Pinnacle IV, L.P. v. Cyberlabs AI Holdings Limited

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
PINNACLE IV, L.P., )
)
Plaintiff/Counterclaim ) C.A. No. N23C-04-021 MAA CCLD
Defendant, )
)
v. )
)
CYBERLABS AI HOLDINGS )
LIMITED, PSAFE TECHNOLOGY )
HOLDING LLC n/k/a AI Technology )
LLC, and PSAFE TECHNOLOGY, INC., )
)
)
Defendants/Counterclaim )
Plaintiffs. )
Submitted: May 1, 2024
Decided: July 1, 2024
Plaintiff's Motion to Dismiss Counterclaims, Strike Affirmative Defenses and for
Judgment on the Pleadings:
GRANTED.
MEMORANDUM OPINION
Andrew D. Cordo, Esquire (Argued), Andrew D. Berni, Esquire, and Joshua A.
Manning, Esquire, of WILSON SONSINI GOODRICH & ROSATI, P.C.,
Wilmington, DE, Attorneys for Plaintiff/Counterclaim Defendant Pinnacle IV, L.P.
Berton W. Ashman, Jr., Esquire, Jesse L. Noa, Esquire, and Justin T. Hymes,
Esquire, of POTTER ANDERSON & CORROON LLP, Wilmington, DE, and
Michael J. Baratz, Esquire (Argued) and Patrick F. Linehan, Esquire of STEPTOE
LLP, Washington, DC, Attorneys for Defendants/Counterclaimants.
Adams, J.1
1
Sitting as a Vice Chancellor of the Court of Chancery of the State of Delaware by designation of
the Chief Justice of the Supreme Court of Delaware pursuant to In re Designation of Actions Filed
1
I. INTRODUCTION
Seller filed a complaint seeking enforcement of a note it received in exchange
for the sale of its interests in a company. Buyer counterclaimed arguing that the note
is unenforceable because of seller’s fraud in connection with the sale. To adequately
plead fraud, a party must identify an actionable misrepresentation or omission. Here,
the pleadings do not identify a single misrepresentation made by seller. To salvage
this deficiency, buyer resorts to a theory that seller deputized management of the
company, thereby seeking to impute management’s conduct onto seller.
The buyer’s agency theory fails. As a result, buyer’s claims for fraud and
negligent misrepresentation also fall short. Therefore, seller’s Motion to Dismiss
the Counterclaims and to Strike the Affirmative Defenses is granted. Because buyer
lacks any viable affirmative defenses, the Court also grants seller’s Motion for
Judgment on the Pleadings to Enforce the Note.
Pursuant to In re: DESIGNATION OF THE HONORABLE MEGHAN A. ADAMS under Del.
Const. art. IV § 13(2) dated September 18, 2023. According to the Supreme Court’s August 18,
2023 Order, the Chief Justice cross designated the undersigned “to sit as a Vice Chancellor on the
Court of Chancery for the purpose of hearing and deciding all issues in Pinnacle IV, L.P. v.
CyberLabs AI Holdings Ltd., et al., C.A. No. N23C-04-021 MAA (CCLD), once the action is
transferred to the Court of Chancery.” The action has not yet been “transferred” to the Court of
Chancery, but the undersigned interprets the Supreme Court’s order that Judge Adams has the
authority to hear both legal and equitable claims in this case due to the cross-designation.
2
II. FACTUAL BACKGROUND2
A. PSafe and the use of MIT
PSafe Technology Holding, LLC (“PSafe” or the “Company”) developed
consumer-oriented cybersecurity products, predominantly serving customers in
Brazil.3 Marco A. De Mello and Benjamin A. Myers (the “Founders”) founded the
Company in 2011, and served as CEO and CFO of the Company, respectively.4
As part of its growth strategy, PSafe sought to acquire new users who installed
its mobile apps.5 To do so, PSafe worked with third-party media sources that
promoted app installations through advertising with third parties (the “Installation
Partners”).6 The Installation Partners then worked with publishers to place
advertisements on the web.7
PSafe paid the Installation Partners based on the number of user installations
in accordance with certain criteria.8 For example, an approved installation required
that the user was a real person and not a bot, and that the user was in an approved
2
The facts are drawn from the well-pleaded allegations in the Amended Complaint for Breach of
Promissory Note and to Enforce Guaranty (“Amended Complaint” or “AC”) (D.I. 15) and Answer
and Defenses of Defendants Cyberlabs AI Holdings Limited, PSafe Technology Holding LLC,
n/k/a AI Technology LLC, and PSafe Technology, Inc. to Amended Complaint for Breach of
Promissory Note and to Enforce Guaranty Counterclaims for Fraudulent Inducement and
Negligent Misrepresentation (“Counterclaim” or “CC”) (D.I. 19).
3
CC ¶¶ 45, 46.
4
Id. ¶¶ 3, 45, 175.
5
Id. ¶ 52.
6
Id. ¶ 53.
7
Id.
8
Id.
3
country.9 PSafe could then “scrub” reported data for any installations that did not
meet the criteria set forth in the Installation Partners’ contracts based on reports
generated by a third party.10 By reducing the number of installations, PSafe lowered
the commission the Installation Partners would otherwise be owed for their
advertising efforts.11
PSafe also developed a proprietary software program called “Marketing
Install Tool” (“MIT”) that used a “filtering process” initiated on PSafe’s back-end
servers once a user installed a PSafe product.12 The use of MIT was allegedly a less
“transparent” way of reducing ineligible installations than the practice of
“scrubbing” the data directly from the third-party reports.13
B. Pinnacle Demands Repayment and PSafe Implements Cost-Savings
Plan
In 2015, Pinnacle IV, L.P. (“Pinnacle”), a venture capital firm, became a
primary creditor to PSafe.14 Through 2017, Pinnacle continued to provide financial
support through an affiliate of PSafe, PSafe Technology, Inc. (“PSafe, Inc.”).15 In
2018, Pinnacle demanded repayment of its loans after PSafe failed to meet its
9
Id. ¶ 56. PSafe and Installation Partners relied on AppsFlyer to verify accurate installation counts.
Id. ¶ 57.
10
Id. ¶ 61.
11
Id. ¶ 54.
12
Id. ¶¶ 64, 66.
13
Id. ¶ 66.
14
Id. ¶ 76.
15
Id. ¶ 77.
4
financial targets.16 Following the demand for repayment, PSafe revised its business
plan to include additional expense reductions.17
To meet these new cost-saving targets, PSafe, through the Founders, allegedly
manipulated MIT to underreport eligible installations.18 Email correspondence
among the Founders and other employees suggest misuse of MIT.19 There is no
allegation, however, that any Pinnacle-designated manager of PSafe or employee of
Pinnacle were on these communications. Indeed, the Founders and PSafe’s User
Acquisition team controlled MIT’s filters.20
C. Sale to Pinnacle, and Later, to Cyberlabs
After failing to find alternative buyers21 in the fall of 2020, PSafe, through an
affiliate, sold its membership interests to Pinnacle with modifications to the loan
agreement between them.22 After the sale, and as PSafe’s new owner, Pinnacle
worked with PSafe’s management to sell the Company to a third party. During this
time, the Founders allegedly continued to misuse MIT.23
16
Id. ¶ 82.
17
Id. ¶ 83.
18
Id. ¶ 84.
19
Id. ¶¶ 98-110, 126-31.
20
Id. ¶ 126.
21
Id. ¶ 95.
22
Id. ¶ 111.
23
Id. ¶¶ 112-117.
5
At the start of 2021, Pinnacle sold its equity interests in PSafe to Cyberlabs
AI Holdings Limited (“Cyberlabs”), an AI company based in Brazil,24 through a
Membership Interest Purchase Agreement (the “MIPA”).25 Pinnacle received cash,
common shares of Cyberlabs, and a Secured Promissory Note (the “Cyberlabs
Note”).26 PSafe and PSafe Inc. guaranteed the Cyberlabs Note through a Guaranty
Agreement (the “PSafe Guaranty”).27
Cyberlabs made a partial payment towards the end of 2021, after which the
parties amended the Cyberlabs Note to adjust the amortization.28
About two years after the sale to Cyberlabs, PSafe’s Board fired the Founders
from their management roles, and within months, new management discovered the
alleged misuse of MIT.29
On March 1, 2023, Pinnacle sent an email notice to Cyberlabs regarding
Cyberlabs’ failure to make a payment.30 To date, Cyberlabs has not paid the
requested amounts under the Cyberlabs Note.31
24
Id. ¶¶ 132, 160.
25
Id. ¶ 8; id., Ex. 1 (the “MIPA”).
26
See MIPA; AC, Ex. A (“Cyberlabs Note”).
27
AC, Ex. B (the “PSafe Guaranty”).
28
AC ¶ 20; id., Ex. D.
29
CC ¶¶ 175-76.
30
AC ¶¶ 22, 24, 27.
31
Id. ¶ 28.
6
D. Procedural History
On April 4, 2023, Pinnacle initiated this action by filing its original complaint.
Pinnacle amended its complaint, raising a claim for breach of the Cyberlabs Note
against Cyberlabs, and breach of the Guaranty against PSafe and PSafe, Inc.
(collectively with Cyberlabs, “Defendants”). Pinnacle seeks $6 million in relief.
Defendants answered and counterclaimed, alleging that Pinnacle orchestrated
a scheme to misrepresent the financials of PSafe. Defendants allege that Pinnacle
and the Founders misused MIT and failed to disclose this practice to Cyberlabs.32
Pinnacle moved to dismiss the counterclaims, strike the affirmative defenses,
and cross-moved for judgment on the pleadings on Pinnacle’s claims for
enforcement of the Cyberlabs Note and PSafe Guaranty. The Court heard oral
argument on February 29, 2024, after which the Court requested supplemental
briefing regarding Defendants’ affirmative defense of fraudulent inducement with
respect to the Founders’ fraud, and any effect on the enforceability of the Cyberlabs
Note and PSafe Guaranty. The parties fully submitted supplemental responses on
May 1, 2024, and the Court took the matter under advisement.33
32
CC ¶¶ 22, 140.
33
The Court requested supplemental briefing after the question was raised whether the alleged
fraud of the Founders, who are neither parties to this action nor the Cyberlabs Note nor PSafe
Guaranty, can render those contracts unenforceable. See Transcript of Oral Argument at 36:14-17
(Counsel for Defendants: “The fraudulent inducement that we are talking about in our affirmative
defense is that the founders defrauded us; and so, these contracts are the product of fraud.”). For
the reasons explained below, the parties’ supplemental briefing has not changed the outcome of
the Court’s analysis, because Defendants’ allegations do not tie the Founders’ actions to Pinnacle.
7
III. ANALYSIS
The Court first addresses Pinnacle’s Motion to Dismiss the Counterclaims,
followed by the Motion to Strike the Affirmative Defenses, and last, Pinnacle’s
Motion for Judgment on the Pleadings to Enforce the Cyberlabs Note and PSafe
Guaranty.
Defendants’ allegations do not show that Pinnacle made misrepresentations of
material fact whether directly, or indirectly by any theory of vicarious liability. The
Founders are not “agents” of Pinnacle, because in the absence of any right of
Pinnacle to control the Founders, the allegations do not raise any inference that
Pinnacle actually controlled the Founders. Without allegations of actual control, the
Court does not infer an agency relationship between the Founders and Pinnacle.
Defendants also have not alleged facts raising a reasonable inference of
scienter on the part of Pinnacle as to the alleged fraud of the Founders. The Court
therefore denies Defendants’ third-party theory of liability that the Cyberlabs Note
and PSafe Guaranty are unenforceable on account of the alleged fraud by the
Founders. With no other viable affirmative defenses, Defendants cannot avoid the
plain meaning of the Cyberlabs Note and PSafe Guaranty. The Court will
accordingly enter judgment in favor of Pinnacle with regard to the enforceability of
those contracts.
8
A. Motion to Dismiss Counterclaims
On a motion to dismiss for failure to state a claim: (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 non-moving party would not be entitled to recover under any reasonably
conceivable set of circumstances susceptible to proof.34 The Court, however, does
not credit conclusory allegations unsupported by specific facts.35
To plead a viable claim for fraud, a party must state the circumstances
constituting fraud with particularity, including time, place, contents and speaker.36
Pinnacle moves to dismiss Defendants’ counterclaims for fraudulent
inducement and negligent misrepresentation. One of the elements required for a
claim for fraudulent inducement is a false representation of material fact.37
“Negligent misrepresentation differs from fraud only in the level of scienter
34
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (internal citations and quotation
marks omitted).
35
Price v. E.I. DuPont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011), overruled on other
grounds by Ramsey v. Ga. S. Univ. Advanced Dev. Ctr., 189 A.3d 1255, 1277 (Del. 2018).
36
Super. Ct. Civ. Rule 9(b); Universal Capital Mgmt., Inc. v. Micco World, Inc., 2012 WL
1413598, at *2 (Del. Super. Feb. 1, 2012) (internal quotation omitted).
37
Infomedia Grp., Inc. v. Orange Health Sols., Inc., 2020 WL 4384087, at *3 (Del. Super. July 31,
2020) (citation omitted); see also Morris v. Thayer, 1991 WL 244235, at *2 (Del. Ch. Nov. 15,
1991).
9
involved, fraud requires knowledge or reckless indifference rather than
negligence.”38
Defendants do not allege that any of Pinnacle’s officers, directors or
employees made any false representations of material fact. Instead, Defendants
argue that the Founders misrepresented material facts regarding the use of MIT.39
Defendants then characterize the Founders as “Pinnacle’s Agents,” and thus seek to
impute their representations onto Pinnacle.
The burden of proving the existence of an agency relationship falls on the
party asserting it.40 To establish an agency relationship, one party must consent to
have another act on its behalf, with the principal controlling and directing the acts of
the agent.41 A party must allege facts supporting a reasonable inference that the
purported “principal had control over the wrongdoing at issue.” 42 A hallmark of a
principal-agent relationship is the principal’s right to control the agent’s conduct.43
38
Osram Sylvania Inc. v. Townsend Ventures, LLC, 2013 WL 6199554, at *16 (Del. Ch. Nov. 19,
2013) (citations omitted).
39
See Defendants/Counterclaimants’ Answering Brief in Opposition to Plaintiff/Counterclaim
Defendant’s Motion to Dismiss Counterclaims, Strike Affirmative Defenses, and for Judgment on
the Pleadings (“Opp.”) at 14-15 (D.I. 27).
40
Baccellieri v. HDM Furniture Indus., Inc., 2013 WL 1088338, at *3 (Del. Super. Feb. 28, 2013),
aff’d, 74 A.3d 653 (Del. 2013).
41
Id.; see also Marshall v. Univ. of Del., 1986 WL 11566, at *10 (Del. Super. Ct 1986) (citing
Restatement (Second) of Agency § 1 cmt (a) (1958)).
42
Otto Candies, LLC v. KPMG, LLP, 2020 WL 4917596, at *8 (Del. Ch. Aug. 21, 2020).
43
Skye Min. Invs., LLC v. DXS Cap. (U.S.) Ltd., 2020 WL 881544, at *23 (Del. Ch. Feb. 24, 2020).
10
Assuming an agency relationship exists, a principal may only be liable for acts
committed by an agent acting within the scope of the agency relationship.44
Although the question of whether an agency relationship exists is normally a
question of fact, conclusory and insufficiently pled allegations do not prevent a
pleadings-stage dismissal of claims predicated on an agency theory.45
Defendants do not identify any communications or agreement, written or
otherwise, showing that Pinnacle consented to have the Founders or any other of
PSafe’s managers or employees act on Pinnacle’s behalf.46 The Court thus analyzes
whether Pinnacle “controll[ed] and direct[ed]” PSafe’s acts such that it can infer an
agency relationship.47 Importantly, the Court’s focus is on Pinnacle’s control over
the Founders’ alleged manipulation of MIT.48
Defendants argue that the following factors raise an inference of an agency
relationship: Pinnacle’s (a) ownership of PSafe; (b) pressure on PSafe to push
through a sale and improve its financials; (c) “hands-on” involvement in the
44
Wenske v. Blue Bell Creameries, Inc., 2018 WL 5994971, at *3 (Del. Ch. Nov. 13, 2018);
Hospitalists of Delaware, LLC v. Lutz, 2012 WL 3679219, at *17 (Del. Ch. Aug. 28, 2012).
45
See, e.g., Skye Mineral Invs., LLC, 2020 WL 881544, at *23−24 (citation omitted); Baccellieri,
2013 WL 1088338, at *3; Albert v. Alex. Brown Mgmt. Servs., Inc., 2005 WL 2130607, at *10 (Del.
Ch. Aug. 26, 2005).
46
Baccellieri, 2013 WL 1088338, at *3.
47
Id. (citing Restatement (Second) of Agency § 1 Cmt (a)).
48
Otto Candies, LLC, 2020 WL 4917596, at *8.
11
business; and (d) “deputiz[ation]” of the Founders, who would receive 10% of the
proceeds from a sale.49
Defendants fail to raise a reasonable inference of the existence of an agency
relationship. An agency relationship does not sprout from the ground of total
ownership or alignment of economic interests alone. Neither Pinnacle’s ownership
of PSafe50 nor the potential for the Founders to receive a tenth of the proceeds of a
sale converts the Founders into Pinnacle’s agents.51
49
CC ¶ 30. During oral argument, the Court inquired as to the meaning of the phrase “deputizing”
the Founders. Transcript of Oral Argument at 13:17-20; 28:3-6. While Defendants’ counsel did
not directly address the Court’s question, the Court infers that “deputizing” means that Pinnacle
appointed the Founders to push through a sale of PSafe.
50
See Weinstein Enterprises, Inc. v. Orloff, 870 A.2d 499, 509 (Del. 2005) (citations omitted)
(finding no inference of an agency relationship based on a parent’s complete ownership of a
subsidiary); Skye Mineral Invs., LLC, 2020 WL 881544, at *24.
51
Otto Candies, LLC, 2020 WL 4917596, at *13 (finding no agency relationship where founding
member of a company derived nearly one-third of its revenues from the company and nearly half
of the company’s personnel worked at the founding member). Defendants argue that because
Pinnacle “controlled” the sale process, the Court can infer that the Founders were acting as
Pinnacle’s agents. But Defendants’ arguments ignore PSafe’s separate corporate existence from
Pinnacle, as well as the absence of Pinnacle’s right to control the actions of the Founders who were
fiduciaries to PSafe, not Pinnacle. There are no well-pled allegations in the Counterclaim that in
the absence of Pinnacle’s right to control the Founders, Pinnacle exercised actual control of the
Founders. The only allegations are that Pinnacle instructed the Founders to go through with the
sale process, and incentivized them with 10 percent of the proceeds. CC ¶¶ 8, 28, 30, 105. These
allegations fall short of establishing the control necessary to infer an agency relationship, because
the allegations do not raise any inference of coercion, or disregard of the corporate form. See
Weinstein Enterprises, Inc., 870 A.2d at 509 (“The parent, once having elected directors, does not
have a right thereafter to intervene. To impose a duty of obedience on directors, moreover, would
conflict with the fundamental point that corporate law assigns ultimate managerial power and
responsibility to directors. The parent thus lacks the right to assert control through interim
instructions, a defining hallmark of a legal relationship of agency. This is not a point of merely
formal or definitional significance. As the preceding discussion illustrates, the distinction between
a right of control and the effective power to control often has practical consequences. In the absence
of a right to control the directors it elects, the parent must either disregard their existence, a move
disrespectful of the corporate paraphernalia that jeopardizes the corporate veil, ... or the parent
must take steps to exercise its power by coercing the directors or removing them, moves that have
12
Defendants’ allegations of Pinnacle’s “hands-on” involvement, pressure to
push through a sale, and references urging the need to achieve profitability do not
change the outcome. These generalized allegations make no specific reference to
the alleged misuse of MIT. Likewise, Defendants circularly argue that an agency
relationship exists because of the “deputiz[ation]” of the Founders. Defendants must
allege specific control over the alleged misconduct––here, misuse of MIT. They do
not do so.52
Defendants similarly miss the mark by relying on the Founders’
representations to the PSafe Board that management was going to “better” employ
MIT to reduce fraud.53 Showing Pinnacle’s mere awareness of MIT or identifying
the Founders’ representations of improved use of MIT does not raise a reasonable
inference that Pinnacle was even aware of MIT’s misuse; representations of MIT’s
drawbacks of their own.”); Skye Mineral Invs., LLC, 2020 WL 881544, at *24 (“Plaintiffs ask me
to ‘infer’ a principal-agent relationship based on the [certain] Defendants’ ability to ‘direct and
control [three companies] in connection with the conduct at issue.’ But ‘effective power to control’
is not enough to establish a principal-agent relationship. Indeed, ‘even when the parent owns all
the stock in the subsidiary, the subsidiary’s directors are not agents of the parent.’”).
52
In fact, Cyberlabs has appeared to plead that only the Founders had control of MIT. See CC ¶
126 (“PSafe employees were aware that MIT’s filters could be altered or used to block installations
from a specific partner, but knew that this process was managed exclusively by the UA team—
specifically, Mr. Patel and Mr. Graham, who reported directly to Mr. De Mello.”).
53
See id. ¶¶ 88, 108. PSafe also generally relies on Pinnacle’s status as a creditor and the terms of
its loan agreement, but it makes no specific references to Pinnacle’s alleged leveraging of those
terms with respect to the misuse of the MIT. Id. at ¶¶ 77, 82.
13
improved use suggest, rather, the opposite – i.e., efforts to prevent Pinnacle from
learning of the alleged misuse of MIT.54
Because Defendants failed to allege any facts raising a reasonable inference
that an agency relationship existed, Defendants cannot impute communications by
the Founders or employees onto Pinnacle. Defendants have not alleged that Pinnacle
itself made any allegedly false representation; therefore Defendants’ claims for fraud
and negligent misrepresentation against Pinnacle fail and will be dismissed.55
B. Motion to Strike Affirmative Defenses
Pinnacle moves to strike Defendants’ five affirmative defenses to the amended
complaint: fraudulent inducement, negligent misrepresentation, unclean hands,
improper venue, and failure to state a claim.
Though motions to strike are not favored and are granted sparingly,56 under
Rule 12(f), “the Court may order stricken from any pleading any insufficient defense
or any redundant, immaterial, impertinent, or scandalous matter.”57 When
addressing a motion to strike an affirmative defense, the Court assumes the truth of
54
Defendants’ reliance on the “technical knowledge” of Pinnacle’s point of contact on PSafe’s
management team also falls short. Having a background in electrical engineering, along with
making edits to PSafe’s “Code and Policy Analysis” document as it relates to PSafe’s compliance
with Google Play policies do not show knowledge, much less control, of the alleged misuse of
MIT. See id. ¶ 123.
55
Dunn v. FastMed Urgent Care, P.C., 2019 WL 4131010, at *12 (Del. Ch. Aug. 30, 2019)
(dismissing negligent misrepresentation claims based on failure to plead fraud claims with
requisite particularity).
56
Columbus Life Ins. v. Wilm. Tr., 2021 WL 537117, at *5 (Del. Super. Feb. 15, 2021).
57
Super. Ct. Civ. R. 12(f).
14
the facts alleged in the answer and asks whether “the challenged defense is legally
sufficient.”58 Nonetheless, “affirmative defenses must be supported by pled facts.”59
Defendants argue that, even in the absence of a viable fraud claim against
Pinnacle, they have sufficiently alleged (though not asserted) a fraud claim against
the Founders. On that basis, they argue they are justified in seeking their prayer for
rescission of the Cyberlabs Note and PSafe Guaranty.60
In seeking to make Pinnacle secondarily liable for the Founders’ alleged fraud,
Defendants rely primarily on Falco v. Alpha Affiliates, Inc..61 In Falco, the District
of Delaware relied on the Restatement (Third) of Suretyship and Guaranty (the
“Restatement”) in ruling on a party’s motion in limine.62 Section 12 of the
Restatement provides that “a secondary obligation is voidable due to a fraudulent or
material misrepresentation by the obligee that induces the secondary obligor to enter
into the secondary obligation.”63 The court then discussed that a guarantor to a
tenant could potentially avoid its obligations to a landlord for the tenant’s delinquent
payments upon a finding that the obligee, the landlord, induced the guarantor to enter
into the guaranty agreement.64
58
Pilot Corp. v. Abel, 2023 WL 8643195, at *2 (Del. Ch. Dec. 13, 2023).
59
Roma Landmark Theaters, LLC v. Cohen Exhibition Co. LLC, 2021 WL 2182828, at *5 (Del.
Ch. May 28, 2021) (citations omitted).
60
See CC, Request for Relief; Opp. at 36.
61
See Falco v. Alpha Affiliates, Inc., 2000 WL 727116, at *1 (D. Del. Feb. 9, 2000).
62
Id.; Restatement (Third) of Suretyship & Guaranty § 12 (1996).
63
Restatement (Third) of Suretyship & Guaranty § 12.
64
Falco, 2000 WL 727116, at *4-5.
15
A contract is not voidable due to the misrepresentation by one other than an
obligee, if the obligee has in good faith and without notice given value or changed
position in reliance on the contract.65 This rule is consistent with the general
principle of law that if an innocent person has in good faith and without notice given
value or changed position in reliance on the contract, the contract is not voidable on
the ground of misrepresentation.66
PSafe cannot seek to avoid its guaranty obligations on the basis that Pinnacle
as the obligee made a fraudulent representation, because PSafe has not alleged any
fraudulent representation by Pinnacle. To the extent Defendants seek to avoid their
obligations based on alleged misrepresentations by one other than an obligee, i.e.,
the Founders, Defendants have not shown that Pinnacle failed to act in good faith
and without notice given value or changed position in reliance on these contracts.
As explained above, Defendants have not made allegations raising a reasonable
inference that Pinnacle was aware of the misuse of MIT.67 Pinnacle also received
65
Restatement (Third) of Suretyship & Guaranty § 12(2) cmt. (e).
66
See Restatement (Second) of Contracts, § 164(2) (“If a party’s manifestation of assent is induced
by either a fraudulent or a material misrepresentation by one who is not a party to the transaction
upon which the recipient is justified in relying, the contract is voidable by the recipient, unless the
other party to the transaction in good faith and without reason to know of the misrepresentation
either gives value or relies materially on the transaction.”); see also 26 Williston on Contracts §
69:14 (4th ed.) (“Another exception to the general rule of nonliability applies where, although the
misrepresentations were not made by one acting as agent of the party benefited, that party: was or
should have been cognizant of them, or was the cause of their being made[, or] gave no value for
what he or she received, or gave no value until after learning of the misrepresentations[.]”).
67
See, e.g., supra note 53.
16
as consideration the right to enforce the Cyberlabs Note and PSafe Guaranty in
exchange for selling PSafe’s shares through the MIPA.
Defendants’ affirmative defense of fraudulent inducement is therefore
stricken. Similarly, because Defendants have failed to allege an actionable
misrepresentation by Pinnacle, its affirmative defense of negligent representation is
also stricken.
Defendants’ allegations fail to give any support to the remaining three
affirmative defenses. Defendants predicate their affirmative defenses of unclean
hands and failure to state a claim on Pinnacle’s alleged fraud. As explained above,
Defendants have failed to state a claim for fraud. Therefore, the affirmative defense
of unclean hands, predicated on Pinnacle’s alleged fraud, also fails. As to improper
venue, Cyberlabs cite to the MIPA’s New York forum selection clause. Yet,
Pinnacle’s claims arise in part from the PSafe Guaranty, which provides that
Delaware is the parties’ choice of forum.68 For these reasons, the remaining
affirmative defenses fail.
68
See PSafe Guaranty § 9(h). Defendants concede that this action properly belongs in this forum
by failing to address in their answering brief Pinnacle’s argument that Defendants waived their
right to assert claims under MIPA’s New York forum selection clause by their conduct in filing
counterclaims in this Court. Larkin v. Shah, 2016 WL 4485447, at *2 n.5 (Del. Ch. Aug. 25, 2016)
(finding waiver due to party’s omission in answering brief); Emerald P’rs v. Berlin, 726 A.2d 1215,
1224 (Del. 1999) (“Issues not briefed are deemed waived.”); Jackson v. Coupe, 2017 WL 3396494,
2 (Del. Super. July 14, 2017).
17
C. Motion for Judgment on the Pleadings
Pinnacle moves for judgment on the pleadings to enforce its claims under the
Cyberlabs Note and PSafe Guaranty. A party may move for judgment on the
pleadings pursuant to Civil Rule 12(c).69 A court may grant a motion for judgment
on the pleadings “where there is no material fact in dispute and the movant is entitled
to judgment as a matter of law.”70 The Court is required to view the facts pleaded
and the inferences to be drawn from such facts in a light most favorable to the non-
moving party.71
Cyberlabs agreed to pay Pinnacle “the lesser of Nine Million Dollars
($9,000,000) or the principal balance outstanding,” and interest, with an original
maturity date of February 1, 2024.72 Under the Cyberlabs Note’s amended
amortization schedule, $517,088.28 in principal and interest became due on March
1, 2023.73 Failure to make a payment when due constitutes an “Event of Default
after five days of such non-payment.”74 Upon the occurrence of an Event of Default,
Pinnacle may, by written notice to Cyberlabs, “declare all outstanding amounts and
69
Super. Ct. Civ. R. 12(c).
70
Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund II, L.P., 1992 WL 181718, at *1
(Del. Ch. July 28, 1992), rev’d, 624 A.2d 1199 (Del. 1993).
71
Warner Communications, Inc. v. Chris-Craft Indus., Inc., 583 A.2d 962, 965 (Del. Ch. 1989).
72
Cyberlabs Note at 1.
73
Id.; AC ¶ 20.
74
Cyberlabs Note at 2.
18
obligations payable by [Cyberlabs] hereunder to be immediately due and payable.”75
Pursuant to the PSafe Guaranty, PSafe and PSafe, Inc. “unconditionally guarantee[d]
and promise[d] to pay and perform as and when due, whether at stated maturity, upon
acceleration or otherwise, any and all of the Guaranteed Obligations.”76
Defendants admit CyberLabs did not make any payments on March 1, 2023,
when payment became due under the Cyberlabs Note, nor did Cyberlabs cure that
failure within five business days.77 Defendants also admit Cyberlabs received the
written notice of Pinnacle’s right to declare all outstanding amounts immediately due
and payable.78 Defendants’ only defense is that the Cyberlabs Note and PSafe
Guaranty were void ab initio due to fraud.
Defendants have made no well-plead allegations of fraud. Accordingly,
because there are no material issues of fact or viable defenses, Pinnacle is entitled to
judgment in its favor as a matter of law.
75
Id. at 3.
76
PSafe Guaranty § 2(a).
77
See Answer ¶ 22 (“Defendants admit that CyberLabs did not make a payment to Pinnacle on
March 1, 2023, but deny that any payments were due on the Note on March 1, 2023. Defendants
informed Plaintiff that the Note and the Guaranty are void ab initio due to fraud. Therefore, no
payment was or is owed to Plaintiff. To the extent any further response is required, Defendants
deny the allegations contained in Paragraph 22.”); see also id. ¶¶ 23, 26.
78
Id. ¶ 27.
19
IV. CONCLUSION
For the reasons set forth above, Pinnacle’s Motion to Dismiss Counterclaims,
Strike Affirmative Defenses, and for Judgment on the Pleadings is GRANTED.
IT IS SO ORDERED.
20