Schatzman v. Modern Controls, Inc.

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
WILLIAM SCHATZMAN, )
)
Plaintiff, )
)
v. ) C.A. No.: N24C-01-071-EMD CCLD
)
MODERN CONTROLS, INC. and )
MICHAEL S. PEET, )
)
Defendants. )
)
Submitted: June 20, 2024
Decided: September 20, 2024
Upon Defendants’ Motion to Dismiss
GRANTED in part and DENIED in part
David G. Culley, Esquire, Tybout, Redfearn & Pell, Wilmington, Delaware. Attorneys for
Plaintiff William Schatzman.
Kevin A. Guerke, Esquire, Michael P. Stafford, Esquire, Elise W. Wolpert, Esquire, Young
Conaway Stargatt & Taylor, LLP, Wilmington, Delaware. Attorneys for Defendants Modern
Controls, Inc. and Michael S. Peet.
DAVIS, J.
I. INTRODUCTION
This is a civil action assigned to the Complex Commercial Litigation Division of the
Court. Plaintiff William Schatzman (“Schatzman”) alleges that his former employer, Defendant
Modern Controls, Inc. (“Modern Controls” or the “Company”) and its President and Chief
Executive Officer Michael S. Peet (“Peet” and, together with Modern Controls, “Defendants”)
are liable for breach of contract, breach of the implied covenant of good faith and fair dealing,
tortious interference with contract, and conversion in connection with Mr. Schatzman’s
termination in 2023.
Mr. Schatzman filed his Complaint on January 10, 2024.1 Defendants filed a Motion to
Dismiss all claims on February 27, 2024 (the “Motion”).2 Mr. Schatzman opposes the Motion.3
The Court held a hearing on the Motion on June 20, 2024. At the conclusion of the hearing, the
Court took the Motion under advisement.
For the reasons stated below, the Court GRANTS the Motion as to Count I, Count II,
Count V, and Count VI. The Court DENIES the Motion as to Count III, Count IV, and Count
VII.
II. RELEVANT FACTS4
A. THE PARTIES
Mr. Schatzman is a Delaware resident.5 Mr. Schatzman was employed by Modern
Controls from 1996 to April 17, 2023.6
Modern Controls is a Delaware corporation with its principal place of business in New
Castle, Delaware.7 Modern Controls “specializes in commercial HVAC solutions, mechanical
and control systems, and building automation systems.”8 Modern Controls has over 100
employees, operates in Delaware, New Jersey, Pennsylvania, and Maryland, and has an
approximate yearly revenue of $40 million.9
1
Hereinafter “Compl.” (D.I. No. 1).
2
Hereinafter “MTD” (D.I. No. 9).
3
Plaintiff’s Answering Brief in Opposition to Defendants’ Motion to Dismiss (hereinafter “Opp’n”) (D.I. No. 15).
See also Defendants’ Reply Brief in Support of Their Motion to Dismiss (hereinafter “Reply”) (D.I. No. 16).
4
Facts are taken from the Complaint, which Defendants “assume the truth of . . . solely for the purposes of this
Motion.” MTD at 3 n.1.
5
Compl. ¶ 1.
6
Id. ¶¶ 5, 14.
7
Id. ¶ 2.
8
Id. ¶ 4, MTD at 3.
9
Id.
2
Mr. Peet is a resident of Delaware.10 Mr. Peet is the founder, former owner, and
President and Chief Executive Officer of Modern Controls.11
B. NATURE OF THE DISPUTE
1. The Supplemental Retirement Plan
Mr. Schatzman and Modern Controls are parties to the Modern Controls, Inc.
Supplemental Retirement Plan (“SRP,” the “Plan,” or the “Agreement”). 12 The effective date of
the SRP is May 16, 2007.13 Mr. Peet is signatory to the SRP “‘on behalf of the Company’ in his
representative capacity as Modern Control’s President and CEO.”14
The SRP states that its “purpose . . . is to reward Employee for his loyal and continuous
service to the Company by providing supplemental retirement benefits.”15 To that end, the SRP
provides that:
The Company will contribute to the Plan on behalf of the Employee such amounts
from time to time as the Company, in its sole discretion, shall determine. The
accumulated value of the Company's contributions, plus earnings and gains (and
losses) thereon, shall be known as the Employee's "account balance." The
Employee's account balance shall be updated annually to reflect additional
Company contributions, earnings and gains (or losses) thereon. The Company shall
from time to time provide the Employee with a statement setting forth Employee's
current account balance.16
Pursuant to Section 5, the SRP is distinguished from an employment contract:
The adoption, continuance, and/or maintenance of this Plan are not deemed to
constitute a contract of employment between Company and Employee, or to be a
consideration for, or an inducement or condition of, employment of Employee.
Nothing herein contained is deemed to give to Employee the right to be retained in
10
Id. ¶¶ 3, 15; About Us, MODERNCONTROLS, LLC, https://www.moderncontrols.com/about-us/ (last visited June
14, 2024).
11
Id.
12
Id. ¶ 7 (the Supplemental Retirement Plan (hereinafter “SRP”) is D.I. No. 1, Ex. A). Mr. Schatzman is identified
as “Employee” in the SRP.
13
SRP at 1.
14
MTD at 4 (quoting SRP at 10).
15
SRP at Background ¶ B.
16
Id. § 2.
3
the employ of the Company, or to interfere with the right of the Company to
discipline or discharge Employee at any time.17
The SRP designates Modern Controls as the “named fiduciary.”18 As such, Modern
Controls has “the authority to control and manage the operation and administration of this
Agreement, and it shall be responsible for establishing and carrying out a funding policy and
method consistent with the objectives of this Agreement.”19
To fund the SRP, Modern Controls:
[W]ill contribute to the Plan on behalf of the Employee such amounts from time to
time as the Company, in its sole discretion, shall determine. The accumulated value
of the Company's contributions, plus earnings and gains (and losses) thereon, shall
be known as the Employee's "account balance." The Employee's account balance
shall be updated annually to reflect additional Company contributions, earnings and
gains (or losses) thereon. The Company shall from time to time provide the
Employee with a statement setting forth Employee's current account balance.20
Mr. Schatzman states that regular monthly contributions in the amount of $3,000.00 were
paid into the account from May 2007 until 2020.21 At the time of Mr. Schatzman’s termination,
the balance of the account was $735,415.28.22
SRP Section 3 provides the mechanism for paying out benefits:
3. Benefits. The Employee’s account balance shall be paid to the Employee as
follows:
...
b. If Employee's employment with the Company is terminated other than by reason
of Employee's death or disability more than ten (10) years after the Effective Date,
the Company shall pay to Employee an amount equal to the Employee's account
balance.
...
If the payment to the Employee is based on subparagraph (b) above, this amount
shall be paid in five (5) consecutive annual installments beginning on the first day
17
Id. § 5.
18
Id. § 7.
19
Id.
20
Id. § 2.
21
Compl. ¶ 10.
22
Id.; MTD at 6.
4
of the month following the month in which Employee's employment with the
Company is terminated . . . The amount of each annual installment shall be
determined by applying a formula to the account balance in which the numerator is
the number one and the denominator is the number of remaining installments to be
paid. The Company may, in the Company's sole discretion, accelerate the payments
to the Employee or the Employee's designated beneficiary, including the payment
of a lump sum . . . .23
Section 3(g) provides “an additional incentive”:24
g. If the Company is sold to anyone other than Employee while Employee is
employed by the Company, Employee shall be entitled to receive ten percent (10%)
of the net proceeds of sale. Employee shall be entitled to receive Employee's share
of the net proceeds as and when payments are received by the Seller, and in the
same manner as payments are received by the Seller.25
The Complaint alleges that Mr. Schatzman’s “reasonable interpretation of these
provisions [is] that he shall become entitled to a 10% share of the net proceeds of a sale of the
Company when said sale takes place to ‘anyone other than himself.’”26 Modern Controls
maintains that if Mr. Schatzman “was not employed at the time of a sale of Modern Controls, he
was not entitled to any proceeds from a sale.”27
Finally, Section 4(a) of the SRP provides:
In no event shall any employee, officer, director, or stockholder of the Company be
liable to any individual or entity on account of any claim arising by reason of the
Plan provisions or any instrument or instruments implementing its provisions, or
for the failure of any employee, beneficiary or other individual or entity to be
entitled to any particular tax consequences with respect to the Plan or any credit or
payment thereunder.28
23
SRP § 3(b).
24
Compl. ¶ 12.
25
SRP § 3(g).
26
Compl. ¶ 12.
27
MTD at 4.
28
SRP § 4(a).
5
2. Plaintiff’s Employment and Termination
Modern Controls hired Mr. Schatzman in 1996 as a service technician.29 At the time of
termination in April 2023, Mr. Schatzman was the company’s Vice President of Operations and
Chief Operating Officer.30
Mr. Schatzman characterizes his employment as “loyal and continuous” and notes that,
prior to the events leading to his termination, Modern Controls had never taken disciplinary
action against him.31 However, Modern Controls alleges that several employees lodged
complaints of harassment and defamation against Mr. Schatzman in the spring of 2023.32 On
April 3, 2023, Modern Controls’ CEO John DiGregorio informed Mr. Schatzman of the
complaints and directed him to stay away from the office pending a two-week internal
investigation.33 Mr. Schatzman denied, and continues to deny, any allegations of harassment or
defamation.34
At the conclusion of the investigation on April 17, 2023, Mr. Schatzman met with Mr.
DiGregorio and other members of Modern Controls’ leadership.35 Modern Controls informed
Mr. Schatzman that Modern Controls was terminating Mr. Schatzman’s at-will employment as a
result of the complaints.36 Mr. Schatzman states that Modern Controls did not provide with
details of the complaints or gave Mr. Schatzman the opportunity to “respond or rebut” the
allegations.37
29
Compl. ¶ 5.
30
Id.
31
Id. ¶ 13.
32
MTD at 5 (citing Compl. ¶ 13).
33
Id. (citing Compl. ¶ 13).
34
Opp’n at 3 (citing Compl. ¶ 17).
35
MTD at 6 (citing Compl. ¶ 14).
36
Id. at 5 (citing Compl. ¶ 14).
37
Compl. ¶ 14.
6
Upon termination, Modern Controls presented Mr. Schatzman with a severance package
that offered $400,000.00 in additional compensation in exchange for several provisions including
non-disclosure and non-compete agreements and a general release of claims against Modern
Controls (the “Confidential Severance Agreement and General Release”).38 Mr. Schatzman
declined the package.39
On May 1, 2023 Mr. Schatzman received a payment of $147,083.06—the first annual
installment due under the SRP payment structure “triggered” by Mr. Schatzman’s termination.40
3. The Sale of Modern Controls and Present Litigation
Modern Controls was sold on January 1, 2024, to someone other than Mr. Schatzman.41
Mr. Schatzman believes this entitles him to 10% of the net proceeds pursuant to SRP Section
3(g).42 Accordingly, Mr. Schatzman made a formal demand for his share of the proceeds on
January 3, 2024.43 The demand was refused.44
4. The Litigation
Mr. Schatzman filed his Complaint with this Court on January 10, 2024. Mr. Schatzman
asserts seven counts against Defendants:
• Count I: Breach of Contract, alleging that Defendants have breached the SRP “by
failing to acknowledge [Mr. Schatzman’s] rights to, or to pay to Plaintiff, the
benefits set forth in Section 3g. of the Plan.”45
• Count II: Breach of the Implied Covenant of Good Faith and Fair Dealing as to
Plaintiff’[s] Employment Contract, alleging that (i) there is an employment contract
between the Parties; and (ii) Defendants have breached the implied covenant
38
Id.
39
Id.; MTD at 5.
40
Id. ¶ 18; MTD at 6.
41
Id. ¶ 19; MTD at 8. The purchaser of Modern Controls is not expressly named by any Party and is not relevant to
this litigation.
42
Id. ¶¶ 20-21.
43
Id. ¶ 23.
44
Id.
45
Id. ¶¶ 26-30.
7
inhered in that contract by their actions related to the compensation Mr. Schatzman
believes he is owed under Section 3(g).46
• Count III: Breach of the Implied Covenant of Good Faith and Fair Dealing as to the
SRP, stating a nearly identical claim as Count II but with respect to the SRP
specifically.47
• Count IV: Tortious Interference with Contract as to Defendant Peet, alleging that
as the former owner and eventual seller of Modern Controls, Mr. Peet
“orchestrated” Mr. Schatzman’s termination with the “sole purpose” of depriving
him of his right to compensation under Section 3(g) of the SRP.48
• Count V: Conversion as to Defendant Peet, alleging that the percentage of the
proceeds to which Mr. Schatzman believes he is entitled is wrongfully in the
possession of Mr. Peet.49
• Count VI: Declaratory Judgment, asking the Court to issue a declaration that Mr.
Schatzman is entitled to a 10% share of the sale proceeds pursuant to SRP Section
3(g); as well as the benefits set forth under SRP Section 3(b) “as those benefits
become due and owing under the terms of the Plan.”50
• Count VII: Fee Shifting, claiming that Defendants’ misconduct in these matters
“warrants a shifting of fees under the bad faith exception to the American Rule.”51
Mr. Schatzman seeks compensatory damages for wrongful termination; compensatory
damages related to the 10% of the sale proceeds; declaratory relief as described above; punitive
damages and fee shifting as described above; and interests and costs.52
III. STANDARD OF REVIEW
Upon a motion to dismiss under Superior Court Civil Rule 12(b)(6), the Court (i) accepts
all well-pleaded factual allegations as true, (ii) accepts even vague allegations as well-pleaded if
they give the opposing party notice of the claim, (iii) draws all reasonable inferences in favor of
46
Id. ¶¶ 31-38.
47
Id. ¶¶ 39-46.
48
Id. ¶¶ 59-63.
49
Id. ¶¶ 59-63.
50
Id. ¶¶ 64-69.
51
Id. ¶¶ 70-73.
52
Id. Prayer for Relief at 17-18.
8
the non-moving party, and (iv) only dismisses a case where the plaintiff would not be entitled to
recover under any reasonably conceivable set of circumstances.53 However, the court must
“ignore conclusory allegations that lack specific supporting factual allegations.”54
Although the non-moving party is entitled to all reasonable inferences drawn in its favor
on a motion to dismiss, the Court may dismiss a claim “if allegations in the complaint or in the
exhibits incorporated into the complaint effectively negate the claim as a matter of law.”55
IV. DISCUSSION
A. COUNT I: BREACH OF CONTRACT
To state a claim for breach of contract, a plaintiff must allege: (1) the existence of a
contract; (2) a breach by defendant of an obligation pursuant to the contract; and (3) damage to
the plaintiff as a result of the defendant's breach.56
Contract interpretation is a matter of law to be decided by the Court.57 “Delaware
adheres to the ‘objective’ theory of contracts, i.e. a contract's construction should be that which
would be understood by an objective, reasonable third party.”58 Courts “will read a contract as a
whole and . . . give each provision and term effect, so as not to render any part of the contract
mere surplusage.”59 Courts “will not read a contract to render a provision or term ‘meaningless
or illusory.’”60
53
See 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).
54
Ramunno v. Crawley, 705 A.2d 1029, 1034 (Del. 1998).
55
Malpiede v. Townson, 780 A.2d 1075, 1083 (Del. 2001).
56
VLIW Tech., LLC v. Hewlett–Packard Co., 840 A.2d 606, 612 (Del. 2003).
57
Rhone-Poulenc Basic Chemicals Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1195 (Del. 1992).
58
NBC Universal v. Paxson Commc'ns, 2005 WL 1038997, at *5 (Del.Ch. Apr. 29, 2005).
59
Kuhn Construction, Inc. v. Diamond State Port Corp., 2010 WL 779992, *2 (Del. Mar. 8, 2010).
60
Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010) (quoting Sonitrol Holding Co. v. Marceau
Investissements, 607 A.2d 1177, 1183 (Del.1992) (“Under general principles of contract law, a contract should be
interpreted in such a way as to not render any of its provisions illusory or meaningless.”).
9
“[I]f the relevant contract language is clear and unambiguous, courts must give the
language its plain meaning.”61 A provision may be considered ambiguous when it is “reasonably
or fairly susceptible of different interpretations or may have two or more different meanings.”62
Even so, “[d]ismissal is proper only if the defendants' interpretation is the only reasonable
construction as a matter of law.”63
Defendants argue that Mr. Schatzman fails to state his claim because the express,
unambiguous language of SRP Section 3(g) provides that,
…if Modern Controls was sold to anyone other than Plaintiff while Plaintiff was
employed by Modern Controls, then Plaintiff would receive 10% of the net proceeds
of the sale.64
Because the Complaint states that Mr. Schatzman had been terminated eight months prior to the
date of the sale, Defendants contend Mr. Schatzman has no contractual right to claim benefits
under Section 3(g).65
Moreover, Defendants maintain that the plain meaning of the SRP does entitle Mr.
Schatzman to benefits—the balance of the retirement account to be paid in five annual
installments.66 Defendants argue that Mr. Schatzman’s receipt of the first installment on May 1,
2023, constitutes evidence that he “is receiving the benefit for which he bargained” and no
breach of the SRP has occurred.67
61
Phillips Home Builders v. Travelers Ins. Co., 700 A.2d 127, 129 (Del. 1997) (internal citation omitted).
62
Rhone-Poulenc, 616 A.2d at 1196.
63
Vanderbilt Income & Growth Assocs., L.L.C. v. Arvida/JMB Managers, Inc., 691 A.2d 609, 613 (Del. 1996)
(emphasis supplied) (citation omitted).
64
MTD at 8 (emphasis supplied—not in original).
65
Id. at 9 (citing Compl. ¶¶ 14, 19).
66
Id. (citing Compl. ¶¶ 10-11).
67
Id. at 9.
10
Mr. Schatzman responds that the language of Section 3(g) is ambiguous, requiring this
Court to allow the breach claim to proceed and to issue the declaratory judgment sought under
Count VI.68 Mr. Schatzman contends:
[T]here is an alternative reasonable interpretation that fits the language . . .
specifically, that the phrase “while the Employee is employed by the Company”
was intended to modify the term “Employee” and not the time of the sale of the
Company. In other words, the language . . . identifies two categories of potential
buyers of the Company—(1) the Employee while employed by the Company, and
(2) anyone else. Under this interpretation, if the Company was sold to Plaintiff
while an employee he would not be eligible to receive the benefits of [Section 3(g)];
but if sold to “any one other than” Plaintiff he would become entitled to receive the
benefits.69
Mr. Schatzman argues that his “interpretation makes logical sense given the purpose of
the SRP—to provide plaintiff with certain supplemental retirement benefits as a reward for his
service to the Company.”70 As such, if “it was Plaintiff himself who purchased the Company, it
would make no sense to compensate him with a share of the net proceeds of the sale because he
would have, by virtue of the purchase, become the owner of the Company.”71
Finally, Mr. Schatzman asks that the Court employ the principle of contra proferentum to
construe this ambiguous provision against the drafter, Modern Controls.72
Defendants reply that Mr. Schatzman’s interpretation “makes the language ‘while the
Employee is employed by the Company’ meaningless and superfluous and, thus, a violation of
68
Opp’n at 7 (citing Weiner v. Selective Way Ins. Co., 793 A.2d 434, 440 (Del. Super. 2002) for the proposition that
declaratory relief may be sought to interpret provisions of a contract).
69
Id. at 10.
70
Id.at 11. Mr. Schatzman also argues that his interpretation makes better grammatical sense because the phrase
“other than” emphasizes there being two potential buyers.
71
Id.
72
Id. (citing, inter alia, Twin City Fire Ins .Co. v. Delaware Racing Ass’n, 840 A.2d 624, 630 (Del. 2003) (internal
citations and quotations omitted) (“[T]he entity in control of articulating the process” had the obligation “to state
clearly the terms of the policy.”).
11
Delaware contract interpretation law.”73 Defendants present “four possible scenarios” under Mr.
Schatzman’s interpretation of Section 3(g):
1. If Modern Controls is sold to a buyer other than Plaintiff while Plaintiff is
employed at the Company, Plaintiff receives 10% of the net proceeds of the
sale.
2. If Modern Controls is sold to Plaintiff while Plaintiff is employed at the
Company, Plaintiff receives no share of the net proceeds.
3. If Modern Controls is sold to a buyer other than Plaintiff while Plaintiff is not
employed at the Company, Plaintiff receives 10% of the net proceeds of the
sale.
4. If Modern Controls is sold to Plaintiff while Plaintiff is not employed at the
Company, Plaintiff receives 10% of the net proceeds of the sale.74
Defendants contend that “Scenario 3” “stands in stark contrast to the purpose of the
Plan.” If the “purpose of the Plan is to Reward [the Plaintiff] for his loyal and continuous
service, then it would be inconsistent to interpret the Plan to mean that he could still be rewarded
with 10% of the net proceeds years after Plaintiff separated from the Company.”75 Defendants
maintain that “[n]o reasonable person reading Section 3(g) could interpret the section to mean
that from the date the Plan was implemented in 2007, Plaintiff was guaranteed to receive 10% of
the sale proceeds unless Plaintiff bought the Company while still employed.”76
Defendants argue that “Scenario 4” is “even more unworkable.” The Court notes that
this construction does produce the “absurd” result that “the Plaintiff could buy the Company
after he is no longer employed and still receive 10% of the net proceeds.”77
73
Reply at 6.
74
Id. (emphasis supplied).
75
Id. at 7 (citation omitted).
76
Id.
77
Id.
12
The Court will address Mr. Schatzman’s contention that the declaratory judgment sought
in Count VI must be issued before Count I can be resolved below. The Court finds that Mr.
Schatzman has not presented a reasonable or fairly susceptible alternative interpretation of SRP
Section 3(g) that would create an ambiguity. The Court understands that Mr. Schatzman
provides an alternative way to have drafted the section, but that does not make SRP Section 3(g)
ambiguous.
The Court holds that the language of SRP Section 3(g) is not ambiguous. The meaning
of this section is clear—if Modern Controls was sold to a party other than Mr. Schatzman when
Mr. Schatzman was employed then Mr. Schatzman would receive 10% of the net proceeds of the
sale. The facts are undisputed. Modern Controls did not employ Mr. Schatzman at the time of
the sale. Accordingly, Mr. Schatzman is not entitled to 10% of the net proceeds of the sale. The
Court will GRANT the Motion as to Count I.
B. COUNTS II AND III: BREACHES OF THE IMPLIED COVENANT OF GOOD FAITH AND FAIR
DEALING
To state a claim for breach of the implied covenant of good faith and fair dealing, a
plaintiff “must allege a specific implied contractual obligation, a breach of that obligation by the
defendant, and resulting damage to the plaintiff.”78 Further, “[g]eneral allegations of bad faith
are not sufficient to survive a motion to dismiss; instead, [the plaintiff] must allege a specific
implied contractual obligation and allege how the violation of that obligation denied it the fruits
of the [contract].”79 Finally, “[o]nly when it is clear from the writing that the contracting parties
would have agreed to proscribe the act later complained of, had they thought to negotiate with
78
Data Centers, LLC v. 1743 Holdings LLC, 2015 WL 9464503, at *7 (Del. Super. Oct. 27, 2015) (quoting Kuroda
v. SPJS Holdings, LLC, 971 A.2d 872, 888 (Del. Ch. 2009) (quoting Fitzgerald v. Cantor, 1998 WL 842316, at *1
(Del. Ch. Nov. 10, 1998)).
79
Id. (quoting Kuroda, 971 A.2d at 888).
13
respect to that matter, may a party invoke the protections of the implied covenant of good faith
and fair dealing.”80
The Delaware Supreme Court warns that the implied covenant of good faith and fair
dealing:
Involves a cautious enterprise, inferring contractual terms to handle developments
or contractual gaps that the asserting party pleads neither party anticipated. One
generally cannot base a claim for breach of the implied covenant on conduct
authorized by the agreement. We will only imply contract terms when the party
asserting the implied covenant proves that the other party has acted arbitrarily or
unreasonably, thereby frustrating the fruits of the bargain that the asserting party
reasonably expected.81
The covenant will not “infer language that contradicts a clear exercise of an express
contractual right” or “extend to post contractual rebalancing of the economic benefits flowing to
the contracting parties.”82 Rather, the covenant applies “only in that narrow band of cases where
the contract as a whole speaks sufficiently to suggest an obligation and point to a result but does
not speak directly enough to provide an explicit answer. In the Venn diagram of contract cases,
the area of overlap is quite small.”83
The Supreme Court discussed the interaction between the implied covenant and
Delaware’s at-will employment doctrine E.I. DuPont de Nemours and Co. v. Pressman.84 The
Court noted that the doctrine “provides a heavy presumption that a contract for employment,
unless otherwise expressly stated, is at-will in nature, with duration indefinite.”85 Further,
though the doctrine “generally permits the dismissal of employees without cause and regardless
80
Id. (citing Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 901 A.2d 106, 116 (Del. 2006) (citing Dunlap v. State Farm
Fire and Cas. Co., 878 A.2d 434, 442 (Del. 2005)).
81
Nemec v. Shrader, 991 A.2d 1120, 1125-26 (Del. 2010) (internal citations and quotations omitted).
82
Id. at 1127-28.
83
Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126, 146 (Del. Ch. 2009).
84
679 A.2d 436 (Del. 1996).
85
Id. at 440 (quoting Merrill v. Crothall–American, Inc., 606 A.2d 96, 102 (Del. 1992)).
14
of motive” the Court held that the implied covenant nevertheless inheres, though the employment
doctrine is broad and the covenant is “narrow and carefully crafted.”86
Summarized later in Lord v. Souder, Pressman described four “exclusive” at-will
employment circumstances when the implied covenant may give rise to actionable claims:
(i) where the termination violated public policy; (ii) where the employer
misrepresented an important fact and the employee relied “thereon either to accept
a new position or remain in a present one”; (iii) where the employer used its
superior bargaining power to deprive an employee of clearly identifiable
compensation related to the employee's past service; and (iv) where the employer
falsified or manipulated employment records to create fictitious grounds for
termination.87
Further, under Pressman, the conduct of the employer must “constitute an aspect of
fraud, deceit or misrepresentation” in order to constitute a breach of the covenant.88
Defendants argue that Mr. Schatzman has failed to state claims for breach of the implied
covenant related to his termination, either “under a non-existent employment contract” in Count
II, nor with respect to the SRP in Count III.89 Defendants specifically contend that Mr.
Schatzman’s allegations must be dismissed because they do not fall within any of the “narrow
categories” outlined in Pressman.90
1. Count II: As to “Plaintiff’[s] Employment Agreement”
Foundationally, Defendants argue that there is no express employment contract between
Mr. Schatzman and Modern Controls. Defendants make this argument even though the
Complaint alleges such an agreement exists, and contrary to Mr. Schatzman’s invocation of the
implied covenant to fill the “gap” in that agreement (a gap he describes as “no provisions in the
86
Id. at 437-38.
87
Lord v. Souder, 748 A.2d 393, 400-01 (Del. 2000) (citing Pressman, 679 A.2d, 442-44)).
88
Pressman, 679 A.2d, 440 (internal citation and quotation omitted).
89
MTD at 9-11.
90
Id. at 10 (citing Pressman, 679 A.2d at 437).
15
employment contract that expressly address or govern the duty of the [Modern Controls] to deal
honestly with Plaintiff . . . .”).91
Defendants acknowledge that Mr. Schatzman is permitted to plead that his breach of the
implied covenant claim pertains to two separate agreements as alternative theories; however,
Defendants contend that Mr. Schatzman “cannot invoke a non-existent employment contract to
create an alternative claim.”92 Instead, Defendants insist that Mr. Schatzman must rely on the
“express terms” of the SRP for “any conceivable basis for recovery of the breach of implied
covenant claim . . . .”93
Moreover, Defendants argue that Count II “fails to allege an independent basis for
recovery” apart from the claim in Count I, contrary to Delaware law.94 Defendants quote this
Court in Good v. Moyer: “[a] court will only consider recovery under an implied contract if there
is no express contract which governs the parties' rights and obligations.”95 Simply stated,
Defendants argue that without an employment contract separate from the provisions contained in
the SRP, there can be no other claim for breach of the implied covenant. Therefore, Defendants
contend Mr. Schatzman has failed to state a claim in Count II.
91
Id. (quoting Compl. ¶¶ 32, 35).
92
Id. at 11-12 (citing BAE Sys. Info. & Elec. Sys. Integration, Inc. v. Lockheed Martin Corp., 2009 WL 264088, at
*8 (Del. Ch. Feb. 3, 2009) (“A right to plead alternative theories does not obviate the obligation to provide factual
support for each theory.”).
93
Id. at 12.
94
Id.
95
Id. and id. n.21; Good v Moyer, 2012 WL 4857367, at *5 (Del. Super. Oct. 10, 2012) (quoting William M. Young
Co. v. Bacon, 1991 WL 89817, at *8 (Del. Super. May 1, 1991)). See also id. (quoting Moore Bus. Forms v.
Cordant Holdings Corp., 1995 WL 662685, at *9 (Del. Ch. Nov. 2, 1995)) (“An implied contractual obligation
cannot flow from matters expressly addressed in a written contract.”).
16
Mr. Schatzman does not directly address Defendants’ contention that there is no
employment agreement. Instead, Mr. Schatzman addresses the applicability of the third and
fourth Pressman exceptions in a subsection entitled “The Employment Contract.”96
Defendants argue that Mr. Schatzman “concedes there is no express employment
contract. There is only the Plan.”97 Moreover, “the Plan is explicitly not an employment
contract, and it is unreasonable to imply an employment term here.”98 Defendants contend that
SRP Section 5 “is dispositive, but Plaintiff does not address it in any way.”99
The Court holds that, without an express employment contract, Mr. Schatzman can
support his argument in Count II. The Court therefore GRANTS the Motion as to Count II.
2. Count III: As to the SRP
Defendants next contend that Mr. Schatzman has failed to allege facts showing the terms
of the SRP altered his at-will employment relationship.100 Defendants state that the express
terms of the SRP did not obligate Modern Controls to retain Mr. Schatzman “as an employee so
that, at some point, he could earn 10% of the net proceeds.”101 Instead, the SRP “simultaneously
disclaims Plaintiff’s ‘right to be retained in the employ of the Company’ and reaffirms Modern
Control’s right to ‘discipline or discharge’ Plaintiff at any time.”102
Defendants highlight that the SRP contains express terms governing Mr. Schatzman’s at-
will status. As such, Defendants maintain that Mr. Schatzman now seeks to use the implied
96
Opp’n at 13-17. Mr. Schatzman may be asserting that there is an implied employment contract. If so, the implied
covenant would most likely not apply. See, e.g., Allen v. El Paso Pipeline GP Co., L.L.C., 113 A.3d 167, 182 (Del.
Ch. 2014) (emphasis added) (“The implied covenant of good faith and fair dealing is the doctrine by which
Delaware law cautiously supplies terms to fill gaps in the express provisions of a specific agreement.”).
97
Reply at 9.
98
Id. at 9-10 (emphasis supplied).
99
Id. at 10 (citing SRP § 5).
100
MTD at 12.
101
Id. at 12-13.
102
Id. at 13 (quoting SRP § 5).
17
covenant to “repackage his breach of contract claim as a violation of the duty of good faith and
fair dealing.”103 Defendants assert that, in the absence of a contractual right to continued
employment, Mr. Schatzman “attempts to invoke the third and fourth Pressman exceptions to his
at-will employment.”104 Defendants characterize Mr. Schatzman’s arguments here as conclusory
and “factually unsupportable.”105 Defendants focus on the allegations in paragraphs 36 and 44 of
the Complaint, in which Mr. Schatzman “maintains that Modern Controls (1) ‘used their superior
bargaining power’ to deprive Plaintiff of ‘clearly identifiable compensation related to his past
service’ and (2) ‘create[d] fictitious grounds’ for his termination.”106
Mr. Schatzman separately insists that the SRP was violated in bad faith. In support, Mr.
Schatzman argues that Defendants “terminated his employment in bad faith as part of a larger
scheme to deprive him of the benefits provided under Section 3g. of the SRP.”107
a. Third Pressman exception: The deprivation of “compensation that is clearly
identifiable and is related to the employee’s past service.”108
Defendants contend that Mr. Schatzman “does not seek to recover a benefit that he
earned prior to his termination—instead he asks this Court to declare him eligible to receive a
benefit for which he did not bargain.”109 Defendants claim that the “contours of clearly
identifiable compensation protected by the implied covenant” are described in Wagenseller v.
Scottsdale Memorial Hospital,110 an Arizona case “cited with approval by the Delaware Supreme
103
Id. at 18 (quoting Nemec, 991 A.2d at 1127) (“The implied covenant will not infer language that contradicts a
clear exercise of an express contractual right.”).
104
Id. at 13. See also id. n.22 (citing Lidya Hldgs. Inc. v. Eksin, 2022 WL 854688, at *3 n.24 (Del. Ch. Mar. 23,
2022) (arguing that Mr. Schatzman “relies on the same factual allegations to invoke” those two “often conflated”
exceptions).
105
Id.106
Id. (citing Compl. ¶¶ 36, 44).
107
Opp’n at 25.
108
Pressman, 679 A.2d at 442 (internal citation and quotations omitted).
109
MTD at 14.
110
710 P.2d 1025 (Az. 1985).
18
Court in Pressman . . . .”111 Wagenseller cites, for example, sales commissions already earned as
protected benefits; whereas tenure necessary to secure pension and retirement benefits would not
be protected.112 Defendants contend that Mr. Schatzman now attempts to secure a right to
similarly unprotected future benefits—“a retirement benefit that did not vest during the term of
his employment.”113
Mr. Schatzman responds that Defendants’ argument “goes too far” because “no Delaware
case has held that the lost benefit must have been ‘earned’ before the exception applies and
Defendants have not cited to any.”114 Mr. Schatzman argues that, in citing Wagenseller, the
Pressman court did not adopt its language but rather “opt[ed] instead to simply link the benefit at
issue to the employee’s past service.”115
Mr. Schatzman has failed to allege facts to claim the third Pressman exception. The
“benefit at issue” is 10% of the sale proceeds. Mr. Schatzman contends that he is entitled to that
benefit under the alternative theories of: (a) his interpretation of SRP Section 3(g), whereby he is
entitled to the proceeds because he did not purchase the Company while he was employed by it;
or (b) Defendants’ interpretation of SRP Section 3(g), whereby Mr. Schatzman is entitled to
relief because his bad-faith termination was effectuated in order to deprive him of the
opportunity to receive the sale proceeds as an employee at the time of the sale.
Under either theory, the issue is whether the benefit was “earned” in the sense of whether
it had “vested” or was “triggered”—not whether it relates to Mr. Schatzman’s past service. The
111
MTD at 14.
112
Wagenseller, 710 P.2d at 1041.
113
MTD at 15.
114
Opp’n at 15 (“Moreover, it is not at all clear what ‘earned’ means in this context.”).
115
Id. (emphasis supplied).
19
answer turns on the interpretation of SRP Section 3(g). It is unclear how Defendants’ “superior
bargaining power” factors in the analysis, or how this differentiates the claim from Count I.
b. Fourth Pressman exception: The falsification or manipulation of employment
records to create a fictitious ground for termination.116
Defendants state that Mr. Schatzman has failed to plead facts invoking the fourth
Pressman exception because his “conclusory” allegations are analogous to cases in which
Delaware courts have declined to invoke the implied covenant.117 Defendants highlight Gilliland
v. St. Joseph’s at Providence Creek118—finding that a terminated executive director was in a
position to defend himself from internal accusations of which he was aware—and Lidya
Holdings Inc. v. Eskin119—holding that a former executive “was not powerless to defend
himself” against a termination following an investigation into a “known and vetted dispute.”120
Defendants argue that, like the terminated employees in Gilliland and Lidya, Mr.
Schatzman was a company leader who knew he was under investigation and was terminated after
an investigation.121 Defendants quote Gilliland:
When employers are faced with accusations among its employees of “he said, she
said”, the employer should be given the right to resolve the disputes in the
employer's best interest by exercising its right to end the employment relationship.
The employer should have the latitude to discharge without having a jury “second
guess” the “correctness” of the employer's decision. To hold otherwise would
substantially erode the concept of employment at will.122
Defendants assert that Modern Controls terminated Mr. Schatzman “[o]nly after its
investigation and based on its review of the harassment complaints against” him.123 Defendants
116
Pressman, 679 A.2d at 443-44.
117
MTD at 14.
118
2006 WL 258259 (Del. Super. Jan. 27, 2006).
119
2022 WL 854688.
120
MTD at 16-17.
121
Id. at 17 (citing Compl. ¶¶ 5, 13-14).
122
Gilliland, 2006 WL 258529 at *8.
123
MTD at 17.
20
argue it is not for the factfinder now to “second guess” Modern Controls’ decision and “erode the
concept of employment at will.”124
Mr. Schatzman takes issue with Defendants’ reliance on Gilliland and Lydia Holdings,
stating those cases are inapposite because, unlike Mr. Schatzman, the terminated parties there
were informed of the specific allegations against them and had the opportunity to defend
themselves.125 Mr. Schatzman notes that the Complaint alleges that Mr. Schatzman “was given
no information about the accusations against him, was never invited to participate in the
investigation, and was never granted a forum in which to defend himself before his employment
was terminated.”126
Moreover, at this stage of the proceedings, Mr. Schatzman responds that “it is reasonable
to infer that the record leading to his termination was falsified or manipulated” given the facts
alleged, “which are assumed to be true . . . .”127 On this point, recent Court of Chancery cases
cited by Mr. Schatzman are instructive.
In Smith v. Scott, an executive subject to both an implied at-will employment agreement
and other express agreements containing pertinent “for cause” provisions was terminated.128 The
executive alleged that his termination was a bad faith violation of the implied covenant because
he was fired based on false allegations made with the “sole motivation to take his Vested
Interests without compensation.”129 The defendants argued that the executive’s “oral at-will
employment agreement is contextualized by the [express agreements], and those agreements
124
Id. at 18 (quoting Gilliland, 2006 WL 258529 at *8).
125
Opp’n at 17.
126
Id.127
Id. at 16-17.
128
Smith v. Scott, 2021 WL 1592463, at *7 (Del. Ch. Apr. 23, 2021).
129
Id.21
clearly define the meaning and implications of a firing for ‘cause,’ leaving no room for the
[Implied] Covenant to operate.”130
The Court of Chancery found that, at the motion to dismiss stage, the executive had
nevertheless adequately stated a claim for breach of the covenant.131 Citing Sheehan v.
AssuredPartners, the Court of Chancery held that even where express agreements had “laid out
the process by which employment could be terminated for ‘cause,’ that process did not address
(or excuse) instances where the termination was carried out in ‘bad faith.’”132 Moreover,
Sheehan held that, “[t]o survive a motion to dismiss [plaintiffs] only must allege that the
termination decision was motivated by an improper purpose.”133
Defendants counter, arguing that, unlike the parties in the cases cited by Mr. Schatzman,
the Complaint fails to allege with particularity the “fraud, deceit, or misrepresentation” necessary
to invoke a breach of the implied covenant in the at-will employment context.134 Yet Sheehan
addresses this point directly. In pleading the alleged tortfeasor’s “improper purpose,”
a plaintiff need not plead knowledge or state of mind with particularity, because
“any attempt to require specificity in pleading a condition of mind would be
unworkable and undesirable. The purpose of Rule 9(b) is to provide the defendant
with “detail sufficient to apprise [her] of the basis for the claim.135
Mr. Schatzman has adequately alleged the improper purpose necessary to state a claim
for breach of the implied covenant with respect to the SRP. The Court DENIES the Motion as
to Count III.
130
Id. at *8.
131
Id.
132
Id. at *7 (citing Sheehan v. AssuredPartners, Inc., 2020 WL 2838575, at *11 (Del. Ch. May 29, 2020)).
133
Sheehan, 2020 WL 2838575, at *11.
134
Reply at 11 (citing Del. Super. Ct. Civ. R. 9(b)) (“In all averments of fraud, negligence or mistake, the
circumstances constituting fraud, negligence or mistake shall be stated with particularity. Malice, intent, knowledge
and other condition of mind of a person may be averred generally.”).
135
Sheehan, 2020 WL 2838575, at *11 (quoting MHS Capital LLC v. Goggin, 2018 WL 2149718, at *9 (Del. Ch.
May 10, 2018)).
22
C. COUNT IV: TORTIOUS INTERFERENCE WITH CONTRACT AS TO DEFENDANT PEET
In Delaware, the elements of a claim for tortious interference with contract are: “(1) a
contract, (2) about which defendant knew, and (3) an intentional act that is a significant factor in
causing the breach of such contract, (4) without justification, (5) which causes injury.”136 Based
on the “rudimentary” notion that parties to a contract cannot be liable for both breaching that
contract and inducing the breach, by “slight extension it has been held that employees or
directors of a contracting corporation cannot be held personally liable for inducing a breach of
contract by their corporations when they act within their role.”137
Moreover:
Delaware law presumes that a corporate officer's actions that cause the corporation
to breach a contract were taken for the corporation's benefit. Accordingly, in order
to state a claim for tortious interference against a corporate officer, a plaintiff must
plead adequately that the officer (1) was not pursuing legitimate profit-seeking
activities of the affiliated enterprise in good faith, or (2) was motivated by some
malicious or other bad faith purpose to injure the plaintiff. This legal rule derives
from the business judgment rule's presumption that officers and directors act loyally
and in good faith when making business decisions in their fiduciary capacity.138
A complaint against an individual officer may not “rely exclusively on actions taken by
the corporate” entity and must instead “at a minimum, describe affirmative actions taken by that
individual directing, ordering, ratifying, approving or consenting to the tort. Requiring that such
136
Bhole, Inc. v. Shore Invs., Inc., 67 A.3d 444, 453 (Del. 2013) (quoting Irwin & Leighton, Inc. v. W.M. Anderson
Co., 532 A.2d 983, 992 (Del.Ch.1987) (emphasis supplied)).
137
Shearin v. E.F. Hutton Grp., Inc., 652 A.2d 578, 590 (Del. Ch. 1994) (internal citations omitted) (emphasis
added).
138
Am. Bottling Co. v. Repole, 2020 WL 7787043, at *6 (Del. Super. Dec. 30, 2020) (internal citations and
quotations omitted).
23
actions be specifically identified in the pleadings plays an important role in preserving limited
corporate liability.”139
Defendants contend that Mr. Schatzman has failed to satisfy the third and fourth prongs
of a tortious interference claim against Mr. Peet. Defendant stress that Mr. Peet was acting
within the scope of his authority and in pursuit of Modern Controls’ legitimate profit-seeking
activities when he “accepted the decision to terminate” Mr. Schatzman.140
First, Defendants argue that the Complaint admits Mr. Peet “was acting within the course
and scope” of his employment “[a]t all times relevant hereto . . . .”141 Defendants note that the
Complaint describes the events leading to Mr. Schatzman’s termination as being “conceived,
directed, ordered and ratified by Mr. Peet as owner, President and Chief Executive Officer of the
Company.”142 Defendants contend that such “factual allegations are fatal to any claim that Mr.
Peet was pursuing his own self-interest.”143
Defendants maintain that Mr. Schatzman fails to show bad faith on the part of Mr. Peet
specifically, instead “relying on actions taken by Modern Controls to attribute a tort to Mr.
Peet.”144 Instead, Defendants contend that Mr. Schatzman must “describe affirmative actions”
taken by Mr. Peet as an individual.145 Defendants claim that Mr. Schatzman has failed to do so
and instead “simply recites the events leading up to his termination and argues that Mr. Peet
‘conceived, directed, ordered and ratified’ his termination without explaining what affirmative
steps Mr. Peet took or how Mr. Peet personally committed a tort.”146
139
Gassis v. Corkery, 2014 WL 3565418, at *5 (Del. Ch. July 21, 2014), aff’d, 113 A.3d 1080 (Del. 2015) (internal
citations and quotations omitted).
140
MTD at 20.
141
Id. at 21 (quoting Compl. ¶ 6).
142
Id. (quoting Compl. ¶ 15).
143
Id.
144
Id.
145
Id.
146
Id. (quoting Compl. ¶ 15).
24
Defendants reject Mr. Schatzman’s claim that Mr. Peet’s motive was “to reserve for
himself alone, and for his own personal benefit, the right to the entire proceeds of the sale.”147
Rather, Defendants contend that Mr. Peet was pursing the legitimate profit-seeking motive of
Modern Controls: “to protect Modern Controls from becoming vicariously liable for Plaintiff’s
harassment.”148 Defendants argue that because Mr. Peet was acting on behalf of Modern
Controls, and because his actions were motivated by the legitimate goals of Modern Controls, his
conduct is protected by the business judgment rule and Mr. Schatzman has failed to plead facts
to the contrary.149 Therefore, Defendants contend Count III should be dismissed.150
Mr. Schatzman responds that he has stated a valid claim in three respects. First, Mr.
Schatzman states that he has pled Mr. Peet’s interference was improper under the factors listed in
the Restatement (Second) of Torts Section 767 and cited by our Supreme Court.151 Those factors
are:
(a) [T]he nature of the actor's conduct, (b) the actor's motive, (c) the interests of the
other with which the actor's conduct interferes, (d) the interests sought to be
advanced by the actor, (e) the social interests in protecting the freedom of action of
the actor and the contractual interests of the other, (f) the proximity or remoteness
of the actor's conduct to the interference and (g) the relations between the parties.152
Applying those factors to his allegations, Mr. Schatzman states that Mr. Peet’s actions were not
justified because:
(a) [T]he conduct was the termination of Plaintiff’s employment through wrongful
means; (b) Peet’s motive was to deny Plaintiff the benefits due him under Section
3g. of the Plan, while augmenting his own personal gain through the sale of the
Company; (c) the interest of Plaintiff was in continuing his employment so as to
secure the benefits provided by Section 3g.; (d) Peet sought to advantage himself
by denying Plaintiff the benefits due hm under Section 3g.; (e) there are no social
147
Id. at 22 (quoting Compl. ¶ 53).
148
Id.
149
Id.
150
Id.
151
Opp’n at 26 (citing, e.g., WaveDivision Holdings, LLC v. Highland Cap. Mgmt., L.P., 49 A.3d 1168, 1174 (Del.
2012)).
152
RESTATEMENT (SECOND) OF TORTS § 767 (1979).
25
interests that would protect Peet’s freedom of action in improperly terminating
Plaintiff’s employment; (f) it is alleged that at the time of Peet’s interference he
was contemplating a sale of the company, which in fact occurred approximately
eight months later; and (g) the relations between the parties are that of an employer
and employee.153
Next, Mr. Schatzman argues “[a]lternatively” that Mr. Peet’s intentional interference was
improper in the sense that Mr. Peet “made it impossible for Plaintiff to comply with his
purported obligation to remain employed with the Company.”154 Mr. Schatzman claims Mr. Peet
did so by wrongfully terminating Mr. Schatzman’s employment.155
Finally, Mr. Schatzman posits that Mr. Peet’s actions were not privileged because they
exceeded the scope of Mr. Peet’s authority.156 Mr. Schatzman cites examples where Delaware
courts have “found grounds for personal liability ‘when the corporate agent responsible for the
wrongdoing was acting solely to advance his own personal financial interest, rather than that of
the corporation itself.’”157 Moreover, Mr. Schatzman avers that “the question of whether an
employee has exceeded the scope of his employment is generally a question for the jury.”158
Indeed, this Court has held that a more fully developed record may be necessary to decide
whether or not a party exceeded the scope of his or her employment, and the tortious interference
claim should therefore survive a motion to dismiss.159
153
Opp’n at 27.
154
Id.
155
Id. at 28 (citing Allen Fam. Foods, Inc. v. Capitol Carbonic Corp., 2011 WL 1205138, at *6 (Del. Super. Mar.
31, 2011) (quoting RESTATEMENT (SECOND) OF TORTS) (“Section 766A is intended to address situations where ‘the
plaintiff is unable to obtain performance of the contract by the third person because he has been prevented from
performing his part of the contract and thus from assuring himself of receiving the performance by the third
person.’”).
156
Id. at 28-29 (citing In Re CVR Refining LP Unitholder Litigation Consolidated, 2020 WL 506680, at *16 (Del.
Ch. Jan. 31, 2020); Shearin, 652 A.2d at 590).
157
Id. at 29 (quoting In Re CVR, 2020 WL 506680, at *16); (citing Nye v. Univ. of Delaware, 2003 WL 22176412,
at *5–6 (Del. Super. Sept. 17, 2003); Smith v. Hercules, Inc., 2002 WL 499817, at *4 (Del. Super. Mar. 28, 2002)).
158
Id. (citing West v. Access Control Related Enterprises, LLC, 2019 WL 2385863, at *5 (Del. Super. June 5, 2019)
(summarizing Smith v. Hercules, 2002 WL 499817)).
159
See, e.g., West v. Access Control Related Enterprises, LLC, 2019 WL 2385863, at *5 (Del. Super. June 5, 2019).
26
Defendants reply that Mr. Schatzman “concedes” the fact that “Mr. Peet’s actions ‘were
conceived, ordered and ratified by Mr. Peet as owner, President and Chief Executive Officer of
the Company’ and, therefore, were taken within the scope of his employment.”160 Defendants
contend, therefore, that the argument this must be decided by a jury is “entirely
irrelevant . . . .”161
Defendants also argue that Mr. Peet was not a “stranger to the contract” for purposes of
tortious interference.162 This appears to be correct, however, it does not negate the need for Mr.
Peet to have been acting within his authority to escape liability:
[I]n a tortious interference claim, an agent for a party to a contract cannot . . .
interfere with her principal's own contract, provided that the agent does not exceed
the scope of her authority. In other words, the party that tortiously interferes with
a contract must be a “stranger” to the contract itself as well as a stranger to the
business relationship underpinning the contract.163
The Court finds that Mr. Schatzman has pled facts sufficient to survive a motion to
dismiss. Drawing all reasonable inferences in Mr. Schatzman’s favor, it is conceivable that Mr.
Peet was improperly motivated by his own financial interest in terminating Mr. Schatzman while
the sale of Modern Controls was contemplated but before it was completed. The question of
whether those actions were within the scope of his agency or not is a fact-intensive question.
Accordingly, the Court will DENY the Motion as to Count IV.
D. COUNT V: CONVERSION AS TO DEFENDANT PEET
Conversion is “any distinct act of dominion wrongfully exerted over the property of
another, in denial of [the plaintiff's] right, or inconsistent with it.”164 However, “Delaware law
160
Reply at 14 (quoting Compl. ¶ 15).
161
Id.162
Id. (Though Defendants address it here, Mr. Schatzman’s argument that Mr. Peet was a stranger to the contract is
made in support of his claim in Count VI for Conversion).
163
Anthony v. Bickley, 2014 WL 3943687, at *3 (Del. Super. Aug. 8, 2014), aff'd, 113 A.3d 1080 (Del. 2015)
(internal citations and quotations omitted).
164
Kuroda, 971 A.2d at 889 (quoting Drug, Inc. v. Hunt, 168 A. 87, 93 (Del. 1933)).
27
does not recognize a cause of action for the conversion of money.”165 A “narrow exception”
recognized in other jurisdictions—but not addressed by Delaware courts—“allows a claim for
conversion of money only when it can be described or identified as a specific chattel, but not
where an indebtedness may be discharged by the payment of money generally.”166
Further, where a “plaintiff's claim arises solely from a breach of contract, the plaintiff
‘generally must sue in contract, and not in tort.’”167 To assert a tort claim along with the contract
claim, there must be an allegation that an independent legal duty was violated separate from the
duty imposed by contract.168
Defendants contend that Mr. Schatzman fails to state a claim for conversion for three
reasons: (1) there can be no conversion of “property” Mr. Schatzman never owned nor has a
right to own; (2) even if Mr. Schatzman’s interest in the proceeds of the sale were legitimate, the
claim would not meet the narrow exception of being “specific chattel”; and (3) the claim is
duplicative of Mr. Schatzman’s breach of contract claim because it is not based on an
independent legal duty.169
Mr. Schatzman responds that his claim is “not necessarily for money exclusively.”170 Mr.
Schatzman “remind[s]” the Court of SRP Section 3(g)’s phrasing that “Employee shall be
entitled to receive Employee’s share of the net proceeds as and when payments are received by
the Seller, and in the same manner as payments are received by the Seller.”171 Mr. Schatzman
contends that at this stage of the proceedings, “and without the benefit of discovery, it is not
165
DeFranco v. Pordham, 2015 WL 4751217, at *2 (Del. Super. Aug. 11, 2015) See also id. n.17 (collecting
authorities).
166
Kuroda, 971 A.2d at 890 (internal citation and quotations omitted).
167
Id. at 889 (quoting Data Mgmt. Internationale, Inc. v. Saraga, 2007 WL 2142848, at *3 (Del. Super. July 25,
2007)).
168
Kuroda, 971 A.2d at 889.
169
MTD at 24-25.
170
Opp’n at 30.
171
Id. at 30-31 (quoting SRP § 3(g) (emphasis supplied—not in original)).
28
known what form the consideration paid for the business took or will take.”172 Mr. Schatzman
argues that it is “reasonably conceivable that instead of, or in addition to, cash or money the sale
of the business could involve the exchange of stock, stock options, or other forms of tangible
property apart from money.”173
In addition, Mr. Schatzman contends that Count V is not duplicative of Count I because
Mr. Peet is not a party to the SRP at issue in Count I.174 Mr. Schatzman argues that Mr. Peet
received the proceeds from the sale of Modern Controls as an individual, and that it is his
retention of the 10% of these proceeds to which Mr. Schatzman claims to be entitled that
constitutes the conversion.175
Defendants reply that only Mr. Schatzman’s Opposition Brief, and not his Complaint,
makes the claim for anything other than “the monetary proceeds from the sale of the
Company.”176 Because the “Court is ‘limited to the facts pled in or appropriately incorporated
into the operative complaint; new facts or facts expanding those contained in the complaint are
not considered.’”177
The Court finds that it is implausible to consider Mr. Schatzman’s claim as one for
anything other than money. Moreover, it is unclear how the claim for conversion is not
duplicative of the claim for breach of contract—even if Mr. Schatzman could prove that Mr. Peet
was a “stranger to the contract” in that Mr. Peet received the proceeds as an individual. The
claims are based on the same allegedly tortious conduct and seek identical relief, but apparently
from different defendants. The Motion is GRANTED as to Count V.
172
Id. at 31.
173
Id.
174
Id.
175
Id.
176
Reply at 17 (quoting Compl. ¶¶ 60-61).
177
Id. at 17-18 (quoting Orman v. Cullman, 794 A.2d 5, 28 n.59 (Del. Ch. 2002)).
29
E. COUNT VI: DECLARATORY JUDGMENT
Declaratory judgments are statutory actions that are “meant to provide relief in situations
where a claim is ripe but would not support an action under common-law pleading rules.”178 A:
Declaratory judgment permits parties to avoid the accrual of avoidable damages to
one not certain of his rights and would strongly affect present behavior, have
present consequences and resolve a present dispute. A declaratory judgment is
inappropriate solely to adjudicate past conduct. The real value of the judicial
pronouncement is in the settling of some dispute which affects the behavior of the
defendant towards the plaintiff.179
Because declarations provide relief where another remedy is otherwise unavailable, “a
declaratory claim may not duplicate a properly-pleaded affirmative count.”180 A declaratory
count that ‘does not add anything’ will be dismissed.”181
Defendants contend that Count VI should be dismissed because the claim is unripe, moot,
and duplicative of the breach of contract claim.
First, Defendants argue that there is no present dispute requiring the Court to declare that
Mr. Schatzman is entitled to relief under SRP Section 2(b).182 Defendants state that Mr.
Schatzman has already received a payment pursuant to the SRP, and thus there is no controversy
to be settled by a declaratory judgment.183 Next, Defendants contend that the “the issue is moot
because Sections 3(b) and 3(g) are mutually exclusive”:
Plaintiff can only conceivably recover under one of these provisions, not both.
Either Plaintiff was terminated by Modern Controls, triggering payment under
178
Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 2014 WL 6703980, at *29 (Del. Ch. Nov.
26, 2014), judgment entered, (Del. Ch. 2014).
179
Delaware State Univ. Student Hous. Found. v. Ambling Mgmt. Co., 556 F. Supp. 2d 367, 374 (D. Del. 2008)
(internal citations and quotations omitted; cleaned up) (emphasis supplied).
180
Intermec IP Corp. v. TransCore, 2021 WL 3620435, at *25 (Del. Super. Aug. 16, 2021) (citing US Ecology, Inc.
v. Allstate Power Vac, Inc., 2018 WL 3025418, at *10 (Del. Ch. June 18, 2018), aff'd, 2019 WL 24460 (Del. Jan. 17,
2019); Trusa v. Nepo, 2017 WL 1379594, at *8 n.71 (Del. Ch. Apr. 13, 2017); Great Hill, 2014 WL 6703980, at
*29; Veloric v. J.G. Wentworth, Inc., 2014 WL 4639217, at *20 (Del. Ch. Sept. 18, 2014)).
181
Intermec IP Corp., 2021 WL 3620435, at *25 (quoting ESG Cap. Partners II, LP v. Passport Special
Opportunities Master Fund, LP, 2015 WL 9060982, at *15 (Del. Ch. Dec. 16, 2015)).
182
MTD at 26 (citing Compl. ¶ 68).
183
Id. The February 27, 2024 Motion notes that a second payment is “not due until May 1, 2024.”
30
Section 3(b), or he was still employed at the time of the sale, triggering payment
under Section 3(g). In that regard, Plaintiff is quite certain of his rights under the
Plan—he accepted the first installment pursuant to Section 3(b).184
Finally, Defendants argue that Mr. Schatzman asks for a declaration using “an almost word-for-
word recitation of his breach of contract claim.”185 As such, Defendants contend that Count VI
asks relief duplicative of Count I and should be dismissed.186
In response, Mr. Schatzman argues that his request for a declaratory judgment is not
duplicative of his claim for breach of contract, but rather that the declaration in Count VI is
necessary to resolve Count I.187 Moreover, Mr. Schatzman contends that, in the event the Court
were to find that he “must have been employed by the Company at the time of the sale” in order
to receive 10% of the proceeds now, “then Plaintiff pleads, alternatively, that his employment
was wrongfully terminated for the sole purpose of depriving him of those benefits.”188
Though Mr. Schatzman is correct that “declaratory relief may be sought to determine
provisions of a contract,” here he asks the Court to issue a declaration that would provide the
same relief as either Count I (because SRP Section 3(g) entitles him to 10% of the sale
proceeds); or Counts II and III (because even though SRP Section 3(g) does not entitle him to
10% of the proceeds, he was nevertheless terminated in bad faith violation of the implied
covenant inhered in his “employment contract” and the SRP). As such, Mr. Schatzman’s request
“does not add anything” to his other affirmatively pled claims and should be dismissed as
duplicative.189
For these reasons, the Court GRANTS the Motion as to Count VI.
184
Id.185
Id. at 26-27 (comparing Compl. ¶¶ 29 and 67).
186
Id. at 27.
187
Opp’n at 7.
188
Id. at 6. Mr. Schatzman here claims he has therefore effectively pled his tortious interference claims.
189
Intermec IP Corp., 2021 WL 3620435, at *25 (quoting ESG Cap. Partners II, 2015 WL 9060982, at *15).
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F. COUNT VII: FEE SHIFTING
Delaware follows the “American Rule,” the prevailing party in a civil action is generally
expected to cover its own attorneys’ fees,190 while an award of costs is generally issued at the
discretion of the trial court.191 There is a “bad faith” exception to the American Rule under
which courts may award attorneys’ fees for certain conduct, including “where parties have
unnecessarily prolonged or delayed litigation, falsified records or knowingly asserted frivolous
claims.”192 “The bad faith exception is applied in ‘extraordinary circumstances’ as a tool to deter
abusive litigation and to protect the integrity of the judicial process.”193
Although “[t]here is no single standard of bad faith that justifies an award of attorneys'
fees—whether a party's conduct warrants fee shifting under the bad faith exception is a fact-
intensive inquiry.”194 A claimant must “demonstrate by clear evidence that the party against
whom fees are sought acted in bad faith” and “Delaware courts have declined to engage in fee
shifting when the evidence of bad faith was less than clear.”195 Moreover, the conduct alleged
“must derive from either the commencement of an action in bad faith or bad faith conduct taken
during litigation, and not from conduct that gave rise to the underlying cause of action.”196 Fees
are only awarded where conduct is “egregious.”197
190
In re Delaware Pub. Sch. Litig., 2024 WL 332738, at *7–8 (Del. Jan. 30, 2024).
191
MTD at 27 (citing 10 Del. C. § 5101; Super. Ct. Civ. R. 54(d); Bishop v. Progressive Direct Ins. Co., 2019 WL
2009331, at *1 (Del. Super. May 3, 2019)).
192
Johnston v. Arbitrium (Cayman Islands) Handels AG, 720 A.2d 542, 546 (Del. 1998) (internal citations omitted).
193
Montgomery Cellular Holding Co. v. Dobler, 880 A.2d 206, 227 (Del. 2005) (quoting Johnston, 720 A.2d at
546).
194
Auriga Cap. Corp. v. Gatz Properties, 40 A.3d 839, 880–81 (Del. Ch. 2012), judgment entered sub nom. Auriga
Cap. Corp. v. Gatz Properties, LLC (Del. Ch. 2012), aff'd, 59 A.3d 1206 (Del. 2012)).
195
Kuratle Contracting, Inc. v. Linden Green Condo., Ass'n, 2014 WL 5391291, at *11-12 (Del. Super. Oct. 22,
2014); see also E.I. du Pont de Nemours & Co. v. Medtronic Vascular, Inc., 2013 WL 1792824, at *2 (Del. Super.
Apr. 24, 2013), aff'd sub nom. E.I. Du Pont Nemours & Co. v. Medtronic Vascular, Inc., 77 A.3d 271 (Del. 2013)
(internal citation omitted) (“Where there is a ‘colorable basis’ for a claim, the award of attorneys' fees and costs is
unwarranted.”).
196
RBC Cap. Markets, LLC v. Jervis, 129 A.3d 816, 877 (Del. 2015).
197
Gulf Aviation Servs. Grp. WLL v. Wilmington Tr. Co., 2023 WL 9118772, at *17 (Del. Super. Dec. 29, 2023).
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Defendants contend that fee shifting is not a cause of action but an “extraordinary
remedy” that is unsupported by Mr. Schatzman’s “conclusory” allegations.198 Defendants argue
that Mr. Schatzman has failed to justify fee shifting, both by failing to allege specific
“egregious” conduct warranting an award of fees, and by failing to prevail in the action.199
As a preliminary matter, Defendants’ contention that “fee shifting is a remedy, not an
independent cause of action” may overstate the law.200 The Court’s experience is that parties do
not generally have a separate cause of action for attorneys’ fee. However, a party is not
“disallowed from seeking fee-shifting in the initial action.”201 Simply put, the claim may be
brought even when it is dependent on the outcome of the action.202 Mr. Schatzman is therefore
permitted to state a claim for fee shifting in his Complaint.
Further, Mr. Schatzman responds that Defendants are incorrect and that the Court can
award fees based on conduct underlying the dispute.203 Indeed, in Gulf Aviation Services Group
v. Wilmington Trust, this Court noted that:
Delaware generally follows the American Rule, which provides that litigants are
responsible for their own litigation costs. But Delaware law recognizes that
exceptions to that rule may be warranted in extraordinary cases, where, for
example, a party's prelitigation conduct is so egregious that it warrants fees as a
form of damages.204
Mr. Schatzman argues that his case is the “extraordinary” example that warrants an award
of fees.205 Mr. Schatzman claims that, according to the Delaware Trial Handbook, there is also a
“bad faith exception to the American Rule in those cases where a party brings, or is forced to
198
MTD at 29.
199
Id.; see also Reply at 22 (noting that the cases Mr. Schatzman cites indicate fee shifting is a remedy only because
those courts only considered fees after the trial court had made its findings).
200
Reply at 22.
201
Urvan v. AMMO, Inc., 2024 WL 863688, at *23 (Del. Ch. Feb. 27, 2024).
202
Id. n.264 (collecting authorities).
203
Opp’n at 32.
204
Gulf Aviation Servs., 2023 WL 9118772, at *17.
205
Opp’n at 32-33.
33
bring, an action due to the bad faith of the defendant.”206 Mr. Schatzman contends that if the
facts as he has alleged them “are proven at trial the circumstances constitute one of those
‘extraordinary cases’ that support[] an award of attorney’s fees.”207
Defendants argue that Mr. Schatzman “simply alleges that his termination in and of itself
is enough to meet the standard for egregious prelitigation conduct.”208 Yet Mr. Schatzman
actually contends that “Defendants wrongfully terminated his employment based on fictitious
grounds for the purpose of depriving him of benefits that he had worked for years to obtain.”209
As noted above, Mr. Schatzman has pled facts adequate to survive a motion to dismiss
with respect to his claims for breach of the implied covenant in Count III and Mr. Peet’s alleged
tortious interference in Count IV. For the same reasons those claims survive a motion to dismiss,
Mr. Schatzman’s “fact-intensive” claim for fee-shifting should proceed. While Mr. Schatzman
may ultimately be unable to prove the egregious conduct necessary to award fees, his allegations
of that conduct are sufficiently pled to survive dismissal.
Therefore, the Motion, as to Count VII, is DENIED.
206
Id. at 33 (citing Delaware Trial Handbook, § 28:11, Attorney’s Fees, at 494-95 (1994) (“Bad faith may be shown
where a defendant has forced plaintiff to bring a legal claim that knows was valid.”).
207
Id. at 33-34.
208
Reply at 22.
209
Opp’n at 33.
34
V. CONCLUSION
For the reasons stated above, the Court GRANTS the Motion as to Count I, Count II,
Count V, and Count VI; and DENIES the Motion as to Count III, Count IV, and Count VII.
IT IS SO ORDERED.
September 20, 2024
Wilmington, Delaware
/s/ Eric M. Davis
Eric M. Davis, Judge
cc: File&ServeXpress
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