Kostyszyn v. Martuscelli

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
AGNIESZKA KOSTYSZYN, )
and MAREK KOSTYSZYN )
Plaintiffs, )
)
v. ) C.A. N14C-08-010 PRW
)
GIANMARCO MARTUSCELLI, )
GILDA MARTUSCELLI, )
the ESTATE OF BRETT J. HARRIS )
FROZEN ENDEAVORS, INC., )
a Delaware Corporation, )
AJT, INC., a Delaware Corporation, )
CHESAPEAKE INN, INC., )
a Maryland Corporation. )
Defendants. )
Submitted: December 8, 2014
Decided: February 18, 2015
MEMORANDUM OPINION AND ORDER
Upon Defendants’ Motion to Dismiss Plaintiffs’ Complaint,
GRANTED.
Gregory D. Stewart, Esquire, Law Office of Gregory D. Stewart, P.A.,
Wilmington, Delaware, Attorney for Plaintiff.
Brian M. Gottesman, Esquire (argued), Michael W. McDermott, Esquire,
Suzanne H. Holly, Esquire, Berger Harris LLP, Wilmington, Delaware,
Attorneys for Defendants.
WALLACE, J.
I. INTRODUCTION
Before the Court is Defendants Gianmarco Martuscelli, Gilda Martuscelli,
the Estate of Brett J. Harris, Frozen Endeavors, Inc., AJT, Inc., and Chesapeake
Inn, Inc.’s (collectively the “Defendants”) motion to dismiss. Plaintiffs Agnieszka
Kostyszyn and Marek Kostyszyn (together the “Plaintiffs”) currently own and
operate Paciugo Gelato and Café (“Paciugo”). They purchased the business from
Defendants and now allege that Defendants committed fraud during its sale and
have breached their duties under the sale’s agreement. Because the Plaintiffs have
failed to meet the required pleading standards for all claims, the Court GRANTS
the Defendants’ motion to dismiss.1
II. FACTS AND PROCEDURAL BACKGROUND
In late 2011, Plaintiffs approached the owners of Paciugo about the
possibility of opening up a franchise. 2 Plaintiffs met with Gianmarco Martuscelli
(“Mr. Martuscelli”), principal of Frozen Endeavors, Inc. (“Endeavors”), and B.J.
Harris (now deceased). 3 Messrs. Martuscelli and Harris presented Plaintiffs with a
1
At oral argument, Defendants argued that only Frozen Endeavors was properly named
and all claims were improperly brought against the other defendants. Because Plaintiffs have
failed in substance to file an adequate complaint, the Court need not determine who are the
proper defendants to the action.
2
See Plf.’s Answering Br. at 1.
3
See Compl. at ¶ 14.
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profit statement for Paciugo ranging from July 2010 to August 2011. 4 The profit
statement reflects a profit (“net with payroll”) of $7,186.21 and details Paciugo’s
retail sales, catering sales, rent cost, insurance cost, ingredient costs, royalties paid,
and payroll for those months.5
On December 1, 2011, Plaintiffs purchased Paciugo from Endeavors for
$272,500, which they paid in three installments. 6 The Martuscellis were not a
party to the Agreement of Sale (“Agreement”); only Plaintiffs and Endeavors
signed the contract.7 The contract provided, in part, that Mr. Martuscelli’s other
businesses, Chesapeake Inn (“Chesapeake”) and Canal Creamery & Sweet Shoppe
(“Creamery”), and Mr. Martuscelli’s parents’ business, La Casa Pasta, would
continue purchasing gelato from Paciugo. Section 5(d) of the agreement states:
Seller shall continue to purchase gelato for Chesapeake Inn,
Canal Creamery & Sweet Shoppe and La Casa Pasta for a
period of ten years so long as Buyer does not breach its
obligations under this Agreement or the companion note and
security agreement or Buyer’s lease with Christiana Mall,
LLC. 8
4
See Profit Statement, Ex. 1 to Compl.
5
See id.
6
See Agreement of Sale (“Agreement”), Ex. 2 to Compl., at 1.
7
See id. at 11.
8
See id. at 3.
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The present dispute arose when Paciugo’s sales declined after Plaintiffs
purchased the business. Plaintiffs claim that gelato sales to Chesapeake, La Casa
Pasta, and the Creamery immediately dropped in 2012 to $18,4759 and further
declined in 2013 to $3,300. 10 The Creamery reportedly stopped purchasing
altogether from Paciugo in April 2013 when Mr. Martuscelli, who held a three-
year lease for the Creamery, sold his interest in the business prior to the
termination of the lease. 11 In an email exchange with the Plaintiffs, Mr.
Martuscelli explained he never owned but only had a lease on the Creamery, and
that he sold his interest because the Creamery had been losing money for the
preceding two years. 12 In that email, Mr. Martuscelli wrote:
I lost money at Paciugo and the Creamery but I tried to [sic] my
best and it wasn’t good enough. BJ and I sold Paciugo because
we were both losing too much money (BJ lost all his savings
and had nothing left). We sold you the business while still
owing the bank over $70k in a loan that I just finished paying
off this year. We didn’t make any money from you or anything
associated with Paciugo. We were absentee owners who
couldn’t afford to pay the bills any longer. 13
9
See Compl. at ¶ 17.
10
See id. at ¶ 22.
11
See Def’s. Mot. to Dismiss at 7.
12
Compl. at ¶¶ 21, 23.
13
Id. at ¶ 24.
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After receiving that email, Plaintiffs commenced this suit in the Court of Chancery,
alleging both equitable and legal claims. The Court of Chancery dismissed the
Plaintiffs’ equitable fraud claim with prejudice and dismissed the remaining legal
claims without prejudice for lack of subject matter jurisdiction. 14 Plaintiffs now
bring legal claims they enumerate as follows: (1) Breach of Contract; (2) Breach
of Warranty; (3) Indemnification; (4) Fraud; (5) Negligent Misrepresentation;
(6) Intentional Misrepresentation; and (7) Breach of Implied Covenant of Good
Faith and Fair Dealing. 15
III. STANDARD OF REVIEW
Generally, a plaintiff must plead the facts with “reasonable conceivability”
to survive a motion to dismiss.16 When considering a motion to dismiss under
Rule 12(b)(6), the Court will:
14
See Kostyszyn v. Martuscelli, 2014 WL 3510676, at *7 (Del. Ch. July 14, 2014)
(declining to engage clean up doctrine to address Plaintiffs’ legal claims, but allowing Plaintiffs
to transfer them to Superior Court).
15
See Compl. Plaintiffs also contend that Frozen Endeavors is a void entity and therefore
lacks standing to move to dismiss. They cite no authority for that argument. Nonetheless,
Frozen Endeavors filed a Certificate of Revival in 2014. That certificate retroactively validated
all of Frozen Endeavors’ actions taken during the time period the corporation was void. See
DEL. CODE ANN. tit. 8, § 312(e) (2013) (reinstatement by Certificate of Revival “shall validate all
contracts, acts, matters and things made, done and performed” by a corporation while its
certificate of incorporation was forfeited or void).
16
WP Devon Assocs. v. Hartstrings, LLC, 2012 WL 3060513, at *3 (Del. Super. Ct. July
26, 2012) (citing Cambium Ltd. v. Trilantic Capital Partners III L.P., 2012 WL 172844, at *1
(Del. Jan. 20, 2012)).
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(1) accept all well pleaded factual allegations as true; (2) accept
even vague allegations as “well pleaded” if they give the
opposing party notice of the claim; (3) draw all reasonable
inferences in favor of the non-moving party; and (4) [not
dismiss a claim] unless the plaintiff would not be entitled to
recover under any reasonably conceivable set of
circumstances.17
The Court may dismiss a claim if a plaintiff fails to plead an element of that
claim. 18
Under Rule 9(b), a plaintiff bringing a fraud or misrepresentation claim must
plead it with particularity—a heightened pleading standard.19 The plaintiff must
plead:
(1) a false representation, usually of fact, made by the
defendant; (2) the defendant’s knowledge or belief that the
representation was false, or was made with reckless
indifference to the truth; (3) an intent to induce the plaintiff to
act or to refrain from acting; (4) [that] the plaintiff’s action or
inaction was taken in justifiable reliance upon the
representation; and (5) damage to the plaintiff as a result of
such reliance. 20
17
See Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d 531, 535
(Del. 2011) (stating standard for motions to dismiss).
18
See Harris v. Dependable Used Cars, Inc., 1997 WL 358302, at *2-3 (Del. Super. Ct.
March 20, 1997); Wolstenholme v. Hygenic Exterminating Co., Inc., 1988 WL 77655, at *1-2
(Del. Super. Ct. July 5, 1988); see also Zebroski v. Progressive Direct Ins. Co., 2014 WL
2156984, at *6 (Del. Ch. Apr. 30, 2014).
19
Super Ct. Civ. R. 9(b); Universal Capital Mgmt. Inc. v. Micco World, Inc., 2012 WL
1413598, at *2 (Del. Super. Ct. Feb. 1, 2012).
20
Id. (citing Crowhorn v. Nationwide Mut. Ins. Co., 2001 WL 695542, at *4 (Del. Super.
Ct. Apr. 26, 2001)).
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The plaintiff must also state the “time, place, and contents of the fraud,” as well as
identify the person accused of committing the fraud. 21
IV. PARTIES’ CONTENTIONS
After the Court of Chancery dismissed Plaintiffs’ legal claims they filed suit
in this Court alleging that Defendants falsely represented the catering revenue and
financial condition of Paciugo, causing them to pay more for the business.22 They
further claim Defendants breached their obligations under the sales agreement by
failing to have their businesses purchase gelato at the same rate they did prior to
the Paciugo sale. 23
Defendants move to dismiss Plaintiffs’ Complaint in its entirety.
Defendants argue that they have not breached their obligations under the
Agreement. 24 Further, Defendants say, Plaintiffs have not specifically alleged
which of Defendants’ representations, made during the sale’s negotiations, were
false so as to provide the support required for the fraud, negligent
misrepresentation, and intentional misrepresentation claims. 25
21
See id. (listing elements of a fraud claim).
22
See Compl. at ¶ 25.
23
See id. at ¶ 36.
24
See Def’s. Mot. to Dismiss at 13.
25
See id. at 9.
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V. DISCUSSION
A. The Agreement is governed by Maryland law.
The parties disagree as to whether Delaware or Maryland substantive law
governs Plaintiffs’ claims. The Agreement contains varied (and seemingly
conflicting) choice of law provisions: Section 9(a) states that the agreement shall
be enforced “to the fullest extent permissible under Maryland or Delaware law”;
while the governing law provision in Section 9(i) says that the contract “will be
governed by, and construed and enforced in accordance with, the laws of the state
of Maryland.”26 The Court finds the latter to be the clearer expression of the
parties’ intended choice of “governing” law and to control here.
Delaware courts “are bound to respect the chosen law of contracting parties,
so long as that law has a material relationship to the transaction.” 27 Maryland law
has a material relationship to this contract because thereunder Plaintiffs sell (or
sold) gelato to two Maryland businesses and the Agreement’s negotiations, during
which the alleged fraud or misrepresentation occurred, took place at the
Chesapeake Inn in Maryland.28 Because the Agreement explicitly designates the
26
See Agreement, at 6.
27
Abry Partners V, L.P. v. F&W Acquisition LLC, 891 A.2d 1032, 1046 (Del. Ch. 2006).
28
See Compl. at ¶ 27 (stating Chesapeake Inn, a Maryland corporation with its principal
place of business in Maryland, purchases gelato from Paciugo).
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laws of Maryland as the governing law of the contract, this Court will apply
Maryland substantive law.
B. Maryland law does not recognize an independent cause of action for
breach of the implied covenant of good faith and fair dealing.
Maryland contract law recognizes an implied covenant of good faith and fair
dealing. 29 It does not, however, recognize an independent cause of action for a
breach of that implied covenant. 30 Because no cause of action exists for the
Plaintiffs’ claim under the governing law of the contract, it must be dismissed.
Defendants’ motion is therefore GRANTED as to the breach of implied covenant
of good faith and fair dealing claim.
C. Plaintiffs fail to adequately allege breach of contract.
Plaintiffs brought three breach of contract claims: breach of contract, breach
of warranty, and indemnification.
29
See Greenfield v. Heckenbach, 797 A.2d 63, 81 (Md. Ct. Spec. App. 2002) (citing Keller
v. A .O. Smith Harvestore Products, Inc., 819 P.2d 69, 73 (Colo. 1991)) (recognizing implied
covenant of good faith and fair dealing).
30
See Baker v. Sun Co., 985 F. Supp. 609, 610 (D. Md. 1997) (stating Maryland does not
explicitly recognize an independent cause of action for the implied contractual duty of good faith
and fair dealing); Mt. Vernon Props., LLC. v. Branch Banking & Trust Co., 907 A.2d 373, 381
(Md. Ct. Spec. App. 2006) (“[T]here is no independent cause of action at law in Maryland for
breach of the implied covenant of good faith and fair dealing.”).
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Even recognizing the low burden imposed to survive dismissal, 31 Plaintiffs’
pleadings do not demonstrate how Defendants have breached the Agreement and
how, on these breach claims, they, Plaintiffs, may recover under any reasonably
conceivable set of circumstances susceptible of proof. The contract requires
Defendants to purchase gelato for the Chesapeake Inn, Creamery, and La Casa
Pasta for ten years.32 Plaintiffs attempt to engraft to the Agreement a requirement
that Defendants purchase gelato in the amounts reflected in the Profit Statement
and refrain from purchasing competing products, such as ice cream. 33 But the
Profit Statement is just that—an accounting of the business’s profits for a certain
period. There is neither an allegation nor evidence it was to be part of the
Agreement.
The contract does not specify any amount of gelato that must be purchased.
Nor does the contract state that Defendants must continue to purchase gelato for a
non-operating business or refrain from purchasing ice cream. Plaintiffs admit that
the Chesapeake Inn and La Casa Pasta still purchase gelato from Paciugo, although
in smaller amounts.34 Plaintiffs also admit that Defendants bought gelato for the
31
Doe v. Cahill, 884 A.2d 451, 458 (Del. 2005).
32
See Profit Statement.
33
See Compl. at ¶¶ 35-36.
34
See id. at ¶¶ 27, 35-36.
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Creamery following the Paciugo sale. 35 Even drawing reasonable inferences in
favor of the Plaintiffs, they could not recover for breach of contract under any
reasonably conceivable set of circumstances because Plaintiffs admit that
Defendants still purchase gelato according to the terms of the contract for the
businesses that Defendants still operate. The Court need not “accept every strained
interpretation of the allegations proposed by the [P]laintiff[s].” 36 Plaintiffs here
have failed to plead facts supporting a finding of a breach of an obligation under
the Agreement, which is, of course, an essential element of their breach of contract
claim. 37 The claim must be dismissed.
In addition, the breach of warranty and indemnification claims must be
dismissed. Plaintiffs complain that Defendants’ alleged “improper accounting and
other business practices resulting in an overstatement of profits and revenues
substantially inflated revenue projections” constituted breaches of warranties in the
contract.38 Although the Court must accept all well-pleaded factual allegations as
true, “allegations that are merely conclusory and lacking factual basis, [ ] will not
35
See id. at ¶ 17.
36
Malpiede v. Townson, 780 A.2d 1075, 1083 (Del. 2001).
37
See VLIW Technology, LLC v. Hewlett-Packard Co., 840 A.2d 606, 612 (Del. 2006)
(listing essential elements for a breach of contract claim as (1) the existence of a contract, (2) the
breach of an obligation imposed by the contract, and (3) damage to the plaintiff).
38
See Compl. at ¶ 44.
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survive a motion to dismiss.”39 Plaintiffs have pled no facts showing that
Defendants utilized improper accounting practices. Nor have they pled facts
showing how the profits or revenues were inflated. They simply allege that the
sales in years following the sale of the franchise did not meet the same level as the
sales in previous years. Absent the necessary specific allegations of fact for
Plaintiffs’ claims that Defendants breached an express warranty in the contract, the
breach of warranty and indemnification claims must also be dismissed. 40
Defendants’ motion is GRANTED as to the breach of contract, breach of
warranty, and indemnification claims.
D. Plaintiffs’ fraud and intentional misrepresentation claims lack
reference to a false statement made by Defendants.
A plaintiff must state the “time, place, and contents” of the fraud or
misrepresentation alleged and allege that the defendant’s representation was false
to plead a claim with particularity as required by Rule 9(b). 41 In this case,
Plaintiffs have merely stated that Defendants presented them with false financial
39
See Brevet Capital Special Opportunities Fund, LP v. Fourth Third, LLC, 2011 WL
3452821, at *6 (Del. Super. Ct. Aug. 5, 2011) (quoting Criden v. Steinberg, 2000 WL 354390, at
*2 (Del. Ch. Mar. 23, 2000)).
40
Lord v. Souder, 748 A.2d 393, 398 (Del. 2000) (“Where allegations are merely
conclusory . . . (i.e., without specific allegations of fact to support them) they may be deemed
insufficient to withstand a motion to dismiss.”).
41
See Universal Capital Mgmt. Inc. v. Micco World, Inc., 2012 WL 1413598, at *2 (Del.
Super. Ct. Feb. 1, 2012).
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information using improper accounting methods 42 without pleading adequate facts
informing how the records were false. Plaintiffs do not specify the time, place, and
contents of the alleged fraud as required. They instead generalize that
“information regarding the financial condition, operating results, revenue, income
and expenses” of the business was false.43 Plaintiffs indicate neither how
Defendants’ accounting methods were improper nor how the one financial
statement Plaintiffs relied on in purchasing the franchise was inaccurate. They
have not specified any false statements made by Defendants nor that Defendants
knew or believed their statements to be false. In short, Plaintiffs have failed to
plead multiple elements of their fraud claims. Accordingly, the fraud and
intentional misrepresentation claims must be dismissed.
Defendants’ motion is GRANTED as to fraud and intentional
misrepresentation claims.
E. Without an “intimate nexus,” there can be no claim of negligent
misrepresentation.
Maryland law requires a plaintiff alleging negligent misrepresentation to
plead all the elements of fraud plus the existence of an “intimate nexus.” 44 To
42
See Compl. at ¶¶ 53-56.
43
See id. at ¶ 55.
44
See Weisman v. Connors, 540 A.2d 783, 792 (Md. 1988) (defining “intimate nexus” as
“contractual privity or its equivalent”).
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show an intimate nexus, the plaintiff must demonstrate that the defendant owed the
plaintiff a duty of care by showing contractual privity or its equivalent. 45 Plaintiffs
have failed to plead the existence of an intimate nexus; there are no facts pled
demonstrating that Defendants owed Plaintiffs a specific duty of care in this
instance. As the Court of Chancery determined, the parties engaged in an arm’s
length transaction. Neither in Chancery, nor here, have Plaintiffs pled “the
existence of a fiduciary, special, or confidential relationship between the parties.”46
In turn, they have failed to plead the existence of an “intimate nexus” as required
under Maryland law. 47 Therefore, the negligent misrepresentation claim must be
dismissed 48 and the Defendants’ motion as to that claim is GRANTED.
45
Dwoskin v. Bank of Am., N.A., 850 F. Supp. 2d 557, 571 (D. Md. 2012) (“When dealing
with claims of economic loss due to negligent misrepresentation, a plaintiff must prove the
defendant owed a duty of care by demonstrating an intimate nexus . . . demonstrated by showing
contractual privity or its equivalent.”).
46
Kostyszyn v. Martuscelli, 2014 WL 3510676, at *5 (Del. Ch. July 14, 2014).
47
Gresi v. Atl. Gen. Hosp. Corp., 756 A.2d 548, 553-56 (Md. 2000).
48
See, e.g., In re Asbestos Litigation (Fluitt), 2014 WL 600638 (Del. Super. Ct. Jan. 29,
2014) (complaint in asbestos matter, to which Florida substantive law applied, insufficient when
it failed to state the essential elements of plaintiffs’ claims, which Delaware’s pleading standard
requires, under Florida’s applicable statute).
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VI. CONCLUSION
While the missing required elements for each of the several claims may
differ, Plaintiffs cannot, under the Complaint and its allegations as pled, recover
under any reasonably conceivable set of circumstances susceptible to proof. The
Defendant’s Motion to Dismiss Plaintiffs’ Complaint is GRANTED, and all of the
Plaintiffs’ claims are DISMISSED.
IT IS SO ORDERED.
/s/ Paul R. Wallace
PAUL R. WALLACE, JUDGE
Original to Prothonotary
cc: All counsel via File & Serve
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