Opinion
C. A. 2022-1149-MAA
09-29-2023
ADVISER INVESTMENTS, LLC, A DELAWARE LIMITED LIABILITY COMPANY, Plaintiff, v. JEFFREY POWELL, Defendant.
David E. Ross, Esquire, Adam D. Gold, Esquire, and A. Gage Whirley, Esquire, of ROSS ARONSTAM &MORITZ, LLP, Wilmington, Delaware, and Mark W. Premo-Hopkins, Esquire (Argued), and Katie Lencioni, Esquire, of KIRKLAND & ELLIS, LLP, Chicago, Illinois, Attorneys for Plaintiff. Henry E. Gallagher, Jr., Esquire, Lauren DeLuca, Esquire, and Jarrett W. Horowitz, Esquire, of CONNOLLY GALLAGHER, LLP, Wilmington, Delaware, and Lazar P. Raynal, Esquire (Argued), Melanie Burke, Esquire, and Tatum Ellis, Esquire, of KING & SPALDING, LLP, Chicago, Illinois, Attorneys for Defendant.
Submitted: June 30, 2023
Upon Defendants' Motion to Dismiss: DENIED in part and GRANTED in part.
David E. Ross, Esquire, Adam D. Gold, Esquire, and A. Gage Whirley, Esquire, of ROSS ARONSTAM &MORITZ, LLP, Wilmington, Delaware, and Mark W. Premo-Hopkins, Esquire (Argued), and Katie Lencioni, Esquire, of KIRKLAND & ELLIS, LLP, Chicago, Illinois, Attorneys for Plaintiff.
Henry E. Gallagher, Jr., Esquire, Lauren DeLuca, Esquire, and Jarrett W. Horowitz, Esquire, of CONNOLLY GALLAGHER, LLP, Wilmington, Delaware, and Lazar P. Raynal, Esquire (Argued), Melanie Burke, Esquire, and Tatum Ellis, Esquire, of KING & SPALDING, LLP, Chicago, Illinois, Attorneys for Defendant.
MEMORANDUM OPINION
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 THE HONORABLE MEGHAN A. ADAMS under Del. Const. art. IV § 13(2) dated June 7, 2023.
INTRODUCTION
Pending before the Court is Defendant Jeffrey Powell's ("Powell") Motion to Dismiss Plaintiff Adviser Investments, LLC's ("Adviser") Complaint. This action, and its companion action pending in the Superior Court of Delaware's Complex Commercial Litigation Division, arise out of Adviser's acquisition of Polaris Wealth Advisory Group, LLC ("Polaris") for nearly $100 million in cash and equity. Adviser and Powell advance two very different versions of the events leading up to, and after, the closing of the transaction.
Adviser alleges in its Complaint in the Court of Chancery that Powell, Polaris's founder, former managing partner and chief investment officer, knowingly sold Adviser a risk-laden company that it would never have purchased but for Powell's fraudulent conduct. Adviser brings claims for fraud, breach of contract, unjust enrichment, tortious interference with contractual relations, and attorneys' fees and investigative costs.
Powell argues all of Adviser's claims should be dismissed for failure to state a claim pursuant to Court of Chancery Rules 9(b) and 12(b)(6). Adviser's fraud claims turn on whether the Securities Purchase Agreement ("SPA") unambiguously bars claims based on extra-contractual statements. The Court finds that the SPA does not, and that Adviser meets the pleading standard for fraud. The remainder of Adviser's claims, except for its claim for tortious interference with contractual relations, also survive considering the plaintiff-friendly pleading standards on a motion to dismiss.
The facts are drawn from the well-pled allegations of Adviser's Complaint dated December 13, 2022. The Court accepts Adviser's allegations as true for purposes of the Motion to Dismiss. Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Holdings LLC, 27 A.3d 531, 536 (Del. 2011).
A. Background
Powell created Polaris in 1998 to provide wealth management services to individual investors. Powell also founded Polaris Equity Management ("PEM"), a separate investment firm providing a variety of portfolio management services.PEM's assets were invested exclusively within Polaris NMX Fund, LLC ("NMX Fund"). "NMX Fund was created for the singular purpose of purchasing a minority interest (or up to 40%) of Preferred A Shares in NovaMetallix, Inc. [], a mine tailing company that promised investors billions in recoverable precious and base metals."Powell registered PEM with the Securities and Exchange Commission as a "related advisor" to Polaris, and allegedly held both firms out as "one and the same."
Compl. ¶ 32. In the SPA, Powell and Jeremy D. Witbeck are each referred to as a "Seller," and collectively, the "Sellers." Polaris is referred to as the "Company."
Id.
Id. ¶¶ 1, 36.
Id.
Id.
Adviser is a wealth management company headquartered in Newton, Massachusetts. Advisor and Powell began negotiations regarding the potential purchase of Polaris in late 2021. Following months of due diligence and negotiations, Advisor purchased Polaris in 2022 for $97,672,387.88.
Id. ¶ 28. In the SPA, Adviser is referred to as the "Buyer."
Id. ¶ 64.
Id. ¶ 41. Powell was to receive approximately 88% of the purchase price and several other financial benefits as part of the transaction, including a salary, incentive equity in Adviser, a potential bonus (for his new role as President of Adviser), as well as future benefits under an earnout schedule with a total potential value of $31 million. Id.
B. The Parties' Negotiation and Execution of the SPA
Shortly before closing, Powell discovered that a Polaris employee, Brandon Berman ("Berman"), attempted to steal 35 clients, proprietary information, and data on more than 150 company contacts from Polaris. Powell alerted Adviser of the issue and both parties "worked together" to file two actions against Berman (the "Berman Actions").
Id. ¶¶ 23, 24, 78, 79, 83. Adviser alleges that this breach caused Polaris to lose approximately $100 million in client revenues. Id. ¶ 83.
Id. Ex. C. On May 26, 2022, the date the transaction closed, the parties executed the First Amendment ("Amendment") to the SPA, which stipulated that "Sellers provided the Buyer notice of the Berman Actions." Id. at 1. The parties agreed that the notice of the Berman Actions "does not (i) cure any breach of, or non-compliance with, any representation or warranty requiring disclosure of the Berman Action, or any breach of any other provision of the Purchase Agreement, (ii) amend or supplement any scheduled disclosure made by the Company pursuant to Article 2 of the Purchase Agreement, or (iii) limit the remedies available to the Buyer, including remedies pursuant to Articles 8, 9, 10 or 11 of the Purchase Agreement." Id.
On April 6, 2022, the parties executed the SPA. Advisor alleges that "[d]uring negotiations and the interim period, unbeknownst to Adviser, Powell defrauded clients and concealed material information regarding PEM and the NMX Fund; made multiple misrepresentations regarding the Company; and breached interim covenants, closing conditions, and other provisions in the SPA."
Compl. ¶ 39.
Id. ¶ 42.
Relevant to this dispute, the SPA included several protective terms, including a guarantee by Powell that he "complied with all legal requirements;" that "no Polaris employees were infringing on the company's intellectual property or violating their employment agreements;" and that Powell would maintain the business between the SPA's execution and closing and provide accurate financial information through closing.
Pl.'s Answering Br. in Opp'n to Def.'s Mot. to Dismiss at 7 (citing SPA §§ 2.5(a), 2.9(a), 2.10(c), 2.11(e), 5.2(a)(ii)-(iii), 5.4, 5.13).
The SPA also included three clauses that Powell argues bar all fraud claims: Section 1.1 ("Purchase and Sale"), Section 2.22 ("Exclusivity of Representations and Warranties"), and Section 11.7 ("Entire Agreement") at the center of this decision.
After closing in May 2022, Adviser alleges that it discovered Polaris was only worth a fraction of the price for which it paid. Adviser also discovered that Powell concealed from Adviser "critical contemporaneous information" regarding the NMX Fund and PEM during negotiations, which Adviser alleges influenced its decision to purchase Polaris. In August 2022, following Adviser's investigation into Powell's representations and inquiries regarding Powell from the NMX Fund investors, Adviser placed Powell on administrative leave. Adviser also withheld $30 million from the closing proceeds payable to Powell. Adviser subsequently terminated Powell.
Compl. ¶ 1.
Ans. Br. at 1, 17; Compl. ¶¶ 18, 25, 42, 45, 48, 62, 72.
Compl. ¶¶ 42, 96.
Id.
Id.
In its complaint, Adviser alleges Powell committed fraud in the following ways:
• Powell did not disclose his "investment scam" with the NMX Fund, including his false promises of a twentyfold return;
• Powell did not disclose that he gave over $4 million in client funds to a company run by "known fraudsters;"
• Powell did not disclose that the NMX Fund's audit and valuation firms were raising serious issues and refusing to work;
• Powell did not disclose that PEM, the NMX Fund, and Polaris were intertwined;
• Powell misrepresented that Polaris' business was strong, despite knowing that Polaris' profits were plummeting;
• Powell called the Schwab partnership a "golden goose" for the business, while knowing the transition from TD Ameritrade to Schwab would severely limit Polaris' ability to source business from the referral network;
• Powell misrepresented that the NMX Fund and PEM were an entirely "separate side business," when they were actually commingled with Polaris;
• Powell represented falsely that the NMX Fund made in-kind distributions to its investors;
• Powell withheld any information that could reveal his "investment scam" with the NMX Fund; and
• Powell suppressed information and gave incomplete financial data to hide Polaris' negative performance.
Id. ¶¶ 2, 6, 46-47.
Id. ¶¶ 2, 37, 49-50.
Id. ¶¶ 2, 48.
Id. ¶¶ 1, 10, 45.
Id. ¶¶ 14-15, 22, 63-69.
Id. ¶¶ 15, 19-21, 73-77.
Id. ¶¶ 1, 10, 45.
Id. ¶¶ 6, 8, 55-59.
Id. ¶¶ 10-11, 55-59.
Id. ¶¶ 15-16, 72.
Along with its fraud claims, Adviser alleges Powell breached the SPA in the following ways:
• breaches of interim covenants: Section 5.2(a)(iii) and (iv) ("Conduct of Business), Section 5.4 ("Stub Period Financial Statements"), and Section 5.13 ("Notification of Certain Matters");
• breaches of representations and warranties: Section 2.5(a) (regarding financial statements), Section 2.6 (absence of certain changes), Section 2.9(a) (regarding compliance with Legal Requirements), and Sections 2.10(c) and 2.11(e) (relating primarily to the Berman Actions); and
• breach of Section 8.1 regarding failure to satisfy closing conditions.
Id. ¶¶ 134-36.
Id. ¶¶ 137-39.
Id. ¶¶ 139-40.
Id. ¶¶ 142-57.
Id. ¶¶ 158-64.
PROCEDURAL HISTORY
Powell filed a Complaint in the Superior Court of Delaware on December 9, 2022, captioned Jeffrey Powell v. Adviser Investments, LLC et al., C. A. No. N22C-12-096 AML (CCLD) ("Superior Court Action") based on Adviser's alleged violations of the SPA and Powell's employment agreement. On December 13, 2022, Adviser filed a Complaint in the Court of Chancery captioned Adviser Investments, LLC v. Jeffrey Powell, C. A. No. 2022-1149-PAF ("Court of Chancery Action") for fraud, breach of contract, unjust enrichment, and tortious interference with contract.
On February 2, 2023, Chief Justice Seitz designated former Judge Abigail M. LeGrow to sit as Vice Chancellor on the Court of Chancery to hear and decide all issues in the Court of Chancery Action. On February 17, 2023, Powell moved to dismiss Adviser's complaint (the "Motion to Dismiss"). After Justice LeGrow's elevation to the Supreme Court of Delaware, Chief Justice Seitz designated the undersigned to sit as a Vice Chancellor on the Court of Chancery to hear and decide all issues in the Court of Chancery Action. The parties completed briefing on the Motion to Dismiss on May 22, 2023, and the Court heard oral argument on June 30, 2023.
The Court also heard oral argument on two matters pending in the Superior Court Action: Powell's Motion to Strike Defendant's Affirmative Defenses and Powell's Motion for a Protective Order. The Court denied both motions on the record.
STANDARD OF REVIEW
A. Rule 12(b)(6) Pleading Standards
The pleading standards on a motion to dismiss pursuant to Court of Chancery Rule 12(b)(6) are minimal and plaintiff friendly. When the Court considers such a motion:
Cent. Mortg. Co., 27 A.3d at 536 (citing Savor, Inc. v. FMR Corp., 812 A.2d 894, 896 (Del. 2002)); Partners & Simons, Inc. v. Sandbox Acquisitions, LLC, 2021 WL 3159883, at *4 (Del. Ch. July 26, 2021).
(i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are well-pleaded if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the non-moving party; and (iv) dismissal is inappropriate
unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof.
Prairie Cap. III, L.P. v. Double E. Holding, Corp., 132 A.3d 35, 49 (Del. Ch. 2015) (quoting Savor, Inc., 812 A.2d at 896-97).
Thus, although the Court need not "'blindly accept conclusory allegations unsupported by specific facts,' or to 'draw unreasonable inferences in the plaintiffs' favor[,]'" the Court must deny a motion to dismiss where "the well-pled factual allegations of the complaint would entitle the plaintiff to relief under a reasonably conceivable set of circumstances."
Raul v. Astoria Fin. Corp., 2014 WL 2795312, at *5 (Del. Ch. June 20, 2014) (quoting Gantler v. Stephens, 965 A.2d 695, 704 (Del. 2009)).
Id. (quoting Sustainable Energy Generation Grp., LLC v. Photon Energy Projects B.V., 2014 WL 2433096, at *12 (Del. Ch. May 30, 2014)).
Although, "as a factual matter, [it may] ultimately prove impossible for the plaintiff to prove [its] claims at a later stage of a proceeding, . . . that is not the test to survive a motion to dismiss." The Court, however, "need not accept conclusory allegations unsupported by specific facts or draw unreasonable inferences in favor of the nonmoving party." The Court is also "not required to accept every strained interpretation of the allegations proposed by the plaintiff."
Cent. Mortg. Co., 27 A.3d at 536.
Sandbox, 2021 WL 3159883, at *4.
In re Trados Inc. S'holder Litig., 2009 WL 2225958, at *4 (Del. Ch. July 24, 2009) (internal citations omitted).
B. Rule 9(b) Pleading Standards
To state a claim for fraud, the plaintiff must plead facts supporting an inference regarding:
(i) a false representation, (ii) the defendant's knowledge of or belief in its falsity or the defendant's reckless indifference to its truth, (iii) the defendant's intention to induce action based on the representation, (iv) reasonable reliance by the plaintiff on the representation, and (v) causally related damages.
Prairie Cap. III, L.P., 132 A.3d at 49 (citing Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1074 (Del. 1983)). See also Abry Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1051 (Del. Ch. 2006).
The heightened pleading standard of Rule 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge and other condition[s] of mind of a person may be averred generally." Such particularity of circumstances refers to "time, place and contents of the false representations, the facts misrepresented, [and] the identity of the person making the misrepresentation and what he obtained [from it]." Essentially, "the plaintiff is required to allege the circumstances of the fraud with detail sufficient to apprise the defendant of the basis for the claim."
Ct. Ch. R. 9(b).
Metro Commc'n Corp. BVI v. Advanced Mobilecomm Techs., Inc., 854 A.2d 121, 144 (Del. Ch. 2004) (internal quotation marks omitted) (quoting York Lingings v. Roach, 1999 WL 608850, at *2 (Del. Ch. July 28, 1999)).
Abry, 891 A.2d at 1050.
ANALYSIS
I. The Complaint States a Claim for Fraud
A. The Language of the SPA Does Not Bar Adviser's Fraud Claims
Much of Powell's Motion to Dismiss focuses on his argument that SPA Sections 1.1, 11.7, and 2.22 bar all fraud claims. The Court, therefore, focuses on this argument first.
"[A] party cannot promise, in a clear integration clause of a negotiated agreement, that it will not rely on promises and representations outside of the agreement and then shirk its own bargain in favor of a 'but we did rely on those other representations' fraudulent inducement claim." Delaware courts have been clear, however, that an aggrieved buyer must clearly and unambiguously disclaim on extra-contractual representations to bar fraud claims.
Id. at 1057.
FdG Logistics LLC v. A&R Logistics Holdings, Inc., 131 A.3d 842, 860 (Del. Ch. 2016).
To be effective, a contract "must contain language that, when read together, can be said to add up to a clear anti-reliance clause by which the plaintiff has contractually promised that it did not rely upon statements outside the contract's four corners in deciding to sign the contract." Such provisions must "identify the specific information on which a party has relied and which foreclose reliance on other information." A disclaimer must also unambiguously "ensure the preclusion of fraud claims for extra-contractual statements." Moreover, because of public policy guarding against fraud, the Court will not protect a defendant from liability for a plaintiff's reliance on fraudulent statements made outside of an agreement "absent a clear statement by that counterparty-that is, the one who is seeking to rely on extra-contractual statements-disclaiming such reliance."
Prairie Cap. III, L.P., 132 A.3d at 51 (internal quotation marks omitted) (quoting Kronenberg v. Katz, 872 A.2d 568, 593 (Del. Ch. 2004)).
Id. at 50 (citing RAA Mgmt., LLC v. Savage Sports Holdings, Inc., 45 A.3d 107, 118-19 (Del. 2012)).
Sandbox, 2021 WL 3159883, at *6 (quoting FdG Logistics LLC, 131 A.3d at 860, aff'd, 148 A.3d 1171 (Del. 2016)).
FdG Logistics LLC, 131 A.3d at 859 (citing Abry, 891 A.2d at 1058-59) (emphasis added).
The relevant provisions in the SPA are as follows:
1.1 Purchase and Sale. In reliance upon the representations and warranties contained herein, and subject to the terms and conditions hereof, at the Closing the Sellers agree to sell, assign, transfer, and deliver to the Buyer, and the Buyer agrees to purchase, acquire, and accept from the Sellers, the Purchased Securities....
* * *
11.7 Entire Agreement. This Agreement, the attached exhibits and schedules, the Side Letter, and the other Transaction Documents contain the entire understanding of the parties, and there are no further or other agreements or understandings, written or oral, in effect among the parties relating to the subject matter hereof unless expressly referred to herein.
* * *
2.22 Exclusivity of Representations and Warranties. Neither the Company nor any of its Affiliates or representatives is making any representation or warranty on behalf of the Company of any kind or nature whatsoever, oral or written, express or implied (including, but not limited to, any relating to financial condition, results of operations, assets or liabilities of the Company or with respect to any other information provided to the Buyer at any time and by any means), except as expressly set forth in this Article 2, in any Transaction Document or in any certificate delivered at Closing, and the Company hereby disclaims any such other representations or warranties whether made by the Company or any of its Affiliates, managers, officers, employees, agents or representatives however made, directly or indirectly. Neither the Company nor any other Person shall have or subject to any liability to the Buyer or any other Person resulting from the distribution to the Buyer or any Person acting on its behalf, or the Buyer's or such other Person's use of, any such information, including any information, documents, projections, forecasts or other material made available to the Buyer or such other Person or their respective representatives in certain "data rooms" or management presentations or otherwise in expectation of the transactions contemplated by this Agreement or the Transaction Documents. Notwithstanding anything to the contrary, nothing shall limit or impair any Person's remedies or rights, or be deemed to be a waiver of, any claims related to actual fraud.
SPA Article 2 is titled, "REPRESENTATIONS AND WARRANTIES CONCERNING THE COMPANY." The preamble to Article 2 states, "[t]he Sellers and the Company hereby represent and warrant to the Buyer that, except as disclosed in the disclosure schedule dated as of the date hereof and delivered to the Buyer (the "Disclosure Schedule"), each of the representations and warranties contained in this Article 2 is true and correct as of the date hereof and will be true and correct as of the Closing Date...."
SPA §2.22 (emphasis added). During oral argument, the Court addressed the parties as to whether there was a difference, under Delaware law, between "fraud" and "actual fraud." At this stage, taking all reasonable inferences in favor of Adviser, the Court finds that "actual fraud" in the SPA refers to common law fraud. See Gaffin v. Teledyne, Inc., 611 A.2d 467, 472 (Del. 1992) (describing the elements for common law fraud, including states of mind). This is in contrast with Express Scripts, Inc. v. Bracket Holdings Corp., 248 A.3d 824, 831 (Del. 2021), cited by Powell. In Express Scripts, the Supreme Court of Delaware recognized that the parties "followed [the] well-worn path" of Delaware law and "address[ed] fraud and allocate[d] risk associated with postclosing disputes" in their securities purchase agreement. Id. The issue in Express Scripts was not whether the plaintiff was foreclosed from bringing a fraud claim based on extra-contractual representations, but rather whether the specific use of the term "deliberate" fraud altered the state of mind for fraud. Id. at 832. The Supreme Court held that the use of the term "deliberate" did alter the state of mind, especially when read with other provisions of the securities purchase agreement, which also used the phrase "deliberate." Id. at 832-34. The Supreme Court also relied upon the dictionary definition of deliberate, and that based on this, "[w]hat the parties intended to describe here was an intentional state of mind, not recklessness." Id. The Court does not find that the use of the term "actual" altered the definition or elements of common law fraud.
Sections 1.1, 11.7, and 2.22 do not clearly and unambiguously disclaim reliance by Adviser on extra-contractual representations. As in FdG and Anvil Holding Corporation, Section 2.22 is a disclaimer by "the Company" (Polaris) and "its Affiliates or representatives" of what it was and was not representing and warranting. Although Section 2.22 contains language that "[n]either [Polaris] nor any other Person shall have or be subject to any liability" to Adviser or any Person due to Adviser's use of "any information, documents, projections, forecasts or other material made available to [Adviser] . . . in certain 'data rooms' or management presentations," this language does not purport to state the universe of information relied upon by Adviser when entering into the SPA.
FdG Logistics, LLC, 131 A.3d at 860 ("[T]he critical language missing from Sections 5.27 and 10.7 of the Merger Agreement is any affirmative expression by Buyer of (1) specifically what it was relying on when it decided to enter the Merger Agreement or (2) that it was not relying on any representations made outside of the Merger Agreement."); Anvil Holding Corp. v. Iron Acquisition Co., Inc., 2013 WL 224965, at *8 (Del. Ch. May 17, 2013) (finding that a similar provision did not "disclaim reliance upon extra-contractual statements," especially when the parties to the purchase agreement agreed to "reserve[] all rights with respect to" any claims based on bad faith of any party) (emphasis in original).
See id. at 861 (discussing Abry and its progeny and the "critical provision[s]" that "operated to 'define what information the Buyer relied upon in deciding to execute the Agreement"). Notably, even though Adviser relied upon FdG in its Answering Brief and during oral argument, Powell did not attempt to distinguish FdG during briefing or at oral argument.
This is especially so given the last clause of Section 2.22, which specifically states that "[n]otwithstanding anything to the contrary, nothing shall limit or impair any Person's remedies or rights, or be deemed to be a waiver of, any claims related to actual fraud." The language of Section 2.22 is virtually identical to that in Sandbox, where the Court held that anti-reliance provision in that action "[could not] operate to bar Plaintiff's fraud claim because it does not unambiguously disclaim reliance on extra-contractual relations in the event of fraud." To the contrary: the anti-reliance provision "expressly exclude[d] fraud from its purview." Also, like Sandbox, the fraud exception in Section 22.2 is consistent with other SPA provisions that limit rights and remedies in the event of fraud.
Sandbox, 2021 WL 3159883, at *7. The Court also notes that Powell did not attempt to distinguish Sandbox during briefing or argument.
Id. The Court also notes that, because Section 22.2 unambiguously carves out claims for fraud, the integration clause does not assist Powell's argument.
See, e.g., SPA §§ 10.2(a)-(c) (noting that indemnification limits do not apply when "relating to fraud"); §10.12 (noting that indemnification is the exclusive remedy "except to the extent that a party suffers Losses as a result of fraud in which case such party shall be entitled to additional relief and remedies otherwise available at law or in equity"). Sandbox, 2021 WL 3159883, at *6 (recognizing that the contract at issue contains similar carve-outs for fraud).
For these reasons, Advisor did not unambiguously disclaim reliance on extra-contractual statements in the SPA. Thus, the SPA does not bar Adviser's fraud claims.
B. Plaintiff does not Impermissibly Bootstrap its Breach of Contract Claim into a Fraud Claim
Delaware law provides that "one cannot 'bootstrap' a claim of breach of contract into a claim of fraud merely by alleging that a contracting party never intended to perform its obligations." Accordingly, "a plaintiff cannot state a claim for fraud simply by adding the term 'fraudulently induced' to a complaint or alleging that the defendant never intended to comply with the agreement at issue at the time the parties entered into it."
Anschutz Corp. v. Brown Robin Cap., LLC, 2020 WL 3096744, at *15 (Del. Ch. June 11, 2020) (internal quotation marks omitted) (quoting Iotex Commc'ns, Inc. v. Defries, 1998 WL 914265, at *4 (Del. Ch. Dec. 21, 1998)).
MicroStrategy Inc. v. Acacia Rsch. Corp., 2010 WL 5550455, at *17 (Del. Ch. Dec. 30, 2010) (citing Iotex, 1998 WL 914265, at *4).
This Court recently synthesized the "anti-bootstrapping" rule in Levy Family Investors, LLC v. Oars + Alps LLC. In Levy Family, the Court held that the "anti-bootstrapping rule:
2022 WL 245543 (Del. Ch. Jan. 27, 2022).
does not prevent parties from bringing a fraud claim if (1) the plaintiff alleges the seller knowingly made false contractual representations, (2) damages for plaintiff's fraud claim [are] different from plaintiff's breach of contract claim, (3) the conduct occurs prior to the execution of the contract and thus with the goal of inducing the plaintiff's signature and willingness to close on the transaction, or (4) the breach of contract claim is not well-pled such that there is no breach claim on which to bootstrap the fraud claim.
Id. at *8 (internal quotations and citations omitted).
Here, Adviser easily overcomes the "anti-bootstrapping rule." The Complaint alleges different damages for fraud and breach of contract and allegations of pre-contractual conduct. Thus, Adviser's fraud claims are not barred by the anti-bootstrapping rule.
Powell v. Advisers Invs., LLC, & Polaris Wealth Advisory Grp., LLC, C. A. No. 2022-1149 (MAA) (June 30, 2023) (Tr. 84-86).
Compl. ¶¶ 16, 18, 25.
C. The Complaint Meets the Pleading Standard for Fraud
Adviser's claims for fraud fall into three buckets: Fraud by Omission (Count I), Fraudulent Misrepresentation (Count II), and Fraudulent Concealment (Count III). The Court, having already found that the SPA carves out claims for fraud and does not disclaim extra-contractual statements, finds that the Complaint states a claim based on the plaintiff-friendly motion to dismiss standard.
Most of Powell's arguments in both his briefing and during oral argument attempt to hold Adviser to a higher pleading standard than is required on a motion to dismiss. While Adviser may be unsuccessful at summary judgment or at trial regarding its claims for fraud, the detailed factual allegations contained in the Complaint state actionable claims for fraud. Therefore, Powell's Motion to Dismiss Adviser's fraud claims is DENIED.
See Sandbox, 2021 WL 3159883, at *7 ("The Complaint includes detailed factual allegations that give rise to the reasonable inference that Sellers knowingly misrepresented information about the Company's finances and accounting practices that were the subject of Sellers' representations and warranties. And to the extent Plaintiffs' fraud claims rely on 'extra contractual' statements, they 'may use external sources of information to plead that a contractually identified fact was false or misleading.'") (internal citations and quotations omitted).
The Court addresses briefly Powell's argument regarding Shareholder Representatives Services LLC v. Albertsons Companies, Inc., 2021 WL 2311455 (Del. Ch. June 7, 2021). In Albertsons, the "gravamen of Plaintiff's fraudulent inducement claim [was] that Albertsons lied about its 'future intent' with respect to the operation of the business post-closing." 2021 WL 2311455, at *12 (citation omitted). This is not the case here. At this stage, taking all reasonable inferences in favor of Adviser, the Court does not find that the allegations in the complaint contain the type of future promises discussed in Albertsons.
II. The Complaint States a Claim for Breach of Contract
The elements for breach of contract under Delaware law are: "(1) the existence of a contract; (2) a breach of an obligation imposed by that contract; and (3) [] damages." Adviser's breach of contract claims, like its fraud claims, easily clear the hurdle on a motion to dismiss.
Sandbox, 2021 WL 3159883, at *5.
There is no dispute that a contract exists or that Adviser has alleged damages. Rather, Adviser alleges "no factual allegations" to support its breach of contract claims. Again, Powell attempts to hold Adviser to a higher standard than is required at this stage. The facts alleged in the Complaint give notice of the claims therein to Powell. Thus, Powell's Motion to Dismiss Adviser's contract claims is DENIED.
Although Powell argues, for the first time in his reply, that Advisor does not allege damages for certain claims, this argument is waived for purposes of the motion to dismiss. See Emerald Partners v. Berlin, 726 A.2d 1215, 1224 (Del. 1999). In any event, the Court finds that Advisor sufficiently pleads damages. See Compl. ¶¶ 26, 42, 83.
See Open. Br. at 30-42; Reply Br. at 26-32.
III. The Complaint States a Claim for Unjust Enrichment
Adviser claims, in the alternative, that Powell's alleged fraud allowed him to pocket tens of millions of dollars that he would have otherwise never received."Unjust enrichment is 'the unjust retention of a benefit to the loss of another, or the retention of money or property of another against the fundamental principles of justice or equity and good conscience.'" The elements of unjust enrichment are: "(1) an enrichment, (2) an impoverishment, (3) a relation between the enrichment and impoverishment, (4) the absence of justification, and (5) the absence of a remedy provided by law."
Compl. ¶¶ 165-73.
Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010) (quoting Fleer Corp. v. Topps Chewing Gum, Inc., 539 A.2d 1060, 1062 (Del. 1998)).
Id. (citing Jackson Nat. Life Ins. Co. v. Kennedy, 741 A.2d 377, 394 (Del. Ch. 1999)).
According to Powell, Adviser's unjust enrichment claim should be dismissed because all claims are governed by the SPA. This Court rejected a similar argument in LVI Group Investments, LLC v. NCM Group Holdings, LLC. In LVI, the Court declined to dismiss an unjust enrichment claim, pled in the alternative, where the plaintiff alleged that the contract at issue itself arose from the defendants' fraud. The same is true here. Therefore, Powell's motion to dismiss Adviser's unjust enrichment claim is DENIED.
Open Br. at 42-43; Reply Br. at 32-33.
2018 WL 1559936 (Del. Ch. Mar. 28, 2018).
Id. at 17.
IV. The Complaint Does Not State a Claim for Tortious Interference
"To state a claim for tortious interference with contract, a plaintiff must allege that the defendant 'intentionally and improperly interfere[d] with the performance of a contract' between the plaintiff 'and a third person by inducing or otherwise causing the third person not to perform the contract.'"
Am. Bottling Co. v. Repole, 2020 WL 7787043, at *6 (Del. Super. Dec. 30, 2020) (quoting Smith v. Hercules, Inc., 2002 WL 499817, at *2 (Del. Super. Mar. 28, 2002)).
Here, Adviser does not state a claim for tortious interference with contract. Adviser cannot state a claim for alleged conduct that occurred before the transaction closed, when Adviser had no contractual relationship with any client. Adviser also does not state a claim for conduct allegedly occurring after the transaction closed. Adviser argues in opposition to the Motion to Dismiss that Powell's actions "were both outside the bounds of his employment and unjustifiable." Although an employee is liable for interfering with its employer's contracts when "they exceed the scope of their authority," Adviser's vague and general allegations in the Complaint regarding the contracts it alleges Powell interfered with and how Powell acted outside the scope of his authority do not meet the pleading standards on a motion to dismiss. Therefore, Adviser's claim for tortious interference with contractual relations is GRANTED.
Answering Br. at 54 (citing Compl. ¶¶ 58, 177-78).
Nye v. Univ. of Delaware, 2003 WL 22176412, at *6 (Del. Super. Sept. 17, 2003).
V. The Complaint States a Claim for Attorneys' Fees and Costs of Investigation
Adviser states a claim for fraud and breach of contract. Therefore, pursuant to SPA § 10.3, Adviser states a claim for attorneys' fees and costs of investigation. Powell's motion to dismiss Adviser's claim for attorneys' fees and investigation costs is DENIED.
CONCLUSION
For the foregoing reasons, Powell's Motion to Dismiss Counts I-VII and IX of Adviser's Complaint is DENIED. Powell's Motion to Dismiss Count VIII of Adviser's Complaint is GRANTED. The parties shall confer on a proposed case management order and submit for the Court's consideration within fourteen days of this order.
IT IS SO ORDERED.