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holding breaches of the duties of loyalty and care must be pleaded with particularity
Summary of this case from Belova v. SharpOpinion
C.A. No. 16622-NC.
Submitted: March 4, 1999.
Decided: July 28, 1999.
Counsel:
Kathleen M. Jennings Lisa A. Borin Oberly Jennings
Robert B. Anderson McCarter English
ISSUES PRESENTED
The director of a Delaware joint venture corporation and two corporations which he controls move to dismiss pursuant to Court of Chancery Rule 12(b)(6) a counterclaim filed against the director that he breached the fiduciary duty of loyalty that he owed to the joint venture corporation. Because the Counterclaimants fail, as required by Court of Chancery Rule 9 (b), to plead with particularity the portion of the breach of fiduciary duty claim based on the director's alleged fraud, I dismiss that portion of Counterclaimants' breach of fiduciary duty claim. However, because the Counterclaimants sufficiently plead the allegations of their breach of fiduciary duty claim based upon intentional and gross mismanagement, I deny the motion to dismiss the remainder of the breach of fiduciary duty claim.
BACKGROUND
Halcon York, Inc. ("Halcon York") is a Delaware joint venture corporation owned by counterclaimant Hal Roach Construction, Inc. ("HRC") and counterclaim defendant York Linings International, Ltd. ("York Linings"), each with a fifty percent ownership stake. The two companies established Halcon York for the purpose of engaging in the business of refractory engineering.
Counterclaimant Scott E. Roach is the majority shareholder and president of HRC. Counterclaim defendant James Black is president and controlling shareholder of York Linings. Roach and Black are Halcon York's only two directors.
York Linings instituted this action against HRC and Roach, alleging that they breached their fiduciary duties owed to Halcon York by misusing and mismanaging Halcon York's funds, assets and business affairs, to the detriment of Halcon York and York Linings.
Roach and HRC in turn filed a counterclaim against York Linings, as well as Black and York Linings International, Inc. ("York-U.S."). In Count II, the Counterclaimants claim that Black breached his fiduciary duty of loyalty owed to Halcon York by, among other things, defrauding HRC and Roach.
The Counterclaim Defendants (York Linings, York-U.S. and Black) filed a motion to dismiss Count II of the counterclaim pursuant to Court of Chancery Rule 12(b)(6). They argue that Count II is not a claim for breach of fiduciary duties, but rather an insufficiently pleaded claim of fraud. They further argue that because the Counterclaimants fail to allege fraud with the particularity required under Rule 9(b), Count II fails to state a claim upon which relief may be granted. The Counterclaimants, on the other hand, argue that Count II of the counterclaim is in fact a claim for breach of fiduciary duty, and that they pleaded Black's fraud with sufficient particularity to satisfy Rule 9(b).
DISCUSSION
A. Legal Standard
The appropriate standard on a motion to dismiss pursuant to Court of Chancery Rule 12(b)(6) for failure to state a claim is rigorous. A complaint will be dismissed only if "it appears to a reasonable degree of certainty the plaintiff would not be entitled to relief under any set of facts which could be proved in support of his claim. This Court assumes the truth of all well-pleaded facts in the complaint and draws all reasonable inferences from those facts in the light most favorable to the plaintiff. Mere conclusory allegations, however, will not be accepted as true.
Rosan v. Chicago Milwaukee Corp., ___ Del. Ch. ___, C.A. No. 10526, mem. op. at 1, Chandler, V.C. (February 6, 1990).
James River-Pennington, Inc. v. CRSS Capital, Inc., ___ Del. Ch. ___, C.A. No. 13870, mem. op. at 10, Steele, V.C. (March 6, 1995) (citing Rabkin v. Phillip A. Hunt Chemical Corp., ___ Del. Supr. ___, 498 A.2d 1099, 1104 (1985)); In re USA Cafes, L.P. Litig., ___ Del. Ch. ___, 600 A.2d 43, 47 (1991).
Id . at 9-10 (citing Grobow v. Perot, ___ Del. Supr. ___, 539 A.2d 180, 187 n. 6 (1998)).
Id . at 10.
B. Analysis
(1) Count II of the Counterclaim Generally
Contrary to Counterclaim Defendants' contention, Count II is a claim for breach of fiduciary duty. The claim that Black's alleged fraudulent conduct breached his fiduciary duties constitutes only a portion of that claim. With the exception of the portion of Counterclaimants' breach of fiduciary duty claim based on Black's alleged fraud, the fiduciary duty counterclaim is pleaded sufficiently to survive this motion to dismiss.
(2) The Portion of Count II not Based upon Fraud
Court of Chancery Rule 8(a) governs the pleading of the portion of Counterclaimants' fiduciary duty claim that is not based on Black's alleged fraud. Under Rule 8(a), a pleading must set forth (1) a short and plain statement of the claim showing that the pleader is entitled to relief, and (2) a demand for judgment for the relief to which the party deems itself entitled.
Del. Ct.Ch.R. 8(a).
The elements of a breach of fiduciary duty claim are (1) that a fiduciary duty exists and (2) that the fiduciary breached that duty. Counterclaimants allege that Black owed fiduciary duties as a director and officer of Halcon York. It is well established that directors of a Delaware corporation owe fiduciary duties to the corporation. The counterclaim goes on to allege that Black breached those duties by (i) intentionally and grossly mismanaging the affairs of Halcon York as demonstrated by (a) his intentional failure to provide qualified, knowledgeable personnel to staff Halcon York's projects and (b) his gross mismanagement of Halcon York's bidding and collection efforts to his and York Linings' benefit; (ii) through his efforts to hire away key Halcon York and HRC personnel to work for York Linings and York-U.S., and (iii) through usurpation of Halcon York and HRC projects for his personal benefit. These allegations, if proved, could constitute a breach of Black's fiduciary duties of loyalty and care to Halcon York. Finally, consistently with Rule 8(b), the Counterclaimants allege damages directly resulting from Black's breach of his fiduciary duties. The Counterclaim Defendants have thus failed to establish that there is no set of circumstances under which Counterclaimants would be entitled to relief.
Jackson Nat'l Life Ins. Co. v. Kennedy, ___ Del. Ch. ___, C.A. No. 16472, mem. op. at 16, Steele, V.C. (July 15, 1999) (citation omitted).
(2) The Portion of Count II Based upon Black's Alleged Fraud
Counterclaimants, however, fail to plead sufficiently the portion of their breach of fiduciary duty claim based on Black's alleged fraud. Pursuant to Court of Chancery Rule 9(b), a complainant must allege the elements of fraud with particularity in order for the claim to survive a Rule 12(b)(6) motion to dismiss. The circumstances which "shall be stated with particularity" in Rule 9(b) refer to the time, place and contents of the false representations, the facts misrepresented, as well as the identity of the person making the misrepresentation and what he obtained thereby." Rule 9(b) also provides, however, that malice, intent, knowledge and other condition of mind of a person necessary to plead fraud may be averred generally.
See Del. Ch. Ct.R. 9(b).
C.V. One v. Resources Group, ___ Del. Super. ___, C.A. No. 81C-OC-95, 1982 WL 172863 at *2, Christie, J. (December 14, 1982) (quoting Autrey v. Chemtrust Indus. Corp., ___ Del. ___, 362 F. Supp. 1085, 1092, 1093 (1973)).
Del. Ch. Ct.R. 9(b).
In Delaware, the essential elements of fraud are (1) a false representation, usually of fact, made by the defendant; (2) the defendant's knowledge or belief that the representation was false, or the defendant's reckless indifference to the truth; (3) an intent to induce the plaintiff to act or refrain from acting; (4) the plaintiffs action or inaction taken in justifiable reliance upon the representation; and (5) damage to the plaintiff as a result of such reliance.
Gaffin v. Teledyne, Inc., ___ Del. Supr. ___, 611 A.2d 467, 472 (1992).
After piecing together Counterclaimants' disjointed allegations of the elements of fraud, I can conclude that they have alleged the following with respect to fraud: (I) that Black approached Counterclaimants in 1995 and proposed that they form Halcon York; (2) that Black made the following representations to them: (a) that through his contacts and York Linings' reputation in the United Kingdom, he would be able to secure work in the United States that neither HRC nor York Linings would otherwise be able to obtain; (b) that he was interested in building a worldwide network of similar "affiliations" in order to compete with multinational industrial furnace contractors; (c) that he would make Roach a "rich man"; (d) that the new venture would couple York Linings' expertise, supervisory workforce and contacts with HRC's ability to assemble an on-site work crew; and (e) that York Linings would supply supervisory personnel with the know-how to complete Halcon York's projects; (3) that after forming Halcon York, York Linings, despite Black's representation, failed to provide supervisory personnel with the skills necessary to run five projects that Halcon York contracted to do; (4) that in one instance York Linings withheld a "profit" from one of the contracts in violation of the agreement between HRC and York Linings and that York Linings has never fully accounted to Halcon York for the monies received from that contract; (5) that Black and York Linings hired unspecified HRC and Halcon York employees for York-U.S. and took three business opportunities from Halcon York and HRC; and (6) that, on the basis of information and belief, Black's relationship with the Counterclaimants reflected a fraudulent scheme to destroy HRC and take its business and whatever business was developed through the new venture to start his own operation in the United States.
Review of these allegations of "fraud" reveals that the counterclaim fails to allege the essential elements of fraud with the particularity necessary to survive a Rule 12(b)(6) motion to dismiss. While the counterclaim alleges that Black intentionally failed to act in accordance with his representations, it does not allege that these representations were false at the time Black made them, nor that Black knew that they were false. As a result, the counterclaim fails to allege with sufficient particularity that Black's actions taken after the formation of Halcon York were part of a scheme to defraud Counterclaimants, as opposed to a breach of the obligations that York Linings and Black agreed to undertake as partners in the joint venture corporation. The counterclaim only alleges, "on information and belief," that Black intentionally, fraudulently and wrongfully induced HRC's participation in the new venture solely as a means to destroy HRC and take its business and whatever business the new venture developed to start his own operation in the United States. In the absence of a sufficiently pleaded allegation that Black's representations were false when he made them, this allegation alone is not sufficient to establish a claim for fraud. If this allegation were sufficient, a partner in a joint venture corporation could sue its partner for fraud anytime the joint venture failed because of the other partner's alleged breach of its representations and promises that it made going into the joint venture. This result would be inconsistent with Rule 9(b)'s purpose of protecting defendants from unfounded charges of wrongdoing which could injure their reputation and goodwill.
See C. V. One at *2 (stating "Rule 9(b) has three purposes: (1) Allegations must be specific enough to inform defendants of the act plaintiff complains of and to enable defendant to prepare an effective response and defense; (2) Eliminate complaints filed as a pretext for discovery of unknown wrongs; and (3) To protect defendant[s] from unfounded charges of wrongdoing which could injure his reputation and goodwill.")
CONCLUSION
For the reasons stated above, I grant Counterclaim Defendants' motion to dismiss Counterclaimants' fiduciary duty claim based on Black's alleged fraud and deny Counterclaim Defendants' motion with respect to the remainder of Counterclaimants' breach of fiduciary duty claim.IT IS SO ORDERED.
_____________________________ Vice Chancellor
MTS/rm oc: Register in Chancery