JCM Innovation Corp. v. FL Acquisition Holdings, Inc.

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
JCM INNOVATION CORP., a Nevada )
corporation, and JCM AMERICAN )
CORPORATION, a Nevada )
corporation, )
)
Plaintiffs, )
)
v. ) C.A. No. N15C-10-255 EMD CCLD
)
FL ACQUISITION HOLDINGS, INC., )
a Delaware corporation, and )
AMERICAN CAPITAL, LTD., a )
Delaware corporation, )
)
Defendants. )
Submitted: June 3, 2016
Decided: September 30, 2016
Upon Defendants’Motion to Dismiss
GRANTED in part and DENIED in part
Sean J. Bellew, Esquire, and Jarret P. Hitchings, Esquire, Duane Morris LLP, Wilmington,
Delaware and Robert L. Ruben, Esquire, Duane Morris LLP, Baltimore, Maryland. Attorneys
for Plaintiffs JCM Innovation Corp. and JCM American Corporation.
Gregory V. Varallo, Esquire, Robert J. Stearn, Jr., Esquire, Robert L. Burns, Esquire, and
Matthew D. Perri, Esquire, Richards, Layton & Finger, P.A., Wilmington Delaware and John C.
Massaro, Esquire, and Dana Y. Elliott, Esquire, Arnold & Porter LLP, Washington, DC.
Attorneys for Defendants FL Acquisition Holdings, Inc. and American Capital Ltd.
DAVIS, J.
INTRODUCTION
This action is assigned to the Complex Commercial Litigation Division. The case arises
out of a purchase of a company, FutureLogic Group, Inc. n/k/a FutureLogic Group, LLC
(“FutureLogic”), through an asset purchase agreement (the “Agreement”). Plaintiffs JCM
Innovation Corp. (“JCM Innovation”) and JCM American Corporation (“JCM American” and
together with JCM Innovation, “JCM”) purchased FutureLogic from Defendants FL Acquisition
Holdings, Inc. (“FL Holdings”) and American Capital Ltd. (“ACAS” and together with FL
Holdings, “Defendants”). Subsequent to FutureLogic’s sale, third parties brought claims against
JCM for malfunctions relating to casino gaming printers manufactured by FutureLogic. Through
the Complaint, JCM seeks to recover these costs from Defendants and to recover JCM’s
investment in FutureLogic. Generally, JCM claims Defendants fraudulently induced JCM into
buying FutureLogic, intentionally misrepresented the casino gaming printer’s viability, willfully
sold JCM a defective product and breached the Agreement. Defendants have moved to dismiss
all counts of the Complaint, contending that (i) the Court lacks jurisdiction, (ii) the Agreement’s
ADR requirement bars the action, and (iii) the Complaint fails to state any claims upon which
relief can be granted.
For the reasons set forth below, the Court finds and holds that venue is proper here; that
Section 2.5 of the Agreement is not a mandatory ADR process that would stay this civil action;
and that Counts I, II, III and IV of the Complaint fail to state a claim upon which relief can be
granted. In addition, the Court finds and holds that Counts V and V1 state claims upon which
relief can be granted. Accordingly, the Court will GRANT in part and DENY in part the
Defendants’ Motion to Dismiss
FACTUAL AND PROCEDURAL BACKGROUND2
A. FACTUAL BACKGROUND
The parties contracted for the purchase of FutureLogic. 3 JCM Innovation and JCM
American are Nevada Corporations which sell printers and currency validators to slot machine
1
The Complaint asserts two Count V – one for Fraud and one for Unjust Enrichment. The Court will treat these as
two claims and the use of Count V twice as a typo.
2
As Defendants’ Motion to Dismiss is a motion filed under Superior Court Civil Rule 12, the Court will, unless
otherwise indicated, be using the facts as alleged in JCM’s Complaint (“Pls.’ Comp.”). See, e.g., Central Mortg. Co.
v. Morgan Stanley Mortg. Capital Holdings LLC, 227 A.3d 531, 536 (Del. 2011)
3
Pls.’ Comp. at ¶¶9–13.
2
original equipment manufacturers.4 JCM Innovation is the buyer under the Agreement.5 JCM
American was the Purchaser Guarantor.6
FL Holdings is a Delaware Corporation, of which Defendant ACAS was the majority
owner and controller.7 FL Holdings is the seller under the Agreement.8 ACAS, a private equity
firm, was the Securityholders’ Representative.9 Several company officers and directors were
also affiliated with ACAS.10
FutureLogic sold gaming printers.11 JCM was interested in FutureLogic’s state of the art
printer, the Gen3.12 In early 2014, Cowen & Co., investment banker for Defendants, invited
JCM to participate in a private auction process for FutureLogic’s sale.13 Defendants held two
meetings with JCM in April and May 2014.14 In the meetings, Defendants alleged the Gen3
printers were “fast, robust, next generation technology.”15 In June 2014, Defendants selected
JCM as the preferred bidder for FutureLogic.16
In July 2014, Defendants delivered financial statements, including future Gen3 warranty
costs, to JCM.17 The parties did their due diligence the week of July 7, 2014.18 The parties
executed the Agreement on August 1, 2014.19
In the Agreement, Defendants warranted that:
4
Id. at ¶4
5
Id. at ¶5
6
Id.
7
Id. at ¶7
8
Id. at ¶8
9
Id.
10
Id. at ¶¶14–20.
11
Id. at ¶9.
12
Id. at ¶13.
13
Id.
14
Id. at ¶¶21–23.
15
Id.
16
Id. at ¶26.
17
Id. at ¶¶27–29.
18
Id. at ¶30.
19
Id. at ¶31.
3
All Products have conformed in all material respects with all applicable
contractual commitments and all express and, to the Company's Knowledge,
implied warranties, and neither the Company nor its Subsidiaries have any
Liability for replacement or repair thereof or other damages in connection
therewith beyond the Company's or any Subsidiary's standard warranties and
those imposed by applicable Law. All Products are subject to standard terms and
conditions of sale, license, lease, or delivery, true, complete and correct copies of
which have been delivered to Purchaser and contain the applicable guaranty,
warranty, and indemnity provisions. No Product is subject to any guaranty,
warranty, or other indemnity beyond the applicable standard terms and conditions
of any such sale, license, lease, or delivery and those imposed by applicable Law.
Without limiting the generality of the foregoing, no product liability claim has
been made against the Company or any of its Subsidiaries as a result of any defect
in design, manufacture, materials or workmanship, arising out of, relating to or
resulting from any injury to any individual or property as a result of the
ownership, possession or use of any product manufactured, sold, leased or
distributed by the Company or any of its Subsidiaries, other than ordinary
warranty claims substantially consistent with the warranty reserves established by
the Company and its Subsidiaries. Neither the Company nor any of its
Subsidiaries have received written notice as to any claim for personal injury or
death, any claim for property, economic, punitive or exemplary damages, any
claim for contribution or indemnification or any claim for injunctive relief, in
each case in connection with any product manufactured, sold, leased or
distributed by the Company or any of its Subsidiaries. There has not been any
product recall (voluntary, involuntary or otherwise) by the Company or any of its
Subsidiaries.20
Further, Defendants agreed to promptly notify JCM in writing of any defects.21
JCM alleges that Defendants intentionally withheld how poor the Gen3 printers
performed. JCM alleges Defendants knew of significant quality issues relating to the Gen3
printers since November 2013, well before JCM bought the company.22 JCM also alleges that
Defendants substantially and intentionally understated warranty costs related to the Gen3.
20
Pls. Comp., Ex. A., pp. 38–39.
21
Id. p. 51. (“From the date hereof until the Closing, Seller shall promptly after becoming aware of the applicable
matter notify Purchaser in writing and Purchaser shall promptly after becoming aware of the applicable matter notify
Seller in writing of: a) any fact, circumstance, event or action the existence, occurrence or taking of which (i) has
had, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect (or, in the
case of Purchaser, a material adverse effect on its ability to consummate the transactions contemplated by this
Agreement), (ii) has resulted in, or could reasonably be expected to result in, any representation or warranty made
by Seller or Purchaser, as applicable, hereunder not being true and correct. . ..”).
22
Pls. Comp. at ¶¶39–50.
4
B. PROCEDURAL BACKGROUND
On November 3, 2015, JCM Innovation and JCM American filed this complaint against
FL Holdings and ACAS. On December 30, 2015, Defendants filed their Defendants’ Motion to
Dismiss and Defendants’ Opening Brief in Support of Their Motion to Dismiss (“Defs.’ Br.”).
Defendants contend that the Complaint should be dismissed because: (1) the Court does not
have venue; (2) the Agreement mandates ADR prior to initiating any civil proceeding; (3) the
Agreement’s exclusive remedy provisions bars most, if not all, of JCM’s claims for relief; (4)
JCM has not satisfied the Agreement’s prerequisites for bringing an indemnification claim; and
(5) JCM has not plead fraud with particularity.
On February 15, 2016, JCM filed Plaintiffs’ Answering Brief in Support of Their
Objection to Defendants’ Motion to Dismiss (“Pls.’ Ans.”). JCM’s opposition alleges the Court
has jurisdiction; it plead fraud with particularity; there is no mandatory ADR; and fraud vitiates
the Agreement, allowing JCM to bring the other claims.
On March 7, 2016, Defendants filed their Defendants’ Reply in Support of Their Motion
to Dismiss (“Defs.’ Rep.”). On May 23, 2016, the Court heard oral argument. The Court
requested the parties file supplemental briefing by June 3, 2016. The parties filed their
supplemental briefs on June 3, 2016. The Court then took the matters under advisement and
reserved decision.
STANDARD OF REVIEW
A. MOTION TO DISMISS – IMPROPER VENUE
Superior Court Civil Rule 12(b)(3) governs a motion to dismiss or stay on the basis of
improper venue. The Court should give effect to private agreements’ terms to resolve disputes in
a contractually-designated judicial forum, out of respect for the parties’ contractual
5
designation.23 The Court can grant dismissal prior to discovery, on the basis of affidavits and
documentary evidence, if the plaintiff cannot make out a prima facie case in support of its
position.24 The Court generally will allow the plaintiff to take discovery when the plaintiff
advances a non-frivolous legal argument that would defeat the motion if the facts turn out to be
as alleged.25
B. MOTION TO DISMISS – FAILURE TO STATE A CLAIM
Upon a motion to dismiss, the Court accepts all well-pleaded factual allegations as true,
accepts even vague allegations as well-pleaded if they give the opposing party notice of the
claim, draws all reasonable inferences in favor of the non-moving party, and only dismisses a
case where the plaintiff would not be entitled to recover under any reasonably conceivable set of
circumstances.26 However, the Court must “ignore conclusory allegations that lack specific
supporting factual allegations.”27
DISCUSSION
A. THE COURT HAS VENUE
The Agreement has a “Jurisdiction” Clause – Section 11.4 of the Agreement. 28 This
section reads, in pertinent part:
This Agreement shall be governed and construed in accordance with the laws of
the State of Delaware, without regard to any applicable conflicts of law provisions
(except to the extent that mandatory provisions of federal Law apply). Each of the
parties hereby irrevocably submits to the exclusive jurisdiction and venue of the
Delaware Court of Chancery (and if the Delaware Court of Chancery shall be
unavailable, any court of the State of Delaware or the United States District Court
23
Loveman v. Nusmile, Inc., 2009 WL 847655, at *2 (Del. Super. March 31, 2009).
24
Id. (citing Simon v. Navellier Series Fund, 2000 WL 1597890, at *4 (Del. Ch. Oct. 19, 2000)).
25
HealthTrio, Inc. v. Margules, 2007 WL 544156, at *2 (Del. Super.) (citing Simon, 2000 WL 1597890, at *4).
26
Central Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 227 A.3d 531, 536 (Del. 2011); Doe v.
Cedars Academy, 2010 WL 5825343, at *3 (Del. Super. Oct. 27, 2010).
27
Ramunno v. Crawley, 705 A.2d 1029, 1034 (Del. 1998).
28
Pls.’ Comp., Ex. A., at 71–72.
6
for the District of the State of Delaware) for the purpose of any Action arising out
of this Agreement[.]29
The parties expressly included a Delaware Court of Chancery ( “Chancery”) carve-out. Under
this section, JCM could file in another Delaware Court if Chancery is unavailable. Without
more, JCM’s legal claims do not create subject matter jurisdiction in Chancery.
Defendants raise three statutory arguments as to why Chancery is mandatory and,
therefore, venue is improper in this Court. First, Defendants argue JCM made an unjust
enrichment claim. Defendants argue 10 Del. C. § 341 governs this equitable claim. So, if the
claim is not barred by the Agreement’s exclusive remedy provision, Chancery retains
jurisdiction.
Chancery has subject matter jurisdiction in three ways: (1) one or more claim for relief is
equitable in character; (2) the plaintiff requests relief that is equitable in nature; or (3) subject
matter jurisdiction is conferred by statute.30 Although unjust enrichment is an equitable remedy
upon which equity jurisdiction might be predicated, that is true only if the complaint, objectively
viewed, discloses a genuine need for such equitable relief. The fact that a complaint contains a
prayer for an equitable remedy, without more, does not conclude the jurisdictional analysis. In
deciding whether or not equitable jurisdiction exists, the Court must look beyond the remedies
nominally being sought, and focus upon the allegations of the complaint in light of what the
plaintiff really seeks to gain by bringing his or her claim.31
29
Id.
30
Candlewood Timber Grp., LLC v. Pan Am. Energy, LLC, 859 A.2d 989, 997 (Del. 2004)
31
Id.
7
JCM drafted the Complaint seeking legal, not equitable, remedies. The Court has heard
unjust enrichment claims. Defendants conceded this point at oral argument and that they were
abandoning the unjust enrichment argument.32
Defendants also argue that this is a technological dispute. Defendants state that 10 Del.
C. § 346 (“Section 346”) governs the parties’ dispute, which grants exclusive jurisdiction to
Chancery. JCM argues Section 346 does not apply because the parties agreed to sell the entire
company, not just the Gen3 printer. JCM argues that the fact the sale included technology does
not make it a technology dispute.
The statute, the implementing rules of procedure and similar civil actions demonstrate
that Section 346 does not apply here to divest the Court of jurisdiction. Section 346 allows
Chancery to implement rules to govern jurisdiction. Chancery Rule 91 allows technology
disputes in Chancery only if it solely involves a claim for monetary damages in excess of one
million dollars.33 Chancery Rule 92 states:
(a) Provided that the parties and the amount in controversy meet the eligibility
requirements in 10 Del. C. § 346, a written agreement to engage in litigation in
the Court of Chancery is acceptable if it contains the following language: “The
parties agree that any dispute arising under this agreement shall be litigated in the
Court of Chancery of the State of Delaware, pursuant to 10 Del. C. § 346. The
parties agree to submit to the jurisdiction of the Court of Chancery of the State of
Delaware and waive trial by jury.”34
The Agreement did not include that language. The parties agreed to Chancery jurisdiction,
unless it is unavailable. The parties do not mention Section 346 at all. The Court will not read in
Chancery jurisdiction where the parties clearly did not intend to create it. Moreover, JCM’s
32
Defs.’ Mot. to Dismiss Hr’g Tr. 4:17–5:6 (May 23, 2016).
33
Del. Ch. R. 91.
34
Del. Ch. R. 92.
8
other claims are also for legal, and not equitable, relief and Chancery would not necessarily have
jurisdiction over such claims unless coupled with a Section 346 type action.
Defendants’ third argument is that JCM’s purchase of FutureLogic is tantamount to a sale
of securities. Section 111 of Title 8 (“Section 111”) governs a sale of securities.35 Section
111(a)(2) grants Chancery jurisdiction to hear claims where a corporation: creates or sells its
stock; offers to create or sell its stock; creates or sells rights or options respecting its stock; or
offers to create or sell rights or options respecting its stock.36 As such, Defendants argue JCM’s
only recourse is equity.
The Court also can have jurisdiction over a sale of a company’s assets if the plaintiff
asserts legal claims for relief. Indeed, many Complex Commercial Litigation Division cases
involve asset sales. For example, the Court decided a case with similar facts in ITW Glob.
Investments Inc. v. Am. Indus. Partners Capital Fund IV, L.P.37 In ITW, plaintiff alleged that
defendants committed fraud, fraud in the inducement, and breach of contract in connection with
plaintiff’s acquisition of a business from defendants.38 The same allegedly occurred here. JCM
purchased a company from Defendants, and allege they were fraudulently induced into doing so.
Now, the Court does understand that the purchase of assets here was the purchase of
FutureLogic stock, but FutureLogic is not the “Seller” in the Agreement and FutureLogic is not
selling its stock. Instead, FL Holdings (defined in the Agreement as the “Seller”) sold assets, the
FutureLogic stock it held (otherwise known as “Purchased Units”),39 to JCM Innovation.40
35
8 Del. C. § 111.
36
8 Del. C. § 111(a)(2)(emphasis added).
37
2015 WL 3970908, at *1 (Del. Super. June 24, 2015)
38
Id.
39
Pls.’ Comp., Ex. A., at 1 (“Purchase Units” is defined as all of the issued and outstanding equity interests of
FutureLogic).
40
The Court needs to note that Defendants contend in their reply brief that “…under the Agreement, the Company
sold its stock to Plaintiffs.” Defs.’ Rep. at 3. For this proposition, Defendants refer the Court to Section 2.1(a) of
the Agreement. Id. Section 2.1(a) does not provide that FutureLogic (defined by Defendants as “Company” in their
9
Understanding this, the Agreement is more properly characterized as an asset purchase
agreement and not an agreement where a company sells its stock.
B. SECTION 2.5 IS A POST-CLOSING PROCEDURE, NOT MANDATORY ADR
Defendants contend that Section 2.5 of the Agreement bars JCM’s claims. Defendants
allege Section 2.5 is a mandatory alternative dispute resolution mechanism which the parties
must go through prior to litigation. JCM argues that Section 2.5 is not mandatory ADR, and the
parties are not “quibbling over math.”41
Section 2.5 does not constitute ADR. It is a post-closing procedure for the parties to
resolve discrepancies in the purchase price and make post-closing adjustments.42 This civil
action involves claims for purported breaches of contract, fraud and unjust enrichment. JCM
seeks more than an adjustment to purchase price, working capital, closing cash, the amount of
indebtedness, or estimated transaction expenses. 43 Moreover, Defendants’ cited cases are
inapposite. In Weiner v. Milliken Design, Inc.,44 the parties disagreed over the scope of
arbitration.45 It was not a disagreement over whether arbitration was mandatory.
Nothing in the Agreement mandates that the parties’ post-closing process must precede
any indemnification argument, fraud claim, or unjust enrichment claim. It is true that JCM’s
damages for indemnification claims are controlled by Section 9.4 of the Agreement.46 But,
briefing) sold its stock to JCM Innovation. Rather, section 2.1(a) provides that, at closing, Seller (defined in the
Agreement as FL Holdings) will sell the “Purchased Units” to JCM Innovation. Purchased Units is defined as “all
of the issued and outstanding equity interests of [FutureLogic]….” Defendants’ argument in their reply brief creates
a misimpression that FutureLogic sold its stock to JCM Innovation. The reality is that FL Holdings sold an asset –
its equity holdings in another entity (recapitalized FutureLogic) – to JCM Innovation.
41
Pls.’ Ans. at 18.
42
Pls. Ex. A. at 17-20.
43
Id.
44
2015 WL 401705 (Del. Ch. Jan. 30, 2015).
45
See Id. at *1.
46
See Pls.’ Comp., Ex. A., at 62–63 (Detailing Defendants’ indemnification obligations).
10
nothing states that the parties have to determine the Final Purchase Price first, prior to litigating
over alleged damages on other types of claims.
C. THE EXCLUSIVE REMEDY CLAUSE PRECLUDES PLAINTIFFS’ BREACH OF CONTRACT,
INDEMNIFICATION, IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING CLAIMS
Defendants argue that Counts I, II, III, IV and V (unjust enrichment) of the Complaint
(i.e., JCM’s breaches of contract claims, indemnity and implied covenant of good faith and fair
dealing claim) all fail because the contract’s exclusive remedy provision limits Plaintiffs’
remedies.47
JCM counters that the exclusive provision expressly carves out “claims arising from
fraud.” So, JCM is not barred from bringing its claims because they stem from Defendants’
alleged fraud.48 Second, JCM contends that Defendants’ intentional fraud voids the clause.
Defendants’ fraudulent conduct goes against public policy, and JCM does not have to comply
with the clause.
Section 9.9, the exclusive remedy provision, states:
From and after the Closing, except for the resolution of disputes relating to
Section 2.5, the sole and exclusive remedy for any breach or failure to be true and
correct, or alleged breach or failure to be true and correct, of any representation or
warranty or any covenant or agreement in this Agreement (other than for claims
arising from fraud), shall be indemnification in accordance with this
ARTICLE IX and, as applicable, ARTICLE VIII. The parties have voluntarily
agreed to define their rights, liabilities and obligations respecting the subject
matter of this Agreement exclusively in contract (other than for fraud) pursuant
to the terms and provisions of this Agreement and their sole and exclusive
remedies regarding the subject matter of this Agreement (other than for fraud)
shall be remedies available at law or in equity for breach of contract only (as such
remedies may be limited by the express terms of this Agreement).
Notwithstanding anything to the contrary in this Section 9.9, the Parties shall
retain (a) remedies that cannot be waived as a matter of Law and (b) any equitable
relief to which any Party shall be entitled under this Agreement or (c) to seek any
remedy related to fraud.49
47
Defs.’ Op. Br. at *21–22.
48
Pls.’ Ans. at *20–21.
49
Pls. Comp., Ex. A., pp. 65–66 (emphasis added).
11
The Exclusive Remedy Provision explicitly sets forth JCM’s options for claims under the
Agreement. JCM can go through the indemnification process, or it can bring fraud claims. JCM
attempts to disregard the exclusive remedy provision by claiming Defendants’ fraudulent
conduct vitiates the entire clause. But, Plaintiffs do not provide any case law supporting this
conclusion. Moreover, the Complaint alleges fraud in the inducement as to the entire
Agreement. To avoid the application of Section 9.9 but still assert breach of contract type
claims, the Complaint would need to be more “surgical” in nature. In other words, JCM would
need to allege facts demonstrating that Section 9.9 is void for public policy reasons, or was
somehow negotiated with fraudulent intent and that Section 9.9 should be severed from the rest
of the Agreement.
Defendants cite several cases in support.50 While none of them deal with exclusive
remedy provisions with fraud carve-outs, the holdings are helpful here. For example, in
Transched Sys., the Court granted a defendant’s motion to dismiss for a plaintiff’s attempt to
bring a claim in violation of the parties’ contract’s exclusive remedy provision.51 But, the Court
did permit Plaintiff to amend its complaint to bring fraudulent claims.52 The Court was
concerned with “contractual provisions such as the ones at issue here would insulate or protect a
party whose conduct would be fraudulent in nature. In spite of due diligence by sophisticated
parties, the Court can never be in a position to condone or prevent redress for clearly fraudulent
activity.”53
50
Abry Partners V, L.P. v. F&W Acquisition LLC, 891 A.2d 1032 (Del. Ch. 2006); Transched Sys. v. Versyss
Transit Solutions, LLC, 2008 WL 948307 (Del. Super. Apr. 2, 2008).
51
Transched Sys., 2008 WL 948307, at *2.
52
Id. at *4.
53
Id.
12
Delaware has a strong public policy distaste for fraud. JCM appears to have understood
for this case. JCM has plead a fraud and an unjust enrichment claim. Those will proceed. The
Exclusive Remedy Provision, however, bars JCM’s contractual claims. JCM and its counsel are
not “unsophisticated part[ies] or part[ies] lacking bargaining clout.”54 Nor did JCM sign a
contract with a boilerplate merger clause.55 Therefore, the “vitiation” claim cannot extend to
those types of claims.
The Court will not dismiss the unjust enrichment claim – the second Count V. An unjust
enrichment claim is a quasi-contractual claim, but it is a claim that proceeds under the theory that
no contract exists. The courts developed unjust enrichment as a theory of recovery to remedy the
absence of a formal contract and a plaintiff cannot recover under this theory if a contract is a
measure of the plaintiff’s rights.56 Logically, the Court cannot, at this stage in the proceedings,
use a provision of the Agreement to dismiss JCM’s unjust enrichment claim that must rely on the
theory there is no valid Agreement.
D. PLAINTIFFS VALIDLY PLEAD FRAUD
In order to state a valid claim for fraud, JCM must allege: (1) Defendants falsely
represented or omitted facts that the Defendants had a duty to disclose; (2) the Defendants knew
or believed that the representation was false or made the representation with a reckless
indifference to the truth; (3) the Defendants intended to induce Plaintiffs to act or refrain from
acting; (4) Plaintiffs acted in justifiable reliance on the representation; and (5) the Plaintiffs were
injured by their reliance.57 Fraud must be plead with particularity.58
54
Abry, 891 A.2d at 1061.
55
Id.
56
ID Biomedical Corp. v. TM Technologies, Inc., C.A. No. 13269, 1995 WL 130743, at *15 (Del. Ch. Mar. 16,
1995).
57
DCV Holdings, Inc. v. ConAgra, Inc., 889 A.2d 954, 958 (Del. 2005).
58
Super. Ct. Civ. R. 9(b).
13
Defendants claim JCM did not validly plead fraud. And, if they did, the Agreement’s
warranty, anti-reliance, and integration clauses bar the claim.
Section 3.23 of the Agreement states:
EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES CONTAINED
IN SECTIONS 3.1 THROUGH 3.23 OF THIS ARTICLE III (INCLUDING THE
RELEVANT PORTIONS OF THE DISCLOSURE SCHEDULE), THE
COMPANY MAKES NO EXPRESS OR IMPLIED REPRESENTATION OR
WARRANTY WITH RESPECT TO THE COMPANY, AND PURCHASER
HEREBY DISCLAIMS ANY SUCH REPRESENTATION OR WARRANTY IN
CONNECTION WITH THE EXECUTION AND DELIVERY OF THIS
AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS
CONTEMPLATED BY THIS AGREEMENT.59
The anti-reliance clause, Section 4.10, states:
Purchaser's investigation of Seller, the Company and its Subsidiaries, Purchaser
and its Representatives have received from Seller and its Subsidiaries
(individually or through its Representatives) certain projections, estimates and
other forecasts and certain business plan information (collectively, "Projections").
Purchaser acknowledges that there are uncertainties inherent in attempting to
make such Projections, that it is familiar with such uncertainties, that it is making
its own evaluation of the adequacy and accuracy of all Projections so furnished to
it and any use of, or reliance by, it on such Projections shall be at its sole risk, and
without limiting any other provisions herein, that it shall have no claim against
anyone with respect thereto; provided, that the foregoing shall not be
interpreted to waive any rights that Purchaser has with respect to recovery
for breaches of express representations and warranties made by Seller or the
Company in ARTICLE III of this Agreement or for any intentional
misconduct by Seller, the Company, its Subsidiaries, or any person
authorized to act on behalf of Seller, the Company or its Subsidiaries.60
The integration clause states:
This Agreement, the other Transaction Documents and the certificates, documents
and instruments and other agreements specifically referred to herein or therein or
delivered pursuant hereto or thereto, including the Exhibits and the Schedules
(including the Disclosure Schedule), and the Confidentiality Agreement (a)
constitute the entire agreement among the Parties with respect to the subject
matter hereof and supersede all prior agreements and understandings, both written
and oral, among the Parties with respect to the subject matter hereof, (b) shall not
be assigned by operation of law or otherwise except as otherwise specifically
59
Pls. Comp., Ex. A., at p. 39.
60
Id. at p. 44 (Emphasis Added).
14
provided herein or therein, except Purchaser and Seller may assign this
Agreement and any Transaction Document, in whole or in part, to any Affiliate by
operation of law or otherwise, and (c) shall be binding upon and inure to the
benefit of the Parties and their respective successors and permitted assigns.
Nothing in this Agreement shall create or be deemed to create any third party
beneficiary rights in any Person not a party to this Agreement other than the
Purchaser Indemnitees, the Seller Indemnitees and Arnold & Porter LLP.61
Defendants argue these clauses bar JCM’s extra-contractual contentions. JCM contends
that there is an intentional misconduct carve-out in Section 4.10. Further, JCM argues that it
made contractual references in its complaint. For example, JCM alleges paragraphs 32-34 of its
complaint lay out fraudulent warranties that the printers conformed with all applicable
contractual commitments and that FutureLogic had no liability for replacement or repair.62 JCM
claims that these knowingly false statements directly violate Section 3.8, one of the warranties
preserved in 3.23.
Delaware courts have consistently held that to successfully plead a fraud claim, the
allegedly defrauded plaintiff must have sustained damages as a result of a defendant's action.”63
The damages allegations may not simply ‘rehash’ the damages allegedly caused by the breach of
contract.”64 Further, Delaware law holds that a plaintiff “cannot ‘bootstrap’ a claim of breach of
contract into a claim of fraud merely by alleging that a contracting party never intended to
perform its obligations.”65 In other words, a plaintiff cannot state a claim for fraud simply by
adding the term “fraudulently induced” to a complaint.66 Thus, couching an alleged failure to
comply with a contract as a failure to disclose an intention to take certain actions arguably
61
Pls. Comp., Ex. A., at p. 74.
62
Pls. Comp., at ¶¶ 31–32.
63
ITW Glob. Investments Inc. v. Am. Indus. Partners Capital Fund IV, L.P., 2015 WL 3970908, at *5 (Del. Super.
June 24, 2015).
64
Id.
65
Narrowstep, Inc. v. Onstream Media Corp., 2010 WL 5422405, at *15 (Del. Ch. Dec. 22, 2010).
66
Id.
15
inconsistent with that contract is “exactly the type of bootstrapping this Court will not
entertain.”67
JCM’s fraud claim states Defendants intentionally and knowingly made numerous false
representations, and concealed their knowledge about Gen3’s quality.68 JCM was “induce[d] to
enter into the Purchase Agreement.”69 This is akin to the issue Chancery dealt with in
Narrowstep, Inc. Vice Chancellor Parsons denied a defendant’s “bootstrap” argument, holding
that:
[Defendant] repeatedly lied to [Plaintiff] at multiple steps in the Integration
process in order to strip [Plaintiff] of its valuable assets with no intention of
closing the merger. This conduct, if true, goes beyond a mere intention not to
comply with the terms of the Agreement. . . . The Agreement is not the source of
[Plaintiff’s] fraud claim, but rather the instrument by which Defendant perpetrated
its broader scheme to loot Narrowstep.70
The same purportedly occurred here. JCM alleges Defendants repeatedly misled it
throughout the negotiation and signing. If true, then the Agreement is the “instrument by which
Defendants perpetrated its broader scheme” to defraud JCM. At this juncture, JCM’s fraud claim
is different from its breach of contract claim.
67
Id.
68
Pls. Comp. ¶¶107–08.
69
Id. at ¶112.
70
Narrowstep, Inc. 2010 WL 5422405, at *15.
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CONCLUSION
For the foregoing reasons, Defendants’ Motion to Dismiss is GRANTED in part and
DENIED in part. The Superior Court has jurisdiction over this matter. Section 2.5 of the
Agreement is a post-closing procedure, not mandatory ADR. The contract’s exclusive remedy
provision bars JCM’s contractual claims, Counts I, II, III and IV. JCM has validly plead claims
for fraud and unjust enrichment.
IT IS SO ORDERED.
/s/ Eric M. Davis
Eric M. Davis, Judge
17