment Vehicle, and Funding Vehicle
fraudulently induced Plaintiffs to enter into the Holdings LLC Agreement.
Count II, against the same three Defendants, contains similar claims of
fraud, which Plaintiffs allege caused them to continue their business
venture with Lemonis.
• Counts III and IV allege breaches of fiduciary duty. Count III is a
derivative claim (on behalf of Holdings) against Lemonis. Count IV is a
direct claim (by Plaintiffs) against Lemonis, Investment Vehicle, and
Funding Vehicle; Plaintiffs allege these entities formed a control group.
The underlying breaches are substantially similar. Count V alleges Raffel
aided and abetted these breaches.
• Counts VI, VII, and VIII relate to the Holdings LLC Agreement. Count
VI alleges Lemonis, Investment Vehicle, and Funding Vehicle breached
the implied covenant of good faith and fair dealing in that agreement.
Count VII alleges the same defendants breached that agreement. Because
Count I seeks to rescind the LLC Agreement, Count VIII, against the same
defendants, alleges unjust enrichment as an alternative theory.
17
• Count IX alleges Lemonis, Investment Vehicle, and Funding Vehicle
grossly mismanaged Holdings and its assets. Count X alleges waste and
misappropriation of Holdings’ assets by the same Defendants.
• Count XI, against all Defendants, alleges conversion.
• Counts XII, XIII, and XIV focus on remedies for the above-described
misconduct. Count XII seeks appointment of a receiver. Count XIII seeks
injunctive relief. Count XIV seeks to dissolve Holdings.
• Count XV alleges that by failing to pay Menkin her salary as Holdings’
president, Holdings and Retail Sub breached a contract between the
parties.
After they filed the Delaware Complaint, Plaintiffs renewed their request for
expedited proceedings and a status quo order.34 On September 1, the Court held oral
argument and denied the motion to expedite.35 After the parties conferred, the Court
entered a status quo order, limiting, among other things, the parties’ use of the
AMEX Card for purchases outside the ordinary course of business (the “Status Quo
Order”).36
34
D.I. 30.
35
D.I. 47.
36
D.I. 55.
18
Defendants initially attacked the Delaware Complaint as procedurally
deficient, moving to strike it on August 28.37 On September 2, Defendants withdrew
their motion to strike38 and, instead, moved to dismiss the Delaware Complaint on
September 16 (the “Motion”).39 The parties briefed the Motion and the Court held
oral argument on December 4.40
On the same day Plaintiffs initiated this action, they initiated overlapping
litigation regarding Plaintiffs’ joint venture with Lemonis in the United States
District Court for the Southern District of New York (the “New York Action”).41
Plaintiffs amended their complaint in the New York Action on August 17, eight days
before they filed the Delaware Complaint (the “New York Complaint”).42
The New York Complaint asserts thirteen claims against Lemonis, Investment
Vehicle, ML LLC, and Machete.43 It also asserts derivative claims on behalf of
37
D.I. 36.
38
D.I. 48.
39
D.I. 57.
40
D.I. 74; see also D.I. 79.
41
See generally Complaint, Goureau v. Lemonis, 1:20-cv-04691-MKV (S.D.N.Y.
June 6, 2020), ECF No. 1. Other citations to that docket are styled “New York D.I. —”.
In addition to this action and the New York Action, Lemonis, Investment Vehicle,
and others filed suit against Plaintiffs and others in Illinois federal court on August 31. See
D.I. 64 at 18:23–19:5.
42
See New York D.I. 24 [hereinafter “New York FAC”].
43
See id. at 1.
19
Gooberry, which is a New York corporation.44 As described in more detail below,
the facts alleged in the New York Complaint overlap substantially with the claims
in this action. The theories of recovery also overlap. Like the Delaware Complaint,
the New York Complaint includes claims for fraudulent inducement,45 common law
fraud,46 breaches of fiduciary duty,47 breaches of the implied covenant,48 unjust
enrichment,49 misappropriation of assets,50 mismanagement and waste,51 and
conversion.52 The New York Complaint also seeks similar relief: appointment of a
receiver,53 injunctive relief,54 statutory dissolution,55 and money damages.56 Unlike
the Delaware Complaint, the New York Complaint alleges an additional claim that
44
See id.
45
See id. ¶¶ 133–42.
46
See id. ¶¶ 143–53.
47
See id. ¶¶ 154–57.
48
See id. ¶¶ 158–62.
49
See id. ¶¶ 163–72.
50
See id. ¶¶ 173–76.
51
See id. ¶¶ 177–83.
52
See id. ¶¶ 184–89.
53
See id. ¶¶ 226–33.
54
See id. ¶¶ 234–39.
55
See id. ¶¶ 240–47.
56
E.g., id. at 59.
20
Lemonis, Investment Vehicle, Funding Vehicle, and Machete violated the
Racketeering Influenced and Corrupt Organizations Act (“RICO”).57
On September 16, the defendants in the New York Action informed the
District Court of their intention to file a motion to dismiss in that action, raising,
among other issues, the argument that Plaintiffs’ two complaints violate the rule
against claim splitting.58 The parties began briefing that motion in October,59 with
the last brief filed on December 18.60 As of today, the motion to dismiss in the New
York Action remains pending. The last filing on the New York Action’s docket is a
December 18 request for oral argument.61
II. ANALYSIS
Defendants’ Motion argues, among other things, that in light of the New York
Action, Plaintiffs violated the rule against claim splitting. I agree, and therefore stay
this action pending resolution of the New York Action. Because the claim splitting
issue is dispositive, I do not reach Defendants’ other arguments.62
57
See id. ¶¶ 190–216; see also 18 U.S.C. §§ 1961–1968.
58
See New York D.I. 33.
59
See New York D.I. 44; New York D.I. 45.
60
See New York D.I. 55.
61
See New York D.I. 56.
62
Defendants also argue that the Delaware Complaint must be dismissed under Rule
12(b)(3) because this Court is not the proper venue to hear Plaintiffs’ claims. See D.I. 57
at 8–10. Defendants’ argument is based on forum selection clauses in several of the credit
and security agreements. See id. Defendants have made a similar argument in the New
21
The crucial question the Motion presents is whether Plaintiffs violated the rule
against claim splitting. As explained in Maldonado v. Flynn,
The rule against claim splitting is an aspect of the doctrine of res
judicata and is based on the belief that it is fairer to require a plaintiff
to present in one action all of his theories of recovery relating to a
transaction, and all of the evidence relating to those theories, than to
permit him to prosecute overlapping or repetitive actions in different
courts or at different times.63
Importantly, the rule “eliminates the contemporaneous litigation of the same factual
or legal issues in different courts.”64 “Two basic principles animate the rule. First,
the rule is founded upon the principle that no person should be unnecessarily
harassed with a multiplicity of suits. Second, the rule is designed to prevent a litigant
from getting two bites at the apple.”65 In short, the rule against claim splitting is
designed to “prevent burdening the same defendant with duplicative proceedings in
York Action. See New York D.I. 33 at 2. While venue is typically a threshold question,
addressing this argument would require me to consider the merits of Plaintiffs’ claims and
construe the relevant agreements. See Ashall Homes Ltd. v. ROK Entm’t Gp. Inc., 992 A.2d
1239, 1241 (Del. Ch. 2010) (describing venue as a “threshold question”). Because I find
that Plaintiffs’ claims have been improperly split, I leave the venue questions for the
District Court in the New York Action.
63
417 A.2d 378, 382 (Del. Ch. 1980) (italics added).
64
Balin v. Amerimar Realty Co., 1995 WL 170421, at *4 (Del. Ch. Apr. 10, 1995).
65
J.L. v. Barnes, 33 A.3d 902, 918 (Del. Super. Ct. 2011) (alterations and internal quotation
marks omitted) (collecting sources).
22
different courts brought by the same plaintiff based on different causes of action
arising out of a common underlying nucleus of facts.”66
Delaware takes a modern “transactional” view of claim splitting,67 barring
overlapping complaints that arise from the “same transaction or from a ‘common
nucleus of operative facts.’”68 In LaPoint v. AmerisourceBergen Corp., the
Delaware Supreme Court applied the analysis described in the Restatement (Second)
of Judgments:
Determining whether two claims arise from the same transaction
requires pragmatic consideration, with the fact finder “giving weight to
such considerations as whether the facts are related in time, space,
origin, or motivation, whether they form a convenient trial unit, and
whether their treatment as a unit conforms to the parties’ expectations
or business understanding or usage.” Two claims “derive[d] from a
common nucleus of operative fact[s]” arise from the same transaction.69
66
Winner Acceptance Corp. v. Return on Cap. Corp., 2008 WL 5352063, at *18 (Del. Ch.
Dec. 23, 2008).
67
See Maldonado, 417 A.2d at 381; see also Villare v. Beebe Med. Ctr., Inc., 2013 WL
2296312, at *3 (Del. Super. Ct. May 21, 2013) (“In making this determination, Delaware
courts apply the transactional approach to define a claim.”); DeRamus v. Redman, 1986
WL 13089, at *5 (Del. Super. Ct. Nov. 14, 1986) (applying the “‘transactional’ approach
[to res judicata] described by Restatement (Second) Judgments § 24”).
68
Villare, at *3 (quoting DeRamus, 1986 WL 13089, at *5).
69
970 A.2d 185, 193 (Del. 2009) (quoting Restatement (Second) Judgments § 24(2) (1982),
and then quoting Maldonado, 417 A.2d at 383); see also DeRamus, 1986 WL 13089, at *5
(“Among the factors relevant to a determination [are] whether the facts are so woven
together as to constitute a single claim are their relatedness in time, space, origin, or
motivation, and whether, taken together, they form a convenient unit for trial purposes.
Though no single factor is determinative, the relevance of trial convenience makes it
appropriate to ask how far the witnesses or proofs in the second action would tend to
overlap the witnesses or proofs relevant to the first.” (quoting Restatement (Second)
Judgments § 24 cmt. (b))).
23
In some circumstances, duplicitous litigation over a “series” of transactions may also
be barred.70 Whether a factual grouping constitutes a series of transactions is also a
pragmatic question and turns on the same factors.71 Thus, the rule against claim
splitting is not limited to complaints that are word-for-word identical or present
identical theories. A second complaint may include additional defendants or assert
additional theories and still be barred.72
This action and the New York Action arise from a connected series of
transactions and the same common nucleus of operative facts. Plaintiffs argue the
New York Action focuses on the events surrounding The Profit and the Episode,
70
See Villare, 2013 WL 2296312, at *3 (“Simply put, if the action arises from the same
transaction or series of connected transactions, it will be barred as a matter of law.”);
DeRamus, 1986 WL 13089, at *5 (“When a valid and final judgment rendered in an action
extinguishes the plaintiff’s claim pursuant to the rules of merger or bar, the claim
extinguished includes all rights of the plaintiff to remedies against the defendant with
respect to all or any part of the transaction, or series of connected transactions, out of which
the action arose.” (alterations omitted) (quoting Restatement (Second) Judgments § 24));
see also Transamerica Corp. v. Reliance Ins. Co. of Ill., 1995 WL 1312656, at *5 (Del.
Super. Ct. Aug. 30, 1995) (“Although there may not be an absolute identity of parties and
issues in both actions, lack of absolute identity of parties and issues is not a prerequisite to
granting a motion to stay.”) (collecting sources).
71
See DeRamus, 1986 WL 13089, at *5.
72
See J.L., 33 A.3d at 917–21 (staying action on claim splitting grounds, despite the fact
that fact that plaintiffs added additional defendants); Restatement (Second) of Judgments
§ 24 cmt. (a) (“The present trend is to see claim in factual terms and to make it coterminous
with the transaction regardless of the number of substantive theories, or variant forms of
relief flowing from those theories, that may be available to the plaintiff; regardless of the
number of primary rights that may have been invaded; and regardless of the variations in
the evidence needed to support the theories or rights. The transaction is the basis of the
litigative unit or entity which may not be split.”).
24
while the Delaware action focuses on the parties’ subsequent business relationship.
But the line Plaintiffs seek to draw is blurred by the two actions’ extensively
overlapping allegations, which span from the Plaintiffs’ initial application for The
Profit in 2014 through Lemonis’ looting of their businesses in 2020.
Both complaints begin by describing Plaintiffs’ application to appear on The
Profit in 2014,73 including their initial conversations with Machete producers.74
They then cover Plaintiffs’ Episode,75 Lemonis’ excessive spending on renovations
for the Gooberry store,76 and the substantial debt those renovations incurred.77
Against the backdrop of Gooberry’s problems, both complaints then describe the
formation of Holdings.78 The Delaware Complaint alleges Plaintiffs agreed to form
Holdings because of Gooberry’s debt incurred after accepting Lemonis’ offer on The
Profit.79 Lemonis allegedly presented Holdings not as a “separate business
73
Compare New York FAC ¶¶ 45–46, with FAC ¶¶ 51–52.
74
Compare New York FAC ¶¶ 47, 51, with FAC ¶¶ 53–54.
75
Compare New York FAC ¶¶ 52–56, 62, with FAC ¶¶ 55–60, 65.
76
Compare New York FAC ¶¶ 57–60, with FAC ¶¶ 61–63.
77
Compare New York FAC ¶¶ 61, 65, with FAC ¶¶ 64, 68.
78
Compare New York FAC ¶¶ 89–92, with FAC ¶¶ 82–86, 91.
79
See FAC ¶ 9 (“By March 2016, Lemonis had destroyed Gooberry’s profit margins and
saddled it with debt owed to himself and his entities that neither Gooberry nor the Plaintiffs
could ever repay. Lemonis represented to Plaintiffs that the only way they could make
money from their business venture now was to join him in investing in other businesses.”);
id. ¶ 82 (“Lemonis told Plaintiffs that investing in these other businesses [through
Holdings] was the only way to make profits—this was, of course, after Lemonis slashed
Gooberry’s profit margins.”); id. ¶ 84 (“Lemonis represented that Plaintiffs would be able
25
venture”80 unconnected to Gooberry, but rather an opportunity to “expand” or
“grow” their existing business.81 The New York Complaint also acknowledges the
overlap: “Eventually, Lemonis began running Plaintiffs’ business through the ML
Fashion entity instead of Gooberry.”82
A central focus of both complaints is Lemonis’ scheme to saddle the parties’
joint ventures with substantial debt, on which he would threaten to foreclose to keep
Plaintiffs “in line.”83 Both complaints allege he facilitated this scheme using his
alter ego entities, Investment Vehicle and Funding Vehicle.84 Both specifically point
to the credit and security agreements between Holdings, Gooberry, Retail Sub, and
Lemonis’ other entities as critical instruments of Lemonis’ scheme. 85 Both
to make more money in this new business venture than they were making with Gooberry.”);
id. ¶ 87 (“Lemonis also represented that he and Plaintiffs would work to grow a fashion
empire that they would eventually be able to sell for millions in profit. Lemonis
represented that Plaintiffs and Lemonis would split any such profits equally—after
Lemonis’ debts were repaid.”).
80
See D.I. 65 at 14.
81
See FAC ¶ 204 (“Defendants’ material misrepresentations and/or failures to disclose
material information described above include but are not limited to: (1) representing that
Defendants wanted to help Plaintiffs expand their business through [Holdings] . . . .”); id.
¶ 88 (“Lemonis represented to Plaintiffs that [Holdings] would be an umbrella entity to
hold the parties’ various business ventures. He told Plaintiffs that he wanted to help them
grow their business and that they could build something special together.”).
82
New York FAC ¶ 92.
83
See New York FAC ¶¶ 96–97, 113, 199(a); FAC ¶¶ 12, 81, 146, 155. Compare New
York FAC ¶¶ 130, 156, 161, 167, 175, 243, with FAC ¶¶ 199, 220, 224, 232, 252, 255.
84
Compare New York FAC ¶ 23, with FAC ¶ 25.
85
Compare New York FAC ¶¶ 93–97, with FAC ¶¶ 105–06, 108–14.
26
complaints also specify transactions through which Plaintiffs incurred oppressive
debt, including investments in Blues Jean Bar86 and Runway.87
Both allege that as Lemonis forced Plaintiffs and their entities into more debt,
he also intentionally drove down profits, forcing Plaintiffs to take on more loans
from Lemonis to stay afloat.88 Both allege that his threats to foreclose on that debt
gave Plaintiffs no choice but to continue to cooperate.89 Both complaints tell the
story of Lemonis removing Plaintiffs and Neomi from their employment positions,90
and continue through Lemonis looting the businesses in spring 2020.91 While
Plaintiffs in briefing describe the New York Complaint as being focused on the
show, it relies on post-Episode allegations—including the formation of MARCUS,
the parties’ investments in other businesses featured on The Profit, and Lemonis’
looting of the parties’ stores—to support several theories, including demand
86
Compare New York FAC ¶ 86, with FAC ¶ 76.
87
Compare New York FAC ¶¶ 99–103, with FAC ¶¶ 136–40.
88
Compare New York FAC ¶¶ 82–84, 130, 156, 161, 167, 175, 243, with FAC ¶¶ 9, 79–
81, 199, 220, 224, 232, 252, 255, 280.
89
Compare New York FAC ¶¶ 97, 113, 199(a), with FAC ¶¶ 12, 81, 146, 155.
90
Compare New York FAC ¶¶ 107–09, 116, with FAC ¶¶ 166–69.
91
Compare New York FAC ¶¶ 117–18, with FAC ¶¶ 172–77.
27
futility,92 breach of fiduciary duty,93 breach of the implied covenant,94 unjust
enrichment,95 misappropriation of assets,96 and dissolution.97
And both complaints allege Lemonis engaged in all of these actions out of
self-interest.98 Lemonis allegedly used his considerable influence over Holdings and
Gooberry to: (1) build a relationship with Raffel;99 (2) expand his personal
MARCUS brand;100 (3) boost his own image by investing in companies that
appeared on The Profit;101 and (4) otherwise “financially favor[]” his other entities,
particularly Investment Vehicle.102 These allegations of self-interest support
92
See New York FAC ¶ 130.
93
See id. ¶ 156.
94
See id. ¶ 161.
95
See id. ¶ 167.
96
See id. ¶ 175.
97
See id. ¶ 243.
98
Compare id. ¶¶ 1, 11, 99–101, 110–12, 121, 127, with FAC ¶¶ 1, 12, 116, 124–25, 136–
38, 156–58; see LaPoint, 970 A.2d at 193 (considering “whether the facts are related in
time, space, origin, or motivation” as part of the “common nucleus” analysis (quoting
Restatement (Second) of Judgments § 24(2))).
99
Compare New York FAC ¶¶ 99–101, with FAC ¶¶ 136–38.
100
Compare New York FAC ¶¶ 110–12, 130, 156, 161, 167, 175, 243, with FAC ¶¶ 156–
58, 199, 220, 224, 232, 252, 255, 280.
101
Compare New York FAC ¶¶ 85, 129, with FAC ¶¶ 116, 198. Both complaints allege
that this practice was fraudulent. Compare New York FAC ¶¶ 130, 138, 147, 156, 161,
167, 175, 243, with FAC ¶¶ 199, 205, 213, 220, 224, 232, 255.
102
Compare New York FAC ¶¶ 128, 130, 156, 161, 167, 175, 243, with FAC ¶¶ 197, 199,
220, 224, 232, 252, 255.
28
multiple theories of recovery in both complaints, including breaches of fiduciary
duty and breaches of the implied covenant.103
Plaintiffs’ attempt to distinguish the two actions based on the two different
nominal defendants is belied by their own allegations. The New York Complaint
alleges that Gooberry was funded through a credit agreement with Holdings.104
When Lemonis forced Gooberry to draw from its credit line with Holdings, he also
effectively forced Holdings to borrow money from Lemonis’ other entities.105
Asserting that both Gooberry and Holdings were harmed when Gooberry drew from
that credit line, the New York Complaint calls this practice “killing two birds with
one stone.”106 The complaints’ common nucleus—Lemonis throwing the stone—
103
Compare New York FAC ¶¶ 156, 161, with FAC ¶¶ 220, 224, 232.
104
See New York FAC ¶ 93. It appears that this credit agreement may be the same
agreement between Holdings and Retail Sub described in the Delaware Complaint.
Compare id., with FAC ¶ 105. While the agreement referenced by the Delaware Complaint
was not attached, the agreement attached to the New York Complaint fits the description
in the Delaware Complaint: the contract was executed on October 1, 2016, and provides
for a $10 million revolving line of credit at 7.5% interest. Compare FAC ¶ 105, with New
York FAC, Ex. C. To the extent the two complaints derive their claims from the same
contract, a contract is considered a single “transaction” for res judicata purposes. See
LaPoint, 970 A.2d at 194. In any case, it appears that Retail Sub is effectively Gooberry’s
successor, having purchased substantially all its assets other than Runway. See FAC ¶ 104.
The close connections between these entities further underscore the value of treating them
as a single trial unit.
105
New York FAC ¶ 97.
106
Id.29
should be evaluated in one court. The fact that the stone, by design, killed two birds
does not warrant two actions.
In sum, the two complaints derive from a “common nucleus of operative
facts.”107 Both allege facts across the same time period, from Plaintiffs’ Episode in
2014 to Lemonis’ looting of their stores in 2020.108 As alleged, these events stem
from a common self-interested motivation.109 Moreover, Plaintiffs’ interconnected
allegations and resultant theories of recovery are a “convenient trial unit.”110 Forcing
the parties to litigate these overlapping issues in two forums would unfairly
“burden[] the same defendant with duplicative proceedings in different courts
brought by the same plaintiff”111 and open the possibility for double recovery.112
Plaintiffs’ two actions violate the rule against claim splitting.
The Court has ample discretion in considering how to remedy claim
splitting.113 While dismissal with prejudice is sometimes appropriate, Delaware
Courts may also dismiss split claims without prejudice or stay the action, pending
107
See LaPoint, 970 A.2d at 193 (alterations omitted) (quoting Maldonado, 417 A.2d at
383).
108
See id.109
See id.110
See id. (quoting Restatement (Second) Judgments § 24(2)).
111
Winner, 2008 WL 5352063, at *18.
112
See J.L., 33 A.3d at 919.
113
See id. at 921 n.115.
30
resolution of the overlapping proceeding.114 Here, I conclude that efficiency
supports staying this action in favor of the New York Action and its exclusive federal
question.
In J.L. v. Barnes, the Court chose to stay an action on claim splitting grounds
pending resolution of an overlapping case in federal court:
A dismissal with prejudice of Plaintiff’s claims in this Court may have
res judicata implications for the Plaintiff in the District Court if she
tried to name the dismissed defendants in that action. There may be
statute of limitations consequences too. Neither of these consequences
are consistent with the purposes of the claim splitting doctrine which
are to prevent exposure to duplicitous litigation and/or double
recoveries.115
A similar approach is warranted here. The District Court has not yet passed on the
merits of Plaintiffs’ claims in the New York Action, where a similar motion to
dismiss remains pending. The New York Complaint alleges that the District Court
has federal question jurisdiction over the RICO claim,116 and pendent jurisdiction
over the related state law claims.117 As explained, Plaintiffs’ claims in this action
and the New York Action “derive from a common nucleus of operative fact.”118 Like
the plaintiff in Maldonado, “[Plaintiffs] could, therefore, have presented [their
114
See id. at 920–21.
115
Id. at 921.
116
New York FAC ¶ 27 (citing 28 U.S.C. § 1331).
117
Id. (citing 28 U.S.C. § 1367).
118
See Maldonado, 417 A.2d at 383.
31
related state law claims] in the same action as that in which [they] sought to present
[their] [RICO claim], and the District Court could have exercised its discretionary
judicial power to hear as pendent claims, the claims based on state common law.”119
As in J.L., “[i]f the [New York Action] is dismissed, either voluntarily or otherwise,
then the Court will consider an application to lift the stay. But the Court will not
countenance Plaintiff ‘taking two bites at the apple.’”120
A stay is particularly appropriate in light of Plaintiffs’ claim seeking statutory
dissolution of Holdings, a Delaware entity. Generally, an exception to the rule
against claim splitting applies when “a plaintiff could not for jurisdictional reasons
presented his claim in its entirety” in a single action.121 Plaintiffs correctly point out
that this Court has the unique ability to dissolve Delaware entities.122 The unique
119
Id. I note that when this case was removed to District of Delaware, it was remanded
based on that Court’s determination that it lacked original subject matter jurisdiction—
particularly diversity jurisdiction—over Plaintiffs’ claims. See Remand Order 4. The
District of Delaware thus did not reach the question of whether it would exercise pendent
jurisdiction over Plaintiffs’ related state law claims.
120
33 A.3d at 921 (quoting Balin, 1995 WL 170421, at *4).
121
Maldonado, 417 A.2d at 383.
122
In re TGM Enters., L.L.C., 2008 WL 4261035, at *2 (Del. Ch. Sept. 12, 2008) (“The
Court understands that jurisdiction rests solely with the Court of Chancery where a party
moves for dissolution of a company . . . .”); see 6 Del. C. § 18-802 (“On application by or
for a member or manager the Court of Chancery may decree dissolution of a limited
liability company whenever it is not reasonably practicable to carry on the business in
conformity with a limited liability company agreement.”).
32
nature of a request for dissolution counsels in favor of a stay to preserve Plaintiffs’
remedial options while furthering Delaware’s strong policy against claim splitting.
Dissolution is an extreme remedy to be applied only when it is no[]
longer reasonably practicable for the company to operate in accordance
with its founding documents, not as a response to fiduciary or
contractual violations for which more appropriate and proportional
relief is available. And, in many instances, such fiduciary and
contractual claims may be subject to important, policy-based rules
governing how they may be brought . . . . For these reasons, parties
should first prove their fiduciary claims in a plenary action, and then
seek dissolution only if the remedy granted in that action is insufficient
to make continuation of the entity in accordance with its operating
agreement reasonably practicable.123
Whether Holdings should be dissolved will turn in part on whether Lemonis
is found to have committed the conduct Plaintiffs allege. The policies against claim
splitting and the unique nature of dissolution support considering dissolution of
Holdings only after the parties’ underlying disputes are resolved, rather than
subjecting Defendants to duplicitous litigation and risking inconsistent findings.124
When the New York Action comes to an end, the parties may petition the Court to
lift the stay and consider whether the record developed in New York supports
123
In re Arrow Inv. Advisors, LLC, 2009 WL 1101682, at *1 (Del. Ch. Apr. 23, 2009); see
id. at *2 (“[T]his court views any form of judicial dissolution as a limited remedy that
should be granted sparingly.”).
124
See In re TGM Enters., L.L.C., 2008 WL 4261035, at *2 (“The Court understands that
jurisdiction rests solely with the Court of Chancery where a party moves for dissolution of
a company; therefore, after defendant’s claims have been resolved in the Superior Court
the parties will maintain the opportunity to re-open and resolve any remaining issues,
including plaintiff’s motion to dissolve [the entity], in the Court of Chancery.”).
33
dissolution. Staying this action while Plaintiffs pursue their claims in New York
would not prejudice Defendants, who themselves suggested that “the issue of
dissolution can be dealt with separately by the [Court of Chancery] after [the District
Court] resolves Plaintiffs’ underlying claims.”125
I also note that several other motions are currently pending in this action,
including a motion to enforce the Status Quo Order and a motion to compel.126 These
motions will be held in abeyance during the stay. The Status Quo Order is also
vacated during the stay.
III. CONCLUSION
For the foregoing reasons, the action is STAYED, pending resolution of the
New York Action. The remaining questions raised by the Motion are held in
abeyance. The Status Quo Order is vacated. The parties’ pending motions are held
in abeyance. An implementing order accompanies this decision.
125
D.I. 68 at 10.
126
See D.I. 73; D.I. 94; see also D.I. 95. Plaintiffs also recently filed a motion to quash a
subpoena to AT&T. D.I. 106. Discovery in this matter is also stayed.
34