Ramco Asset Management, LLC v. USA Rare Earth, LLC

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
RAMCO ASSET MANAGEMENT, )
LLC, US TRADING COMPANY )
METALS RE, LLC, and DINSHA )
DYNASTY TRUST, )
)
Plaintiffs, )
)
v. ) C.A. No. 2022-0665-SG
)
USA RARE EARTH, LLC, MORZEV )
PTY LTD., MORDECHAI GUTNICK )
ATF THE MORZEV TRUST, )
MORDECHAI GUTNICK, and PINI )
ALTHAUS, )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: January 5, 2024
Date Decided: April 22, 2024
David A. Felice, BAILEY & GLASSER, LLP, Wilmington, Delaware; OF
COUNSEL: Andrew St. Laurent, HARRIS ST. LAURENT & WECHSLER LLP,
New York, New York, Attorneys for Plaintiffs Ramco Asset Management, LLC, US
Trading Company Metals Re, LLC, and the DinSha Dynasty Trust.
John M. Seaman and E. Wade Houston, ABRAMS & BAYLISS LLP, Wilmington,
Delaware; OF COUNSEL: Chelsea Corey, KING & SPALDING LLP, Charlotte,
North Carolina, Attorneys for Defendant USA Rare Earth, LLC.
Carl D. Neff, PIERSON FERDINAND LLP, Wilmington, Delaware; OF
COUNSEL: Aurora Cassirer and Christina H. Bost Seaton, FISHERBROYLES,
LLP, New York, New York, Attorneys for Defendant Pini Althaus.
Karen E. Keller, Andrew E. Russell, and Nathan R. Hoeschen, SHAW KELLER
LLP, Wilmington, Delaware; OF COUNSEL: Justin L. Ormand, ALLEN &
OVERY, New York, New York; Patrick W. Pearsall, ALLEN & OVERY,
Washington, D.C., Attorneys for Defendants Mordechai Gutnick ATF the Morzev
Trust, Morzev Pty Ltd., and Mordechai Gutnick.
GLASSCOCK, Vice Chancellor
The simplicity of the facts of this Memorandum Opinion is matched by its
surprising legal complexity, arising in part from the large number of jurisdictions
whose law does, or plausibly could, apply. Factually, Plaintiffs are former members
of an Australian LLC, Morzev PTY Ltd., whose principals proposed reorganizing as
a Delaware LLC, USARE, ostensibly to better participate in the U.S. capital markets.
According to the Amended Complaint, the Plaintiffs were promised that if they
consented to exchange their interests in Morzev for interests in USARE, they would
be given the same ownership percentage in the latter as the former. Instead, their
interests were diluted. Plaintiffs, accordingly, have stated a smorgasbord of claims;1
what follows is a partial motion to dismiss in which the individual dishes are
digested, under Rule 12(b)(6).
I. BACKGROUND
A. Factual Background
1. The Parties
Plaintiff Ramco Asset Management, LLC (“Ramco”) is a New Jersey limited
liability company.2 Ramco is a Member of USA Rare Earth, LLC (“USARE” or the
“Company”).3
1
The most pertinent of these claims, perhaps, were against Morzev and its principal, and related
entites—those claims await vindication, if at all, in another jurisdiction; in an earlier Memorandum
Opinion in this matter, I found that this court lacked jurisdiction over those parties.
2
Am. Verified Compl. for Breach of Contract and Breach of Fiduciary Duties ¶ 5, Dkt. No. 29
(“Am. Compl.”).
3
Id.
1
Plaintiff US Trading Company Metals RE, LLC (“US Trading Company”) is
a Delaware limited liability company, with its headquarters in New York. 4 US
Trading Company is a Member of USARE.5
Plaintiff DinSha Dynasty Trust (“DinSha,” and together with Ramco and US
Trading Company, the “Plaintiffs”) is a trust organized under the laws of New
Jersey.6 DinSha is a Member of USARE.7
Defendant USARE is a limited liability company organized under the laws of
Delaware.8
Defendant Mordechai Gutnick is a Manager of USARE and is the largest
current holder of USARE Class A shares through entities that he controls.9 Gutnick
is also a Member of USARE through Vested Incentive Units he holds.10 Gutnick is
a resident of the state of New York.11
Former defendant Morzev PTY Ltd. (“Morzev”) is an Australian limited
liability company.12 Gutnick was a director of Morzev.13
4
Id. ¶ 6.
5
Id.
6
Id.¶ 7.
7
Id.
8
Id. ¶ 8.
9
Id. ¶ 11.
10
Id.
11
Id.
12
Id. ¶ 9.
13
Id.
2
Former defendant the Mordechai Gutnick ATF the Morzev Trust (the “ATF
Morzev Trust,” and together with Gutnick and Morzev, the “Morzev Defendants”)
is a trust organized under the laws of Australia.14
Defendant Pini Althaus was the chief executive officer of USARE from 2019–
2021 and is a former Manager of the Company.15 Althaus is a Member of USARE
through Vested Incentive Unites that he holds.16 Althaus is a resident of New York.17
2. Plaintiffs Invest
Gutnick founded Morzev on March 6, 2015.18 Morzev’s primary asset was
the option to acquire up to 80% of the Round Top heavy rare-earth and critical
minerals project in Hudspeth County, Texas (the “Round Top Option”).19 Ramco
invested in Morzev through the purchase of convertible notes;20 DinSha and US
Trading Company invested in Morzev by purchasing shares in the entity.21
3. Gutnick Transfers Morzev’s Assets to USARE
In 2019, Gutnick decided to transfer the assets and liabilities of Morzev to a
U.S.-based entity to increase the availability of U.S.-based capital to exploit
14
Id. ¶ 10.
15
Id. ¶ 12.
16
Id.
17
Id.
18
Id. ¶ 18.
19
Id.
20
Id. ¶ 19.
21
Id. ¶¶ 20–21.
3
Morzev’s primary asset, the Round Top Option.22 On May 6, 2019, Althaus formed
USARE as a Delaware limited liability company.23 Gutnick then transferred the
Round Top Option on August 23, 2019, when USARE entered into the Amended
and Restated Round Top Option Agreement.24 Under the Amended and Restated
Round Top Option Agreement, USARE was given the rights to the Round Top
Option on the same terms as Morzev to acquire interests in the Round Top heavy
rare-earth and critical minerals project.25
4. Plaintiffs Transfer Their Interests from Morzev to USARE
From March to May 2019, Gutnick spoke with Stewart Kleiner, Ramco’s
principal and DinSha’s grantor, regarding the potential for Ramco and DinSha to
transfer their interests in Morzev to the new U.S.-based entity, USARE.26 Gutnick
had similar conversations with Steven Rosenfeld, the principal of US Trading
Company.27
a. The 2019 Memo
Kleiner memorialized his understanding of his conversations with Gutnick in
a writing he sent to Gutnick in May 2019 (the “2019 Memo”).28 Before turning to
22
Id. ¶ 22.
23
Id. ¶ 23.
24
Id. ¶ 25.
25
Id.
26
Id. ¶ 28.
27
Id. ¶ 29.
28
Id. ¶ 31.
4
the substance of the conversations, Kleiner wrote that “[u]ntil more formal
documentation should occur, if at all, [the 2019 Memo] shall serve as our
Understanding and Agreement Re [sic] the Following.”29 The 2019 Memo, as
drafted by Kleiner, stated that Ramco owned 14.29% interest in Morzev, or
20,7777,000 shares.30 With respect to DinSha, the 2019 Memo stated DinSha owned
2.143% interest in Morzev.31 In explaining how the Morzev interests would be
transferred to USARE, the 2019 Memo states that USARE would deliver Ramco and
DinSha’s shares in USARE “within two weeks’ time” after those shares in “Morzev
Pty Ltd, the Australian company” were “translated / transcribed / transferred into
valid U.S. shares . . . of Morzev LLC / d.b.a. USA Rare Earth, the United States of
America company.”32 The 2019 Memo concluded by stating: “Assuming the above
is in accordance with our understanding Please [sic] make two copies of this
agreement, sign both of them and overnight them both to me.”33
Gutnick returned a copy of the 2019 Memo to Kleiner that included several
handwritten edits.34 Specifically, Gutnick wrote by Ramco’s asserted 14.29%
29
Am. Compl., Ex. B, Dkt. No. 29 (the “2019 Memo”).
30
Am. Compl. ¶ 35 (citing 2019 Memo).
31
Id. ¶ 44, (citing the 2019 Memo).
32
2019 Memo at 1.
33
Id. at 2.
34
See id. While the Amended Complaint alleges that the 2019 Memo is an agreement that includes
specific percentages of equity interest in USARE to be issued to Ramco and DinSha, the
incorporation by references doctrine allows the Court to review the documents relied upon in the
complaint to ensure that the statements are accurately represented. See Lebanon Cnty. Emps.’ Ret.
Fund v. Collis, 287 A.3d 1160, 1181 (Del. Ch. 2022). Accordingly, I have reviewed the 2019
5
interest and DinSha’s asserted 2.143% interest in Morzev that he was “not sure exact
percentages.”35 Gutnick also edited the timing of when the USARE certificates
would be delivered to DinSha by scratching through “within” and penciling in
“approximately 2 weeks.”36 While the 2019 Memo defined “Morzev” as “Morzev
Pty Ltd / Morzev LLC / d.b.a. USA Rare Earth,” Gutnick wrote above his signature
that he was signing on behalf of “Morzev Pty Ltd.”37
b. Plaintiffs’ Respective Conversion Agreements
Months later, the parties entered into agreements under which each plaintiff’s
interest in Morzev were to convert to interests in USARE. On July 29, 2019,
USARE, Morzev, and Ramco signed an agreement (the “Ramco Conversion
Agreement”) whereby USARE agreed to adopt and endorse the term sheets for the
convertible notes that Ramco had entered into with Morzev.38 Under the Ramco
Conversion Agreement, Ramco agreed to convert its convertible notes in Morzev
into 21,123,677 shares of USARE.39 The Ramco Conversion Agreement provides
that “[t]his Letter is governed by the laws in force from time to time in New Jersey,
USA.”40
Memo and find it is necessary to include this paragraph of facts in my opinion to accurately
represent the contents of the 2019 Memo.
35
See 2019 Memo at 1.
36
Id.37
Id. at 2.
38
Am. Compl. ¶ 36.
39
Id.
40
Am. Compl., Ex. C at 2, Dkt. No. 29 (the “Ramco Conversion Agreement”).
6
DinSha entered into a similar agreement with Morzev to transfer DinSha’s
shares in Morzev to shares in USARE on July 25, 2019 (the “DinSha Conversion
Agreement”).41 Under the terms of the DinSha Conversion Agreement, the parties
thereto agreed that, in exchange for transferring its’ Morzev shares, DinSha was to
“be issued fully paid ordinary shares in the capital of [USARE] on a one for one
(1:1) basis.”42 While the DinSha Conversion Agreement specifies that DinSha
“currently holds 3,116,608 [s]hares” in Morzev,43 DinSha acquired more shares in
Morzev and held 3,562,898 shares when it entered into the DinSha Conversion
Agreement.44 The DinSha Conversion Agreement provides that “[t]his Letter is
governed by the laws in force from time to time in Western Australia.”45
On July 22, 2019, US Trading Company executed the agreement under which
it would transfer its Morzev interest (the “US Trading Company Conversion
Agreement”).46 Under the terms of the US Trading Company Conversion
Agreement, US Trading Company agreed to transfer its shares of Morzev in
exchange for “fully paid ordinary shares in the Capital of [USARE] on a one for one
(1:1) basis.”47 The US Trading Company Conversion Agreement provided that, as
41
Am. Compl. ¶ 45.
42
Id. ¶ 36 (quoting Am. Compl., Ex. D at 1, Dkt. No. 29 (the “DinSha Conversion Agreement”)).
43
DinSha Conversion Agreement at 1.
44
Am. Compl. ¶ 47.
45
DinSha Conversion Agreement at 2.
46
Am. Compl. ¶ 48.
47
Id. ¶ 49 (quoting Am. Compl., Ex. E at 1, Dkt. No. 29 (the “US Trading Company Conversion
Agreement”)).
7
of the date of the agreement, US Trading Company held 23,178,571 shares in
Morzev.48
B. Procedural History
Plaintiffs initiated this action on July 29, 2022.49 On November 4, 2023,
Plaintiffs filed the operative complaint in this action (the “Amended Complaint”).50
The Amended Complaint asserted fourteen causes of action against five
defendants.51 On October 20, 2023, I issued a memorandum opinion addressing
whether this Court has personal jurisdiction over certain defendants.52 In Ramco I,
I dismissed all counts brought against Morzev and ATF Morzev Trust because this
Court lacks personal jurisdiction over those defendants.53 Similarly, with respect to
Gutnick, I dismissed Counts I–VI and IX–XIV for lack of personal jurisdiction.54
However, I denied Althaus’s motion for dismissal for lack of personal jurisdiction.55
As a result of the holding in Ramco I, I cannot adjudicate Plaintiffs’ claims asserted
solely against the Morzev Defendants. Those claims are Count III for breach of the
DinSha Conversion Agreement; Count IV for breach of the implied covenant
48
US Trading Company Conversion Agreement at 1.
49
See Verified Compl. for Breach of Contract and Breach of Fiduciary Duties, Dkt. No. 1.
50
See Am. Compl.
51
See id. ¶¶ 61–158.
52
See Ramco Asset Mgmt., LLC v. USA Rare Earth, LLC, 2023 WL 6939263 (Del. Ch. Oct. 20,
2023) (“Ramco I”).
53
Id. at *7.
54
Id.
55
Id. at *4.
8
inhering in the DinSha Conversion Agreement; Count V for breach of the US
Trading Company Conversion Agreement; and Count VI for breach of the implied
covenant inhering in the US Trading Company Conversion Agreement.56
Ramco I did not address Gutnick and Althaus’s motions to dismiss on forum
non conveniens grounds and all defendants’ motion to dismiss under Rule 12(b)(6).57
On November 15, 2023, Gutnick and Althaus informed the Court that the issue of
forum non conveniens did not need to be reached at this time.58 The parties submitted
supplemental filings, as requested by the Court, regarding choice of law issues
inhering in Counts IX–XII on January 5, 2024.59 I consider the motions to dismiss
fully submitted as of that date.
II. ANALYSIS
Before me currently are motions brought by USARE, Althaus, and Gutnick to
dismiss the remaining counts of the Amended Complaint under Rule 12(b)(6). The
remaining counts are as follows: Count I for breach of contract against USARE
based on the 2019 Memo and the Ramco Conversion Agreement; Count II for breach
of the implied covenant inhering in the 2019 Memo and the Ramco Conversion
Agreement against USARE; Count VII for breach of fiduciary duty against Althaus
56
Am. Compl. ¶¶ 70–88.
57
Ramco I, 2023 WL 6939263, at *7.
58
See Joint Letter to Hon. Sam Glasscock III from Counsel re questions posed in the Ct.’s Oct. 20,
2023 mem. op. at 1, Dkt. No. 61.
59
See Letter to the Hon. Sam Glasscock III on behalf of Def. USARE Re: Choice of Law, Dkt.
No. 65; Pls.’ Suppl. Mem. on Choice of Law Question, Dkt. No. 66 (“Pls.’ Suppl. Mem.”).
9
and Gutnick; Count VIII for breach of the implied covenant inhering in USARE’s
LLC operating agreement (the “LLC Agreement”) against Althaus and Gutnick;
Count IX for negligent misrepresentation against USARE brought by Ramco; Count
X for fraud against USARE for inducing Ramco to transfer its interests; Count XI
for negligent misrepresentation against USARE brought by DinSha; and Count XII
for fraud against USARE for inducing DinSha to transfer its interests.60
Plaintiffs’ claims are governed by the laws of at least two jurisdictions: Counts
VII and VIII are governed by Delaware law as they relate to a Delaware limited
liability company while Counts I and II are governed by New Jersey law to the extent
that those counts rely upon the Ramco Conversion Agreement, which contains a
New Jersey choice-of-law provision. The parties dispute which jurisdiction’s laws
apply to the remaining tort claims, with Plaintiffs advocating for the application of
New Jersey law to at least Counts IX and X and Western Australian law to Counts
XI and XII while USARE seeks application of Delaware law to all tort claims.
Below, I analyze the various claims, making choice of law decisions only as
necessary.
A. Standard of Review
The standard of review for a motion to dismiss under Court of Chancery Rule
12(b)(6) is well established:
60
Am. Compl. ¶¶ 61–69, 89–139.
10
(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.61
“A trial court is not, however, required to accept as true conclusory allegations
without specific supporting factual allegations.”62 “Moreover, a claim may be
dismissed if allegations in the complaint or in the exhibits incorporated into the
complaint effectively negate the claim as a matter of law.”63
B. Counts I–II: The Contract Claims
1. Count I for Breach of Contract
Plaintiffs allege that USARE breached the parties’ contractual agreement to
transfer Ramco’s interest from Morzev to USARE without diminution, as reflected
in the 2019 Memo and the Ramco Conversion Agreement, because USARE
provided Ramco with an interest that was materially less than Ramco’s interest in
Morzev.64 USARE contends that Count I fails to state a claim because (i) the Ramco
Conversion Agreement is a fully-integrated contract that does not guarantee Ramco
a specific percentage ownership in USARE following the conversion—instead, it
provides for a specific number of units, which Ramco received; and (ii) the Ramco
61
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (internal quotations omitted).
62
In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 168 (Del. 2006) (internal quotations
omitted).
63
Malpiede v. Townson, 780 A.2d 1075, 1083 (Del. 2001).
64
Am. Compl. ¶¶ 62, 64.
11
Conversion Agreement is clear and unambiguous, so the Court should not consider
the 2019 Memo to modify the express terms of the Ramco Conversion Agreement.65
Plaintiffs, however, aver that the Ramco Conversion Agreement must be read
together with the 2019 Memo and construed as one contract.66 Plaintiffs invoke New
Jersey’s expansive approach to the parol evidence rule to urge the Court to consider
the 2019 Memo to interpret the meaning of the Ramco Conversion Agreement.67
The Ramco Conversion Agreement contains a choice-of-law provision that states,
“[t]his Letter is governed by the laws in force from time to time in New Jersey,
USA.”68 Both parties agree that Count I is subject to this choice-of-law provision.
Under New Jersey law, to state a claim for breach of contract, Plaintiffs must
allege four elements: (i) “that the parties entered into a contract containing certain
terms;” (ii) “plaintiffs did what the contract required them to do;” (iii) “defendants
did not do what the contract required them to do;” and (iv) “defendant’s breach, or
failure to do what the contract required, caused a loss to the plaintiffs.”69 A contract
is fully integrated “[w]here the parties reduce an agreement to a writing which in
view of its completeness and specificity reasonably appears to be a complete
agreement . . . unless it is established by other evidence that the writing did not
65
Def. USA Rare Earth, LLC’s Opening Br. Supp. Mot. Dismiss Am. Compl. 22–27, Dkt. No. 34
(“USARE’s OB”).
66
[Corrected] Pls.’ Answering Br. Opp’n Defs.’ Mots. to Dismiss 25–26, Dkt. No. 39 (“Pls.’ AB”).
67
Id. at 27–28
68
Ramco Conversion Agreement at 2.
69
Goldfarb v. Solimine, 245 A.3d 570, 577 (N.J. 2021) (citation omitted).
12
constitute a final expression.”70 The Court may consider extrinsic evidence to
interpret an agreement, “even when the contract on its face is free from ambiguity.”71
“Such evidence is adducible only for the purpose of interpreting the writing—not
for the purpose of modifying or enlarging or curtailing its terms, but to aid in
determining the meaning of what has been said.”72 Once the Court has ascertained
the true meaning of the contractual terms, “the parol evidence rule comes into play
to prohibit the introduction of extrinsic evidence to vary the terms of the contract.”73
USARE contends that the Ramco Conversion Agreement is a fully integrated
contract. Plaintiffs have not alleged that the Ramco Conversion Agreement does not
constitute a final expression of the parties’ agreement. Rather, Plaintiffs ask this
Court to read the 2019 Memo and the Ramco Conversion Agreement as one contract.
The Ramco Conversion Agreement provided that Ramco would receive 21,123,677
shares in USARE. Plaintiffs contend that, when read together, the 2019 Memo
allows the Court to interpret the terms of the Ramco Conversion Agreement such
that the 21,123,677 shares in USARE provided to Ramco should be interpreted as
equaling the 14.29% equity interest in USARE that Ramco requested in the 2019
Memo.74
70
Chance v. McCann, 966 A.2d 29, 41 n.6 (N.J. Super. Ct. App. Div. 2009) (emphasis added)
(citation omitted).
71
Atl. N. Airlines v. Schwimmer, 96 A.2d 652, 656 (N.J. 1953).
72
Id.73
Conway v. 287 Corp. Ctr. Assocs., 901 A.2d 341, 347 (N.J. 2006).
74
Pls.’ AB 27–28.
13
Despite USARE’s arguments that the 2019 Memo itself is not a valid contract
and that Gutnick lacked the authority to sign it on behalf of USARE, under New
Jersey law, I consider the circumstances surrounding the execution of the Ramco
Conversion Agreement by considering extrinsic evidence, such as the 2019 Memo.
When read together, the inclusion of the exact percentages in the 2019 Memo
provides insight into what the parties intended the 21,123,677 shares in USARE to
represent. It is unclear from the Ramco Conversion Agreement alone what the
absolute number of shares included therein was intended to represent as the Ramco
Conversion Agreement does not state the total number of shares of USARE that
would be outstanding. As Plaintiffs posit, it is plausible at this stage to infer that the
parties intended the 21,123,677 shares of USARE to represent an equity interest in
USARE equivalent to what Plaintiffs previously held in Morzev. Because Plaintiffs’
purpose in asking this Court to consider the 2019 Memo is to assist the Court in
ascertaining the true meaning of contractual terms in the Ramco Conversion
Agreement, the parol evidence rule does not exclude the 2019 Memo under the law
of New Jersey, as I understand it.
While Plaintiffs do not contend that USARE failed to deliver the exact number
of shares required under the Ramco Conversion Agreement, Plaintiffs have stated a
claim for breach of contract because USARE failed to maintain Ramco’s equity
interest when converting Ramco’s shares from Morzev. It is reasonably conceivable
14
that such was the bargain of the parties. Therefore, USARE’s motion to dismiss
Count I is denied.
2. Count II for Breach of the Implied Covenant of Good Faith and
Fair Dealing that Inhered in the Ramco Conversion Agreement
Plaintiffs also assert a breach of the implied covenant of good faith and fair
dealing against USARE for its failure to abide by the inherent obligations set forth
in the 2019 Memo and the Ramco Conversion Agreement.75 Specifically, Plaintiffs
allege that USARE was impliedly required to affect a 1:1 transfer of Ramco’s equity
interest from Morzev to USARE without change or diminution, which USARE
failed to do.76 USARE seeks dismissal of Count II on the grounds that (i) it is
duplicative of Count I; (ii) there is no such thing as an obligation by implication
when the terms of an agreement are unambiguous; and (iii) this Court cannot invoke
the implied covenant to correct Plaintiffs’ mistake regarding the terms of the Ramco
Conversion Agreement.77 Both parties agree that, because Plaintiffs seek to invoke
the implied covenant with respect to the Ramco Conversion Agreement, New Jersey
law applies to Count II.
New Jersey recognizes that “[i]n every contract there is an implied covenant
that neither party shall do anything which will have the effect of destroying or
75
Id. at 32.
76
Id.
77
Def. USA Rare Earth LLC’s Reply Br. Supp. Mot. Dismiss Am. Compl. 9–12, Dkt. No. 40.
15
injuring the right of the other party to receive the fruits of the contract[.]” 78 The
implied covenant of good faith and fair dealing is breached when a party that has
discretion under a contract “exercises its discretionary authority arbitrarily,
unreasonably, or capriciously, with the objective of preventing the other party from
receiving its reasonably expected fruits under the contract.”79 Courts in New Jersey
view the implied covenant liberally; they apply the covenant in three ways: (1) to
“permit[] the inclusion of terms and conditions which have not been set forth in the
written contract . . . . The covenant acts in such instances to include terms the parties
must have intended because they are necessary to give business efficacy to the
contract;” (2) “to allow redress for the bad faith performance of an agreement even
when the defendant has not breached any express term;” and (3) “to permit inquiry
into a party’s exercise of discretion expressly granted by a contract’s terms.”80
Plaintiffs assert that the spirit of the 2019 Memo and Ramco Conversion
Agreements required USARE to transfer the Ramco’s interest in Morzev to USARE
without change or diminution.81 As I have already found above in Section II.B.1,
the Ramco Conversion Agreement, when read in conjunction with the 2019 Memo,
is an ambiguous contract. Therefore, the implied covenant may be invoked under
78
Wilson v. Amerada Hess Corp., 773 A.2d 1121, 1126 (N.J. 2001) (citation omitted).
79
Id. at 1130.
80
Seidenberg v. Summit Bank, 791 A.2d 1068, 1076 (N.J. Super. Ct. App. Div. 2002) (citations
and internal quotations omitted).
81
Pls.’ AB 34.
16
New Jersey law to read into the Ramco Conversion Agreement terms that the parties
must have intended to give the contract meaning or to ensure that Ramco was not
denied the benefit of its bargain. Here, Plaintiffs have sufficiently stated that the
21,123,677 shares of USARE promised to Ramco in the Ramco Conversion
Agreement were intended by the parties to represent an equivalent interest in
USARE that Ramco previously held in Morzev. Therefore, under the law of New
Jersey and at this stage of the proceedings, Plaintiffs have sufficiently pled that the
Ramco Conversion Agreement lacks business efficacy because it lacks terms
explaining what the 21,123,677 shares in USARE represents, or has been performed
so as to deny Plaintiffs the benefit of their bargain. Accordingly, USARE’s motion
to dismiss Count II is denied.
C. Counts IX–XII: The Tort Actions
Plaintiffs assert two claims for fraud: Count X pertains to the Ramco
Conversion Agreement, which contains a New Jersey choice of law provision, and
Count XII pertains to the DinSha Conversion Agreement, which contains a Western
Australia choice of law provision. Plaintiffs also state two claims for negligent
misrepresentation: Count IX pertains to the Ramco Conversion Agreement and
Count XI pertains to the DinSha Conversion Agreement. Undergirding these four
tort claims, Plaintiffs allege that USARE knowingly made false representations to
Plaintiffs regarding their post-conversion interest in USARE and Plaintiffs relied on
17
those false representations when agreeing to execute their respective conversion
agreements.82
The tort claims are an awkward fit, brought against USARE, as will become
apparent. Originally, the claims were brought against Gutnick and Morzev as well—
these claims may still be pursued against those defendants, but not here—as I have
found, this Court lacks in personam jurisdiction over those parties.83
USARE mounts six arguments in favor of dismissing these claims: (1)
Plaintiffs signed the unambiguous conversion agreements that did not guarantee
either an exact percentage equity holding in USARE; (2) Counts IX and XI are
duplicative of the breach of contract claim; (3) USARE did not make the challenged
representations; (4) the 2019 Memo did not represent that Plaintiffs would receive
exactly the same percentage interest in USARE as they previously held in Morzev;
(5) promissory statements cannot support claims for negligent misrepresentation;
and (6) Plaintiffs have otherwise failed to pled the fraud claims with the specificity
required under Court of Chancery Rule 9(b).84
Plaintiffs assert that these tort claims arise from the Ramco Conversion
Agreement and DinSha Conversion Agreement such that the choice-of-law
provisions (favoring application of Western Australian and New Jersey laws) in
82
See id. at 53.
83
See Ramco I, 2023 WL 6939263, at *7.
84
USARE’s OB 29–31.
18
those contracts apply to the tort claims.85 In the alternative, Plaintiffs assert that
New Jersey law applies to all tort claims because New Jersey has the most significant
relationship to these claims.86 With respect to choice-of-law, USARE notes that the
choice-of-law provisions in the Ramco Conversion Agreement and DinSha
Conversion Agreement are narrow, limited only to disputes arising out of the
agreements themselves.87 USARE also notes that it is not a party nor signatory to
the DinSha Conversion Agreement, so USARE is not bound to that agreement’s
choice-of-law provision.88
“Where the parties agreed to the application of a state’s law in their contract,
Delaware courts are ‘strongly inclined’ to respect the parties’ freedom of contract
and enforce the contract provision[.]”89 With respect to tort claims that relate to a
contract, the Court must determine whether the scope of the choice-of-law provision
is broad enough to encompass those claims arising from the parties’ contractual
relationship.90 The question turns on the intent of the parties.
85
Pls.’ Suppl. Mem. 2, 5–6.
86
Id. at 7–11.
87
Letter to the Hon. Sam Glasscock III from E. Wade Houston, Esq. on Behalf of Def. USARE 1,
Dkt. No. 65.
88
Id. at 1–2.
89
Travelers Cas. and Sur. Co. of Am. v. Blackbaud, Inc., 2024 WL 1298762, at *7 (Del. Super.
Mar. 27, 2024) (quoting Wind Point P’rs VII-A, L.P. v. Insight Equity A.P. X Co., LLC, 2020 WL
5054791, at *18 (Del. Super. Aug. 17, 2020)).
90
See Gloucester Hldg. Corp. v. U.S. Tape and Sticky Prods., LLC, 832 A.2d 116, 124 (Del. Ch.
2003) (“There are certain circumstances where courts have held that a broad choice of law clause
in a contract could encompass tort claims that relate to contract formation.”).
19
The choice-of-law provision in the Ramco Conversion Agreement provides
that “[t]his Letter is governed by the laws in force from time to time in New Jersey,
USA.”91 Likewise, the DinSha Conversion Agreement provides that “[t]his Letter
is governed by the laws in force from time to time in Western Australia.” 92 The
plain language of these provisions is not broad enough to encompass tort claims
relating to the formation of those contracts. These provisions do not contain
language that expands the application thereof beyond contract claims; they do not
purpose “to cover litigation that arises out of or relates to the” agreements.93
Since the choice-of-law provisions are not broad enough to encompass
Plaintiffs’ tort claims, the normal next step would be to conduct a choice-of-law
analysis to determine which jurisdiction’s laws apply to these claims. Where parties
91
Ramco Conversion Agreement at 2 (emphasis added).
92
DinSha Conversion Agreement at 2 (emphasis added).
93
Gloucester Hldg. Corp., 832 A.2d at 124. Plaintiffs rely on two cases to advocate for a broad
reading of these provisions, namely Weil v. Morgan Stanley DW Inc., 877 A.2d 1024 (Del. Ch.
2005), and Abry Partners V, L.P. v. F&W Acquisition LLC, 891 A.2d 1032 (Del. Ch. 2006). Pls.
Suppl. Mem. 5–7. Neither case is persuasive because neither dealt with the application of a choice-
of-law provision to tort claims arising from the contract’s formation. The choice-of-law provision
in Weil explicitly stated that the contract was entered “in the State of California and shall be
construed, and the rights and liabilities of the parties determined, in accordance with the laws of
the State of California.” 877 A.2d at 1032. The Court determined that the scope of this provision
was broad enough to conclude that Morgan Stanley was a fiduciary who owed duties to its
customers because the fiduciary relationship arose from the contract containing the California
choice-of-law provision. Id. at 1032–35. In Arby Partners, the choice-of-law provision provided
that the agreement was to “be governed by, and construed in accordance with, the Laws of the
State of Delaware, regardless of the laws that might otherwise govern under applicable principles
of conflicts of law.” 891 A.2d at 1046. The Court determined that the choice-of-law provision
was applicable where a party was attempting to avoid the contract by challenging the enforceability
of the contract that contained the provision. Id. at 1048–50.
20
dispute which jurisdiction’s law applies, Delaware courts use a two-part test to
determine which states’ laws apply: “first, the court determines whether there is an
actual conflict of law between the proposed jurisdictions. If there is a conflict, the
court determines which jurisdiction has the ‘most significant relationship to the
occurrence and the parties[.]’”94 Where the laws do not conflict, “the Court should
avoid the choice-of-law analysis altogether.”95
However, before I reach a choice-of-law analysis, there is a predicate analysis,
that is, whether Plaintiffs’ have met the procedural hurdle to adequately plead these
tort claims that arise from averments of fraud. I find this analysis is dispositive. “As
a general rule, the law of the forum governs procedural matters.”96 Thus I must
determine whether Plaintiffs have met the heightened pleading standards under
Court of Chancery Rule 9(b).97 Under Rule 9(b), “[i]n all averments of fraud or
mistake, the circumstances constituting fraud or mistake shall be stated with
particularity. Malice, intent, knowledge and other condition of mind of a person
may be averred generally.”98 “Delaware courts routinely apply the more stringent
Rule 9(b) standard to negligent misrepresentation claims, as a negligent
94
Bell Helicopter Textron, Inc. v. Arteaga, 113 A.3d 1045, 1050 (Del. 2015).
95
Deuley v. DynCorp Int’l, Inc., 8 A.3d 1156, 1161 (Del. 2010).
96
Chaplake Hldgs., LTD v. Chrysler Corp., 766 A.2d 1, 5 (Del. 2001) (citations omitted).
97
See inVentiv Health Clinical, LLC v. Odonate Therapeutics, Inc., 2021 WL 252823, at *7 (Del.
Super. Jan. 26, 2021) (explaining that while another jurisdiction’s substantive law governed the
matter, fraud claims must still meet the heightened pleading standards under Delaware rules of
civil procedure).
98
Ct. Ch. R. 9(b).
21
misrepresentation claim must be stated with the same particularity required for
fraud.”99 To satisfy Rule 9(b), a plaintiff “must allege: (1) the time, place, and
contents of the false representation; (2) the identity of the person making the
representation; and (3) what the person intended to gain by making the
representations.”100
Plaintiffs generally allege that Kleiner, the principal of Ramco and grantor of
DinSha, had “numerous” conversations with Gutnick by phone and in-person “in
approximately March, April, and May 2019.”101 Gutnick “specifically” told Kleiner
“in sum and substance” that Plaintiffs would have exactly what they had in Morzev
in the new entity and that Plaintiffs would get exactly what they were owed. 102 In
further support of their fraud allegations, Plaintiffs point to the 2019 Memo, which
was drafted by Plaintiffs, to argue that Gutnick represented to Plaintiffs they would
receive the exact percentages in USARE as sought by Plaintiffs, despite Gutnick’s
handwritten notes indicating those percentages were not yet finalized. 103 These
pleadings, when read as a whole, do not meet the heightened pleading standards of
Rule 9(b). Plaintiffs fail to plead the time when or place where these representations
occurred; what representations are attributable to USARE; and do not allege what
99
Otto Candies, LLC v. KPMG LLP, 2019 WL 994050, at *4 (Del. Ch. Feb. 28, 2019) (collecting
cases) (alterations, citations, and internal quotations omitted).
100
Arby P’rs V, L.P., 891 A.2d at 1050.
101
Am. Compl. ¶ 28.
102
Id.103
See id. ¶¶ 35–37, 44–46.
22
USARE intended to gain from these representations. USARE was not even formed
until May 6, 2019, and the Amended Complaint, therefore, does not state with
specificity that the false statements could have been made on behalf of USARE. In
other words, USARE is not put in a position to defend against these fraud and
negligent misrepresentation claims. Therefore, Counts IX–XII are dismissed for
failure to satisfy the heightened pleading required under Rule 9(b). Accordingly, I
need not reach USARE’s other arguments about the insufficiency of the fraud and
negligent misrepresentation claims.
D. Counts VII–VIII: The Delaware LLC Counts
1. Count VII for Breach of Fiduciary Duty
USARE’s Operating Agreement unambiguously disclaims common-law
fiduciary duties. Plaintiffs allege, however, that Althaus and Gutnick (the
“Individual Defendants”) breached fiduciary duties owed to Plaintiffs from July
2019, when Plaintiffs executed their respective conversion agreements, through
August 26, 2019, the day before USARE’s first operating agreement, which
disclaimed such fiduciary duties, was executed.104 Specifically, Plaintiffs assert that
the Individual Defendants were duty-bound to ensure that Plaintiffs’ “first day”
equity percentages in USARE were exactly the same as Plaintiffs’ “last day” equity
104
Pls.’ AB 42. Plaintiffs refer to this time as the “Fiduciary Period.” Id. at 44.
23
percentages in Morzev.105 Instead, the Individual Defendants actively took steps to
diminish Plaintiffs’ investments during the conversion to USARE, without
disclosing that diminution to Plaintiffs.106 The Individual Defendants contend that
Plaintiffs fail to state a claim because (1) the LLC Agreement that disclaimed
fiduciary duties was effective in July 2019, so there is no period where the Individual
Defendants owed Plaintiffs such duties and (2) Plaintiffs lack standing to bring this
claim because it is derivative in nature.107
To state a claim for breach of fiduciary duty, a plaintiff must allege (1) the
existence of a fiduciary duty and (2) a breach of that duty by the defendant. 108 The
Court determines whether a claim for breach of fiduciary duty is direct or derivative
by considering “(1) who suffered the alleged harm (the corporation or the
stockholders, individually); and (2) who would receive the benefit of any recovery
or other remedy (the corporation or the stockholders, individually)[.]”109 If the
breach of fiduciary duty claim is derivative in nature, the plaintiff must plead that
105
Id. at 42.
106
Id. at 42–43.
107
Opening Br. of Def. Pini Althaus Supp. Mot. Dismiss Am. Compl. 16–20, Dkt. No. 33
(“Althaus’ OB”); Opening Br. of Defs. Morzev Pty Ltd., Mordechai Gutnick ATF the Morzev
Trust, and Mordechai Gutnick Supp. Mot. Dismiss Pls.’ Am. Verified Compl. 19–22, Dkt. No. 32
(“Gutnick’s OB”). Althaus also advocates for dismissal on the grounds that the actions occurred
prior to Plaintiffs obtaining their equity interest in USARE and that Count VII is duplicative of
Count II. Althaus’ OB 20–21.
108
Beard Rsch., Inc. v. Kates, 8 A.3d 573, 601 (Del. Ch. 2010).
109
Tooely v. Donaldson, Lufkin & Jennette, Inc., 845 A.2d 1031, 1033 (Del. 2004).
24
(1) a demand was made on the entity or (2) reasons why making such demand on the
entity would be futile.110
To the extent that the Plaintiffs allege that only they were diluted compared
with their holdings in Morzev,111 that does not state a fiduciary duty claim on the
part of the Defendants. If USARE’s managers had a duty to distribute units to
Plaintiffs, that duty arises in contract. Absent some contractual duty, the Individual
Defendant managers were not obliged to distribute any particular number of USARE
shares, as fiduciaries.
To the extent that Plaintiffs rely upon their respective conversion agreements
to assert this breach of fiduciary duty claim directly, the breach of fiduciary duty
claim is improper bootstrapping. “[T]he general rule under Delaware law . . . is that
a plaintiff may not ‘bootstrap’ a breach of fiduciary duty claim [from] a breach of
contract claim merely by restating the breach of contract claim as a breach of
fiduciary duty.”112 Plaintiffs here seek to enforce contractual obligations. “It is a
well-settled principle that where a dispute arises from obligations that are expressly
addressed by contract, that dispute will be treated as a breach of contract claim.”113
110
Ct. Ch. R. 23.1(a)(1); see also United Food and Com. Workers Union v. Zuckerberg, 250 A.3d
862, 877 (Del. Ch. 2020).
111
To the extent Plaintiffs are claiming a fiduciary breach by issuance of USARE units without
value generally, the action would be derivative, and, given lack of compliance by Plaintiffs with
Rule 23.1, would be dismissed under that rationale.
112
Grunstein v. Silva, 2009 WL 4698541, at *6 (Del. Ch. Dec. 8, 2009).
113
Nemec v. Shrader, 991 A.2d 1120, 1129 (Del. 2010).
25
I have already concluded above in Section II.B.1 that Ramco has stated a claim for
breach of contract under New Jersey law. DinSha and US Trading Company both
have their own respective agreements governing the conversion of their Morzev
interests to USARE. Accordingly, any claim related to the Individual Defendants’
purported failure to properly convert DinSha and US Trading Company’s shares
without diminution would be governed by their respective contracts and is not
properly brought as a breach of fiduciary duty claim. Count VII is dismissed.114
2. Count VIII for Breach of the Implied Covenant of Good Faith and
Fair Dealing that Inhered in the USARE LLC Agreement
In Count VIII, Plaintiffs allege that the Individual Defendants breached the
implied covenant of the duty of good faith and fair dealing inhering in USARE’s
LLC Agreement.115 Specifically, as members, managers, and/or majority owner of
USARE, the Individual Defendants were duty-bound to ensure that Plaintiffs
received a 1:1 equity interest in USARE, without diminution.116 The Individual
Defendants’ duties arise under the original and third amended and restated USARE
Company Agreements that provide that managers of USARE have contractual
obligations to act in accordance with the implied covenant.117 In response, the
114
Because Count VII is dismissed for the reasons above, I decline to reach the fact-intensive issue
of when USARE adopted the operating agreement that disclaimed fiduciary duties and whether
there exists a so-called “Fiduciary Period,” as Plaintiffs advocate. See Pls.’ AB 44–46; Am.
Compl. ¶¶ 52–59, 91.
115
Am. Compl. ¶ 101.
116
Id. ¶¶ 96–99.
117
Pls.’ AB 38.
26
Individual Defendants argue that Count VIII should be dismissed because Plaintiffs
have failed to allege that any contractual gaps existed in the LLC Agreement.118
“The implied covenant is inherent in all contracts and is used to infer contract
terms ‘to handle developments or contractual gaps that the asserting party pleads
neither party anticipated.’”119 The purpose of the implied covenant is to “ensure[]
that parties do not frustrate the fruits of the bargain by acting arbitrarily or
unreasonably.”120 Delaware courts do not use the implied covenant “as a backstop
to imply terms that parties failed to include but which could easily have been
drafted.”121 To plead a claim for the breach of the implied covenant, “the plaintiff
must allege a specific implied contractual obligation, a breach of that obligation by
the defendant, and resulting damage to the plaintiff.”122 The implied covenant,
however, “cannot be used . . . to create a free-floating duty unattached to the
underlying legal documents.”123
Plaintiffs failed to sufficiently plead a claim for a breach of the implied
covenant that inheres in USARE’s LLC Agreement. While Plaintiffs insist that the
Individual Defendants had implied duties to ensure that Plaintiffs received a 1:1
118
Althaus’ OB 23–25; Gutnick’s OB 22–23.
119
Dieckman v. Regency GP LP, 155 A.3d 358, 367 (Del. 2017) (quoting Nemec, 991 A.2d at
1125).
120
Baldwin v. New Wood Res. LLC, 283 A.3d 1099, 1116 (Del. 2022) (internal quotations omitted).
121
Id. at 1117.
122
Cantor Fitzgerald, L.P. v. Cantor, 1998 WL 842316, at *1 (Del. Ch. Nov. 10, 1998).
123
Lonergan v. EPE Hldgs., LLC, 5 A.3d 1008, 1017 (Del. Ch. 2010) (internal quotations omitted).
27
equity interest in USARE, Plaintiffs do not point to a specific implied contractual
obligation in the LLC Agreement that imposed this alleged duty on the Individual
Defendants. Rather, Plaintiffs generally aver that because the LLC Agreement
required the Individual Defendants to comply with the implied covenant, the
Individual Defendants were therefore required to use their authority as managers of
USARE to ensure Plaintiffs’ desired conversion under separate contracts. Merely
citing the provisions that require the Individual Defendants to comply with the
implied covenant is insufficient to allege a specific implied obligation in the LLC
Agreement itself.124
While Plaintiffs allege that, had they foreseen that the Individual Defendants
would diminish their holdings upon converting Plaintiffs’ equity from Morzev to
USARE, Plaintiffs would have insisted upon language in the LLC Agreement to
prevent such diminution,125 such allegation does not overcome the fact that the LLC
Agreement is completely silent as to what interests in USARE investors would
receive if they converted their equity previously held in Morzev. The language of
the LLC Agreement also does not indicate that all parties would have agreed to such
an obligation had the parties negotiated the issue,126 nor does the LLC Agreement,
124
See Cantor Fitzgerald, L.P., 1998 WL 842316, at *1 (explaining that a “plaintiff must advance
provisions of the agreement . . . in order to allege sufficiently a specific implied contractual
obligation”).
125
Pls.’ AB 38–39.
126
See Cantor Fitzgerald, L.P., 1998 WL 842316, at *1.
28
even read as a whole, sufficiently speak to suggest that such an obligation was
intended.127 Plaintiffs’ assertion of a claim for breach of the implied covenant
inhering in the LLC Agreement appears to me to be an attempt to use an “implied”
duty in the LLC Agreement to vindicate what they agreed to, or wish they had agreed
to, i.e., exact percentages in USARE. This Court, however, will not rewrite a
contract simply because Plaintiffs wish they had gotten a better deal. 128 And here,
the contracts that would determine Plaintiffs’ ownership in USARE are Plaintiffs’
respective conversion agreements, not the LLC Agreement. Therefore, Count VIII
for breach of the implied covenant inhering in the LLC Agreement is dismissed.
III. CONCLUSION
For the foregoing reasons, the Defendants’ motions to dismiss are DENIED
in part and GRANTED in part. The parties should submit an appropriate form of
order in accordance with this memorandum opinion.
127
See Lonergan, 5 A.3d at 1017 (internal quotations omitted).
128
See Nemec, 991 A.2d at 1125–26.
29