Rogers et al v. Gentex CorporationBRIEF IN OPPOSITION re MOTION to Dismiss Counts IV-VII MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM of Plaintiffs' Second Amended ComplaintM.D. Pa.May 8, 2017UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA ) DAVID ROGERS AND OPTION-X LLC, ) ) Plaintiffs, ) ) v. ) CIVIL ACTION NO. ) 3:16-cv-00137 ) Honorable Robert D. Mariani GENTEX CORPORATION, ) ) Defendant. ) ) PLAINTIFFS' OPPOSITION TO DEFENDANT GENTEX CORPORATION'S MOTION TO DISMISS COUNTS IV-VII OF PLAINTIFFS' SECOND AMENDED COMPLAINT PURSUANT TO FED. R. CIV. P. 12(b)(6) DAVID ROGERS and OPTION X, LLC Emily H. Edmunds (PA 205919) Saul Ewing LLP 2 North Second Street, 7th Floor Harrisburg, PA 17101 (717) 257-7576 eedmunds@saul.com David H. Rich (BBO# 634275) Todd & Weld, LLP One Federal Street Boston, MA 02110 (617) 720-2626 drich@toddweld.com Admitted pro hac vice Dated: May 8, 2017 Case 3:16-cv-00137-RDM Document 73 Filed 05/08/17 Page 1 of 24 i TABLE OF CONTENTS I. Introduction ................................................................................................... 1 II. Relevant Factual Background ....................................................................... 2 III. Statement of Questions Presented ................................................................ 6 IV. Argument ...................................................................................................... 7 A. Standard of Review ............................................................................ 7 B. Plaintiffs' Count IV Properly Pleads a Claim for Fraudulent Misrepresentation ............................................................. 7 C. Count V Sufficiently States a Claim for Negligent Misrepresentation ............................................................................. 12 D. Plaintiffs State a Claim for Fraud in Count VI ................................ 12 E. In Count VII, Plaintiffs Properly Plead Conversion ........................ 16 IV. Conclusion .................................................................................................. 18 Case 3:16-cv-00137-RDM Document 73 Filed 05/08/17 Page 2 of 24 ii TABLE OF AUTHORITIES Cases American Planned Communities, Inc. v. State Farm Ins. Co., 28 F.Supp.2d 964 (E.D. Pa. 1998) .......................................................................... 13 Ashcroft v. Iqbal, 556 U.S. 662 (2009) ..................................................................... 7 Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) ...................................................... 7 Christidis v. First Pennsylvania Mortgage Trust, 717 F.2d 96 (3d Cir. 1983) ........................................................................................................... 14 Craftmatic Sec. Litig. v. Kraftsow, 890 F.2d 628 (3d Cir. 1990) ............................ 14 eToll, Inc. v. Elias/Savion Adver., Inc., 811 A.2d 10 (Pa. Super. Ct. 2002) ........... 15 Evancho v. Fisher, 423 F.3d 347 (3d Cir. 2005) ....................................................... 7 Fenton v. Balick, 821 F.Supp.2d 755 (E.D. Pa. 2011) ....................................... 16, 17 Foster v. Northwestern Mut. Life, No. 02-2211, 2002 WL 31991114 (E.D. Pa. Jul. 26, 2002) ........................................................................... 15 Frowen v. Blank, 425 A.2d 412 (Pa. 1981) ............................................................. 13 Galdieri v. Monsanto Co., 245 F.Supp.2d 636 (E.D.Pa. 2002) ............................... 16 Jairett v. First Montauk Securities Corp., 203 F.R.D. 181 (E.D. Pa. 2001) ..................................................................................................... 8, 10 Kanter v. Barella, 489 F.3d 170 (3d Cir. 2007)......................................................... 7 Lundy v. Hochberg, 79 Fed.Appx. 503 (3d Cir. 2003) ............................................ 15 Matlack Leasing, LLC v. Morison Cogen, LLP, No. 09-1570, 2010 WL 114883 (E.D. Pa. Jan. 13, 2010) .............................................................................. 10 Case 3:16-cv-00137-RDM Document 73 Filed 05/08/17 Page 3 of 24 iii Mobile Satellite Commc'ns, Inc. v. Intelsat USA Sales Corp., 646 F.Supp.2d 124 (D. D.C. 2009) ...................................................................... 9, 10 Moser v. DeSetta, 589 A.2d 679 (Pa. 1991) ............................................................ 13 Neuman v. Corn Exch. Nat'l Bank & Trust, 356 Pa. 442 (1947) ............................... 8 Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380 (3d Cir. 1994) ........................................................................................................... 17 Overall v. University of Pennsylvania, 412 F.3d 492 (3d Cir. 2005) ........................ 9 Pittsburgh Constr. Co. v. Griffith, 834 A.2d 572 (Pa. Super. Ct. 2003) ................. 15 Porreco v. Porreco, 811 A.2d 566 (Pa. 2002) ......................................................... 15 Prudential Ins. Co. of America v. Stella, 994 F.Supp. 318 (E.D. Pa. 1998)............ 16 Rittenhouse v. Shubert, No. 88-4682, 1989 WL 54030 (E.D. Pa. May 18, 1989) .......................................................................................... 11 Sevin v. Kelshaw, 611 A.2d 1232 (Pa. Super. Ct. 1992) ......................................... 11 Wilson v. Donegal Mut. Ins. Co., 598 A.2d 1310 (Pa. Super. Ct. 1991) ................................................................................................ 13 Woodward v. Dietrich, 548 A.2d 301 (Pa. Super. Ct. 1988) ................................... 11 Rules Fed. R. Civ. P. 9 ....................................................................................................... 12 Fed. R. Civ. P. 12 ...................................................................................................... 7 Case 3:16-cv-00137-RDM Document 73 Filed 05/08/17 Page 4 of 24 1 I. INTRODUCTION Plaintiffs David Rogers ("Mr. Rogers") and Option-X LLC (together, "Plaintiffs") respectfully submit this Opposition to Defendant Gentex Corporation's Motion to Dismiss Counts IV-VII of Plaintiffs’ Second Amended Complaint Pursuant to Fed. R. Civ. P. 12(b)(6) ("Motion"). In the Motion, Defendant Gentex Corporation ("Gentex") asks this Court to dismiss four of the Plaintiffs' seven counts based on misapplications of Pennsylvania law and by selectively ignoring the Plaintiffs’ well-pleaded allegations that must be accepted as true for purposes of the present motion.1 Indeed, to allow Gentex’s motion, the Court would be compelled to ignore the allegations in the Plaintiffs’ Second Amended Complaint and instead rely upon Gentex’s supposed version of the facts. As set forth in further detail below, the Second Amended Complaint provides sufficient factual allegations to support the Plaintiffs' claims that: (1) Gentex fraudulently and/or negligently misrepresented whether certain 2014 revenue numbers were met in order to induce Mr. Rogers to terminate his employment at a time that would make it so that Gentex could avoid paying him an otherwise-earned bonus; (2) Gentex committed fraud in effectively manipulating its financial reporting, concealing accurate information and failing to 1 Gentex has not moved to dismiss Count One – Breach of Stock Purchase Agreement, Count Two – Breach of Employment Agreement, or Count Three – Violation of Pennsylvania Wage Payment and Collection Law. Case 3:16-cv-00137-RDM Document 73 Filed 05/08/17 Page 5 of 24 2 provide an accurate account of Gentex's chinstrap sales and profits to avoid paying royalties; and (3) Gentex converted a hard drive containing proprietary and confidential information by refusing to return it in the face of the Plaintiffs' demand in April 2015. Accordingly, the Motion should be denied. II. RELEVANT FACTUAL BACKGROUND2 In December 2011, Mr. Rogers sold the assets of his company, Artisent, Inc., and the stock of his company, Ops-Core, Inc., to Gentex. See Sec. Am. Compl. ¶ 1. Among other agreements including an Asset Purchase Agreement ("APA"), Gentex and Mr. Rogers entered into a Stock Purchase Agreement ("SPA") through which Gentex agreed to purchase the stock in Ops-Core, Inc. from the shareholders of Ops-Core, Inc., including Mr. Rogers. Id. at ¶ 7, Ex. A. Section 2.3 of the SPA provides for royalty payments to the Plaintiffs based on the operating profits received by Gentex arising from chinstraps sales, an asset acquired in the transaction. Id. at ¶ 10. Also part of the transaction, Mr. Rogers entered into an employment agreement to become Gentex's Vice President of Concept Development ("Employment Agreement"). Sec. Am. Compl. ¶¶ 17-21. The Employment Agreement provided that Mr. Rogers would be eligible to participate in Gentex's bonus and incentive programs. Id. at ¶¶ 19-20, Ex. C. The basis for Mr. Rogers' 2 The Plaintiffs cite to the Second Amended Complaint as "Sec. Am. Compl. ¶ _." Case 3:16-cv-00137-RDM Document 73 Filed 05/08/17 Page 6 of 24 3 entitlement to bonuses was whether certain revenue targets were met at the close of a given fiscal year. Id. at ¶ 51. The Employment Agreement provided, however, that if Mr. Rogers terminated the agreement, then he would be paid "within (30) days after the date of such termination, all accrued but unpaid amounts . . . but not any unpaid bonus or other amount under this Agreement." Id. at ¶ 20. Despite demand, Gentex has manipulated and actively concealed accurate and complete accounting of Gentex's chinstrap sales, profits or royalty payments. Sec. Am. Compl. ¶¶ 22, 30-31. Gentex has delayed, stalled and provided conflicting answers regarding the calculation of royalties due to the Plaintiffs. Id. at ¶¶ 23-28. Through the exercise of diligence, and after receiving fraudulent accountings, the Plaintiffs discovered that (i) Gentex's calculations were prepared outside of the Boston SAP accounting system or formula required in the SPA, (ii) Gentex knowingly and deceptively added costs to falsely lower the chinstrap profits, and (iii) Gentex did not prepare its royalty calculations with an accounting method used for any other financials or that was in accordance with standard accounting principles. Id. at ¶¶ 29, 31-34. Although they uncovered these wrongs, Gentex has continuously limited and precluded the Plaintiffs from accessing Gentex's financial information necessary to properly calculate (i) the royalty payments owed, or (ii) the scope and magnitude of the financial manipulation. Id. at ¶ 31. "In this regard, Gentex has knowingly and actively defrauded Plaintiffs by Case 3:16-cv-00137-RDM Document 73 Filed 05/08/17 Page 7 of 24 4 concealing information from the Plaintiffs which would allow them to calculate their royalty." Id. at ¶ 40. Further, "by withholding full and complete information from Mr. Rogers which would have allowed him to calculate the royalty owed with precision, Gentex has been able to perpetuate and conceal the full scope of its fraudulent conduct and contractual breaches." Id. at ¶ 41. In December 2014, Mr. Rogers informed Gentex of his intention to terminate the employment relationship, but did not specify his departure date. Sec. Am. Compl. ¶ 50. Mr. Rogers and Gentex agreed to develop and implement a transition plan, and Mr. Rogers provided Gentex with an initial draft schedule in late December 2014. Id. In January 2015, while still an employee of Gentex, Mr. Rogers inquired about his 2014 incentive bonus. Id. at ¶ 51. Since the fiscal year had just closed at the end of December, Mr. Rogers sought this information in order to determine his departure date from Gentex. Id. Gentex representatives told Mr. Rogers that, like 2013, the company would not be paying 2014 bonuses because the revenue targets were not met. Sec. Am. Compl. ¶ 52. In response to a direct question about whether the 2014 revenue targets were met on January 14 or 15, 2015, Gentex's Boston facility accountant, Adam Atkins ("Mr. Atkins"), replied that, although the books were not officially closed, the company "hadn't come close to meeting the goal of $181 million in revenue" based on the year end reporting he had seen. Id. at ¶ 53. Further, on Case 3:16-cv-00137-RDM Document 73 Filed 05/08/17 Page 8 of 24 5 January 28, 2015, Gentex's chief financial officer, Heather Acker ("Ms. Acker"), confirmed that the 2014 targets had not been hit and noted "some years are better than others – I've been doing this for a long time and at this point I never expect or take anything for granted." Id. at ¶ 54. Mr. Rogers relied on these statements and ultimately ended his employment on February 6, 2015. Id. at ¶ 55. In March 2015, Mr. Rogers discovered that Gentex did meet its 2014 revenue targets and that many, if not all, employees in similar leadership positions received their bonuses. Id. at ¶ 57. "Aware of Mr. Rogers's pending departure and intending to induce him to leave without having to pay the bonus, Gentex fraudulently and/or negligently made [these] false representations relating to the 2014 bonus." Id. at ¶ 58. The APA that was part of the underlying transaction excluded certain assets such as proprietary and confidential information contained on a certain hard drive. Sec. Am. Compl. ¶¶ 64-67. Upon learning of Mr. Rogers upcoming departure, Gentex and Mr. Rogers agreed to temporarily lock the hard drive in Mr. Rogers' office until they could confirm the hard drive contained only excluded assets. Id. at ¶¶ 68-73. After being served with a third party subpoena seeking the information contained on the hard drive in April 2015, Mr. Rogers contacted Gentex and "demanded" that Gentex return the hard drive. Id. at ¶ 75. He then learned for the first time that the security passwords and protocols put in place to protect the information on the hard drive had been intentionally hacked by Gentex Case 3:16-cv-00137-RDM Document 73 Filed 05/08/17 Page 9 of 24 6 for the purpose of gaining access to the very information it knew was confidential and which it was not authorized to have access to per the APA and multiple confidentiality agreements. Id. at ¶ 76. Gentex has refused and continues to refuse to return the hard drive. Id. at ¶¶ 78-79. III. STATEMENT OF QUESTIONS PRESENTED 1. Whether the Plaintiffs’ claim for fraudulent misrepresentation in Count IV should proceed where it pleads all essential elements of the claim and Gentex’s argument to the contrary fails? Suggested Answer: Yes, the claim should proceed. 2. Whether the Plaintiffs’ claim for negligent misrepresentation in Count V should proceed where it pleads all essential elements of the claim and Gentex’s argument to the contrary fails? Suggested Answer: Yes, the claim should proceed. 3. Whether the Plaintiffs’ claim for fraud in Count VI should proceed where it pleads all essential elements of the claim and Gentex’s argument to the contrary fails? Suggested Answer: Yes, the claim should proceed. 4. Whether the Plaintiffs’ claim for conversion in Count VII should proceed where it pleads all essential elements of the claim and Gentex’s argument to the contrary fails? Suggested Answer: Yes, the claim should proceed. Case 3:16-cv-00137-RDM Document 73 Filed 05/08/17 Page 10 of 24 7 IV. ARGUMENT A. STANDARD OF REVIEW When ruling on a motion to dismiss under Rule 12(b)(6), the Court must "'accept as true all [factual] allegations in the complaint and all reasonable inferences that can be drawn therefrom, and view them in the light most favorable to the plaintiff.'" Kanter v. Barella, 489 F.3d 170, 177 (3d Cir. 2007) (quoting Evancho v. Fisher, 423 F.3d 347, 350 (3d Cir. 2005)). See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007) (explaining complaint must state a claim "that is plausible on its face"). In other words, the "[f]actual allegations must be enough to raise a right to relief above the speculative level on the assumption that all the allegations in the complaint are true (even if doubtful in fact)." Id. at 555 (internal citations omitted). "The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 556). B. PLAINTIFFS' COUNT IV PROPERLY PLEADS A CLAIM FOR FRAUDULENT MISREPRESENTATION Gentex intentionally provided Mr. Rogers with false information, not only in an attempt to foreclose him from money to which he was entitled, but to induce him to leave Gentex before the 2014 bonuses were actually paid so it could avoid their payment under the Employment Agreement. With particularity, the Second Case 3:16-cv-00137-RDM Document 73 Filed 05/08/17 Page 11 of 24 8 Amended Complaint describes two conversations with Gentex representatives – Mr. Atkins and Ms. Acker – that occurred before Mr. Rogers' departure date was set, but after Gentex was aware of his upcoming departure and the close of the 2014 fiscal year that would determine his bonus. The Plaintiffs have properly pled the elements of this claim. For these reasons, the Motion should be denied. Gentex initially focuses on Mr. Atkins' representation to Mr. Rogers on or about January 14 or 15, 2015. Gentex argues that Mr. Atkins' statement – that he thought the company "hadn't come close to meeting the goal of $181 million " as the 2014 revenue target for Mr. Rogers to receive a 2014 bonus – could not relate to an existing fact. The argument fails because, under Pennsylvania law, "'a misrepresentation of fact, opinion, intention or law for the purpose of inducing another to act or refrain from acting in reliance thereon in a business transaction' constitutes actionable fraud." Jairett v. First Montauk Securities Corp., 203 F.R.D. 181, 185 (E.D. Pa. 2001) (quoting Neuman v. Corn Exch. Nat'l Bank & Trust, 356 Pa. 442, 450 (1947)) (emphasis removed). Whether viewed as fact or opinion, Mr. Atkins' statement is alleged to be false and is sufficient as a matter of law. Gentex's efforts to attack this misrepresentation are unpersuasive. Mr. Atkins was Gentex's Boston facility accountant when he directly told Mr. Rogers that the revenue numbers "hadn't come close" to the $181 million target. The certainty of Mr. Atkins' answer negates Gentex's argument about the modest Case 3:16-cv-00137-RDM Document 73 Filed 05/08/17 Page 12 of 24 9 qualifying language he used. By indicating it was not even a close call, Mr. Atkins clearly communicated that his own qualifiers would not affect his answer. Further, Gentex's citation to Overall v. University of Pennsylvania, 412 F.3d 492 (3d Cir. 2005), does not support this argument. In that case, the defendant responded to the plaintiff asking him to "put odds" on her application for a new position she considered applying for at the university by stating "I'll work it out." Id. at 498. The Third Circuit correctly affirmed summary judgment because the defendant was merely asked to weigh in on the likelihood of a future event. Id. at 499. By contrast, Mr. Rogers asked Gentex's Boston facility accountant about whether Gentext "had hit" its 2014 revenue targets after the fiscal year closed. Sec. Am. Compl. ¶ 53. That the bonuses were not yet paid has no impact on the analysis as the determinative events already occurred. See Mobile Satellite Commc'ns, Inc. v. Intelsat USA Sales Corp., 646 F.Supp.2d 124, 134 (D. D.C. 2009) ("These are present misrepresentations, albeit with future consequences; therefore, defendants' argument must fail.") (applying Pennsylvania law). Gentex's attack on Ms. Acker's misrepresentations fairs no better. On or about January 28, 2015, she is alleged to have both confirmed Mr. Rogers' comment to her that it was "too bad that [Gentex] didn't meet [its] revenue targets" for 2014 and explained that "some years are better than others – I've been doing this for a long time and at this point I never expect or take anything for granted." Case 3:16-cv-00137-RDM Document 73 Filed 05/08/17 Page 13 of 24 10 Sec. Am. Compl. ¶ 54. These misrepresentations by Gentex's chief financial officer were definitive and occurred nearly a full month after the factual predicate for the bonus – the close of the 2014 fiscal year – took place. See Mobile Satellite Commc'ns, Inc., 646 F.Supp.2d at 134. The argument that Gentex's chief financial officer and Boston facility accountant lacked knowledge that Mr. Rogers wanted to get paid monies that he was entitled to before departing simply cannot be squared with the law or the allegations pled. The Plaintiffs have alleged these misrepresentations were made with knowledge of their falsity or recklessness as to their truth. Jairett, 203 F.R.D. at 185. Further, "fraud can occur when a misrepresentation is made, for example, in conscious ignorance of the truth or by one who had means of knowledge from which they were bound to ascertain the truth before making the misrepresentation." Matlack Leasing, LLC v. Morison Cogen, LLP, No. 09-1570, 2010 WL 114883, at *9 (E.D. Pa. Jan. 13, 2010) (internal quotations and citations omitted) (copy attached as Exhibit A). The Second Amended Complaint meets these standards. Mr. Rogers made Gentex aware of his intent to depart Gentex in December 2014, but left the exact date of departure undetermined. Sec. Am. Compl. ¶ 50. He inquired about his 2014 bonus in early January in order to determine his formal termination date. Id. at ¶ 51. "Aware of Mr. Rogers's pending departure and intending to induce him to leave without having to pay the bonus, Gentex Case 3:16-cv-00137-RDM Document 73 Filed 05/08/17 Page 14 of 24 11 fraudulently and/or negligently made false representations relating to the 2014 bonus." Id. at ¶ 58 (emphasis added).3 Under these circumstances, Mr. Atkins and/or Ms. Acker had the requisite knowledge or, at the very least, were obligated ascertain to the truth before responding to the question posed by Gentex's departing Vice President of Concept Development. See Rittenhouse v. Shubert, No. 88-4682, 1989 WL 54030, at *3 (E.D. Pa. May 18, 1989) ("Even if Mr. Pearson, the agent, was in fact unaware of the circumstances, he had means of knowledge from which he was bound to ascertain the truth before making the representation.") (internal quotations omitted) (copy attached as Exhibit B). Gentex's additional arguments are no more convincing. Its attempt to have this Court consider the reasonableness of the Plaintiffs' reliance at the motion to dismiss stage is improper. See Woodward v. Dietrich, 548 A.2d 301, 310 (Pa. Super. Ct. 1988) ("The Woodwards allege that they actually relied on misrepresentations relating to the concealed grey water sewage sewer connections. This is a sufficient allegation of 'reasonable' reliance."). Even so, Gentex ignores that Mr. Rogers sought the 2014 revenue information after the fiscal year closed in order to determine his formal termination date. Sec. Am. Compl. ¶ 51. As such, Mr. Rogers' reliance on Gentex's misrepresentations were reasonable because they 3 Accordingly, Gentex cannot rely on Sevin v. Kelshaw, 611 A.2d 1232, 1238 (Pa. Super. Ct. 1992), where the plaintiffs did not allege the defendants had knowledge of the plaintiffs' intention to build. Compare Sec. Am. Compl. ¶ 58. Case 3:16-cv-00137-RDM Document 73 Filed 05/08/17 Page 15 of 24 12 occurred before his departure date was set, but after Gentex was aware of his upcoming departure and the close of the 2014 fiscal year. Similarly, Gentex's intent argument fails because the Plaintiffs alleged Gentex's misrepresentations were fraudulently made. Id. at ¶ 58. They are permitted to do so generally. See Fed. R. Civ. P. 9(b). Since Count IV states a claim, the Motion should be denied. C. COUNT V PROPERLY STATES A CLAIM FOR NEGLIGENT MISREPRESENTATION Gentex's argument seeking to dismiss the Plaintiffs' negligent misrepresentation claim is admittedly a mere rehashing of its argument on Count IV. For the same reasons as above, the statements made to Mr. Rogers by both Mr. Atkins and Ms. Acker are properly pled misrepresentations. These false statements were fraudulently and/or negligently made by Gentex representatives in an effort to induce him to leave without having to pay his bonus. Sec. Am. Compl. ¶ 58. The Plaintiffs properly alleged reliance on these misrepresentations. Id. at ¶ 55. Accordingly, the Motion should be denied with respect to Count V as well. D. PLAINTIFFS STATE A CLAIM FOR FRAUD IN COUNT VI At issue in Count VI is the Plaintiffs' claim that Gentex effectively 'cooked their books' and misrepresented facts about its financial performance to deprive Plaintiffs of owed royalties. These allegations reflect the quintessential example of a fraudulent scheme prohibited by Pennsylvania law. Case 3:16-cv-00137-RDM Document 73 Filed 05/08/17 Page 16 of 24 13 The Second Amended Complaint alleges that Gentex has continuously limited and precluded the Plaintiffs from accessing financial information necessary to properly calculate (i) the royalty payments owed, or (ii) the scope and magnitude of Gentex's financial manipulation. Although the false calculations prepared by Gentex have allowed the Plaintiffs to identify several financial improprieties, see, e.g., Sec. Am. Compl. ¶¶ 32-34, its withholding of full and complete information has allowed Gentex to perpetuate, misrepresent and conceal the full scope of its fraudulent conduct (and breaches of the SPA). Because Count VI sets forth sufficient facts to support the Plaintiffs' fraud claim, the Motion should be denied. Gentex mistakenly characterizes these allegations as nothing more than a difference of opinion, but a "fraud consists in anything calculated to deceive, whether by single act or combination, or by suppression of truth, or a suggestion of what is false, whether it be by direct falsehood or by innuendo, by speech or silence, word of mouth, or look or gesture." Frowen v. Blank, 425 A.2d 412, 415 (Pa. 1981). "Concealment alone may create a sufficient basis for finding that a party engaged in fraud so long as the other elements of fraud are present." American Planned Communities, Inc. v. State Farm Ins. Co., 28 F.Supp.2d 964, 968 (E.D. Pa. 1998). See Moser v. DeSetta, 589 A.2d 679, 682 (Pa. 1991); Wilson v. Donegal Mut. Ins. Co., 598 A.2d 1310, 1315-16 (Pa. Super. Ct. 1991). Case 3:16-cv-00137-RDM Document 73 Filed 05/08/17 Page 17 of 24 14 "Particularly in cases of corporate fraud, plaintiffs cannot be expected to have personal knowledge of the details of corporate internal affairs." Craftmatic Sec. Litig. v. Kraftsow, 890 F.2d 628, 645 (3d Cir. 1990). As such, "[c]ourts must be sensitive to the fact that application of Rule 9(b) prior to discovery 'may permit sophisticated defrauders to successfully conceal the details of their fraud.'" Id. (quoting Christidis v. First Pennsylvania Mortgage Trust, 717 F.2d 96, 99-100 (3d Cir. 1983)). The Second Amended Complaint is replete with allegations of Gentex actively concealing and manipulating information related to the calculation of the chinstrap royalty payments. For example, "Gentex has knowingly and actively defrauded the Plaintiffs by concealing information from Plaintiffs which would allow them to calculate their royalty." Sec. Am. Compl. ¶ 40. Also, "by withholding full and complete information from Mr. Rogers which would have allowed him to calculate the royalty owed with precision, Gentex has been able to perpetuate and conceal the full scope of its fraudulent conduct and contractual breaches." Id. at ¶ 41. Gentex's argument that the Plaintiffs are fully aware of the details of Gentex's calculations and the underlying financial information cannot be squared with the allegations in the Second Amended Complaint. In fact, to accept Gentex’s position here would literally require the Court to ignore the allegations of Case 3:16-cv-00137-RDM Document 73 Filed 05/08/17 Page 18 of 24 15 the Second Amended Complaint.4 Further, these detailed allegations of Gentex's efforts to defraud the Plaintiffs out of their royalties negate the argument that the Plaintiffs have not alleged reliance. Id. at ¶¶ 40, 124. Gentex's effort to invoke the 'gist of the action' doctrine to support dismissal of Count VI is misplaced and, at best, premature. A breach of contract may give rise to a tort claim when the wrongful conduct is the gist of the action, and the contract itself is collateral. Pittsburgh Constr. Co. v. Griffith, 834 A.2d 572, 582 (Pa. Super. Ct. 2003). "[F]raud in the inducement of a contract would not necessarily be covered by [the] doctrine because fraud to induce a person to enter into a contract is generally collateral to (i.e., not 'interwoven' with) the terms of the contract itself." eToll, Inc. v. Elias/Savion Adver., Inc., 811 A.2d 10, 17 (Pa. Super. Ct. 2002). For this reason, application of the doctrine at the motion to dismiss stage has its limits. See Foster v. Northwestern Mut. Life, No. 02-2211, 2002 WL 31991114, at *3 (E.D. Pa. Jul. 26, 2002) (holding that because case was in early stages of litigation, it was unclear whether fraud related to performance of contract or fraud in the inducement) (copy attached as Exhibit C). Similar to Foster, and depending on what further information can be elicited during discovery, the Plaintiffs may support their position that not only was there 4 The allegations of Gentex's active concealment make this case materially different from the cases cited in the Motion. See Lundy v. Hochberg, 79 Fed.Appx. 503, 505 (3d Cir. 2003); Porreco v. Porreco, 811 A.2d 566, 572 (Pa. 2002). Case 3:16-cv-00137-RDM Document 73 Filed 05/08/17 Page 19 of 24 16 fraud in the performance of the SPA, but that there was fraud in the inducement. Discovery may show that Gentex never intended to pay royalties since the matter was brought to their attention upon missing every required reporting date. Compare Galdieri v. Monsanto Co., 245 F.Supp.2d 636, 650-51 (E.D.Pa. 2002) (applying gist of the action doctrine where plaintiffs merely alleged that contracting parties never intended to perform). Here, the Plaintiffs have alleged that Gentex never paid chinstrap royalties and never provided formal notifications of operating profits and losses sufficient for them to calculate with precision potential royalties owed. At this initial pleading stage, the Plaintiffs allege facts sufficient to pursue both theories relative to the SPA chinstrap royalties. E. IN COUNT VII, PLAINTIFFS PROPERLY PLEAD CONVERSION Finally, the Plaintiffs have properly alleged a count for conversion. "Where one lawfully comes into possession of a chattel, a conversion occurs if a demand for the chattel is made by the rightful owner and the other party refuses to deliver." Fenton v. Balick, 821 F.Supp.2d 755, 760 (E.D. Pa. 2011) (quoting Prudential Ins. Co. of America v. Stella, 994 F.Supp. 318, 323 (E.D. Pa. 1998)). Although the Plaintiffs acknowledge that they voluntarily put the hard drive in Gentex's possession as part of an interim step to work through a potentially disputed issue, they "demanded" its return after receiving a third party subpoena in April 2015. Case 3:16-cv-00137-RDM Document 73 Filed 05/08/17 Page 20 of 24 17 Sec. Am. Compl. ¶ 75. Gentex has refused and continues to refuse to return it. Id. at ¶ 78. These allegations state a claim for conversion. Gentex's statute of limitation argument fares no better. "Under Pennsylvania law, a cause of action for conversion does not accrue until there has been a demand for the goods and a refusal to deliver." Fenton, 821 F.Supp.2d at 761 (internal quotations omitted). "Generally, the statute of limitations is not an appropriate ground for a 12(b)(6) motion, and an exception is only made 'where the complaint facially shows noncompliance with the limitations period and the affirmative defense clearly appears on the face of the pleading.'" Id. (quoting Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1384 n.1 (3d Cir. 1994)). "The defendant bears a heavy burden in seeking to establish that the challenged claims are barred as a matter of law." Fenton, 821 F.Supp.2d at 761 (internal quotations omitted). Especially at the motion to dismiss stage, Gentex cannot carry this heavy burden as the Second Amended Complaint alleges clearly that it was not until April 2015 that the Plaintiffs "demanded" that Gentex return the hard drive. Sec. Am. Compl. ¶ 75. As such, Count VII is not time-barred. Case 3:16-cv-00137-RDM Document 73 Filed 05/08/17 Page 21 of 24 18 V. Conclusion For the foregoing reasons, the Motion should be denied in its entirety. Respectfully Submitted, _/s/ Emily H. Edmunds______________ Emily H. Edmunds (PA 205919) Saul Ewing LLP 2 North Second Street, 7th Floor Harrisburg, PA 17101 (717) 257-7576 eedmunds@saul.com David H. Rich (BBO# 634275) Todd & Weld, LLP One Federal Street Boston, MA 02110 (617) 720-2626 drich@toddweld.com Admitted pro hac vice Dated: May 8, 2017 Case 3:16-cv-00137-RDM Document 73 Filed 05/08/17 Page 22 of 24 19 CERTIFICATE OF COMPLIANCE WITH LOCAL RULE 7.8 I, Emily H. Edmunds, hereby certify pursuant to Local Rule 7.8(b)(2) that the foregoing Brief includes 4,792 words according to Microsoft Word’s word- count feature and thus complies with the length requirement of the Middle District of Pennsylvania Local Rules. /s/ Emily H. Edmunds Emily H. Edmunds Case 3:16-cv-00137-RDM Document 73 Filed 05/08/17 Page 23 of 24 20 CERTIFICATE OF SERVICE I hereby certify that on the date set forth below, I caused a true and correct copy of the foregoing to be served upon the following via the Court’s ECF system: Daniel T. Brier Donna Walsh Myers, Brier & Kelly, LLP 425 Spruce Street, Suite 200 Scranton, PA 18503 Date: May 8, 2017 /s/ Emily H. Edmunds Emily H. Edmunds Case 3:16-cv-00137-RDM Document 73 Filed 05/08/17 Page 24 of 24 Matlack Leasing, LLC v. Morison Cogen, LLP, Not Reported in F.Supp.2d (2010) 2010 WL 114883 © 2017 Thomson Reuters. No claim to original U.S. Government Works. 1 2010 WL 114883 Only the Westlaw citation is currently available. United States District Court, E.D. Pennsylvania. MATLACK LEASING, LLC; Penn Intermodal Leasing, Inc.; and Vasili Krishnamurti; Plaintiffs, v. MORISON COGEN, LLP, and James M. Burns, CPA, Defendants. Civil Action No. 09–1570. | Jan. 13, 2010. Attorneys and Law Firms Richard L. Scheff, Jeffrey S. Feldman, Montgomery McCracken Walker & Rhoads LLP, Philadelphia, PA, for Plaintiffs. Jonathan S. Ziss, Seth L. Laver, Margolis Edelstein, Philadelphia, PA, for Defendants. MEMORANDUM DuBOIS, District Judge. I. INTRODUCTION *1 This is an action against an accounting firm and one of its partners for breach of contract, fraudulent misrepresentation and tort liability. Presently before the Court is defendants' motion to dismiss, pursuant to Federal Rule of Civil Procedure 12(b)(6), all six counts of the Complaint for failure to state a claim and to dismiss Count VI, pursuant to Rule 12(b)(7) for failure to join a necessary party under Rule 19. For the reasons discussed below, the Court grants defendants' motion to dismiss Counts II and III of the Complaint. Defendants' motion is denied in all other respects. II. BACKGROUND 1 Richard Parillo negotiated an agreement to purchase Matlack Leasing Corporation (“Matlack”) in 2000. (Compl.¶ 17.) In order to close on the purchase, Parillo sought and received a $1 million investment from Vasili Krishnamurti's investment company, Penn Intermodal Leasing (“Penn”). (Compl.¶¶ 18–20.) In return for this investment, Penn received a 40% equity interest in Matlack. (Compl.¶ 21.) Sometime around November 15, 2000, Matlack, Penn, and Parillo entered into a written Operating Agreement for Matlack. (Compl.¶ 22.) This agreement formalized Penn's 40% interest in Matlack and appointed Parillo, who held the remaining 60%, as the company's Managing Member responsible for day-to-day operations. (Compl.¶ 23–25.) The Operating Agreement contained several clauses designed to protect Penn as the minority member. First, the agreement prohibited Parillo from approving any expense not included in Matlack's annual budget that exceeded $25,000 per expenditure or $250,000 in aggregate per year without the written consent of 90% of Matlack's members. (Compl.¶ 26.) Second, the agreement stipulated that Matlack's approved annual budget would govern the use and expenditure of Matlack funds, except for individual expenditures of less than $25,000 or annual aggregate purchases less than $250,000. (Compl.¶ 27.) Finally, the agreement provided that Parillo was prohibited from violating the term of the Operating Agreement without the prior written consent of 100% of Matlack's members. (Compl.¶ 28.) Matlack hired Morison Cogen (“MoCo”) to audit its financial statement for the fiscal years 2001 through 2006. (Compl. ¶ 31–33 .) James M. Burns served as the MoCo partner in charge of each of these audits. (Compl.¶ 33.) After each of these audits, MoCo certified that Matlack's annual financial statements were audited in accordance with Generally Accepted Auditing Standards (“GAAS”) and that the statements presented Matlack's financial position fairly in all material respects. (Compl.¶ 35.) Matlack's Operating Agreement gave Parillo the authority to make distributions from Matlack's cash flow. (Compl.¶ 105.) When exercising this authority Parillo was required to make the distributions in proportion to the members' percentages of ownership: Parillo was to receive 60% of any distribution, Penn 40%. (Compl.¶ 106.) *2 Plaintiffs allege that Parillo distributed money to himself, but never to Penn, in a series of allegedly improper transactions designed to finance several businesses owned and operated entirely by Parillo. First, the Complaint alleges that between 2001 and 2006 Parillo used Matlack funds to purchase property, capital, and to pay salaries and expenses for businesses owned entirely by Parillo. Case 3:16-cv-00137-RDM Document 73-1 Filed 05/08/17 Page 1 of 10 Matlack Leasing, LLC v. Morison Cogen, LLP, Not Reported in F.Supp.2d (2010) 2010 WL 114883 © 2017 Thomson Reuters. No claim to original U.S. Government Works. 2 These businesses included Brite Clean, LLC (“BCL”), Brite Clean, Inc. (“BCI”), Brite Clean, NJ, Inc. (“BCNJ”), U.S. Liquids Terminal Services Inc. (“US Liquids”), Brite Clean Houston (“BCH”), RAP Beaumont Properties, LP, (“RAP–BP”) and Brite Clean Chicago, LLC (“BCC”). (Compl.¶¶ 36–98.) Penn did not approve these purchases, did not receive an equity stake in the purchased companies, and did not receive its 40% share of the money Parillo distributed to himself in order to make these purchases. (Compl.¶ 45, 48–50, 52, 62, 65, 66, 75– 78, 83, 85, 95, 97, 113(b)-(g), 114.) Second, Parillo and BCH took improper loans from Matlack and never paid them back. (Compl.¶¶ 99–104, 113(h).) Third, between April 13, 2006 and October 9, 2006, Parillo distributed $952,110.60 of Matlack funds to himself, but not to Penn. (Compl. ¶ ¶ 105–112 .) Fourth, in 2000, Parillo issued checks from Matlack to himself for a total of $59,000 of “financing costs” that are alleged to have actually been disguised contributions to Parillo. (Compl.¶ 113(a).) Finally, Parillo used Matlack's American Express credit card for personal expenses and for expenses related to his various businesses. (Compl.¶ 113(i).) All told, plaintiffs allege that they are entitled to 40% of the amount of these distributions—a sum in excess of $1 million. (Compl.¶ 115.) Sometime around February 2, 2007, Krishnamurti agreed to purchase Parillo's 60% membership interest in Matlack. (Compl.¶ 116.) Krishnamurti determined the purchase price for Parillo's interest by relying, in part, on Matlack's audited financial statements. (Compl.¶ 119.) Because these statements did not disclose the improper distributions made to Parillo's side-businesses, or the loans, credit-card purchases and “finance fees” paid to Parillo, Krishnamurti alleges that he paid much more for Parillo's interest than he otherwise would have. (Compl.¶ 121.) Plaintiffs allege that they could not have discovered Parillo's undisclosed distributions from reading Matlack's financial statements, in part because Matlack's MoCo- audited financial statements did not contain any “related party” disclosures before 2006. (Compl.¶¶ 125, 126.) When related party disclosures were made in Matlack's 2006 statement, they were in a summary form that did not identify the entities involved or the amounts of the transactions. (Compl.¶ 127). Plaintiffs acquired control of Matlack's electronic and paper records sometime around April 30, 2007. (Compl.¶ 122.) They allege that they did not discover the improper BCL, BCNJ, and some of the BCH transfers until Autumn 2007 and did not discover other BCH transfers, the RAP–BP and BCC transfers until Spring 2008. (Compl.¶ 128.) After discovering the improper transfers, plaintiffs filed suit against Parillo and each of the various Brite Clean entities. (Compl.¶ 129). *3 The claims in plaintiffs' Complaint stem from the actions of MoCo and Burns. Plaintiffs allege that (1) MoCo and Burns know about BCI and BCL as “related parties” at the time of the 2001 audit, (2) MoCo and Burns served as accountants for the Brite Clean entites, and (3) MoCo served as Parillo's personal accountant. (Compl.¶¶ 132–135.) Because of these relationships, MoCo had access to the financial books and records of Parillo and the Brite Clean businesses and access to Brite Clean employees. (Compl.¶ 136.) In Count One of the Complaint, Matlack claims that it suffered over $1 million of losses as a result of MoCo and Burns's professional negligence in preparing Matlack's financial statements in the years 2001 through 2006. (Compl.¶¶ 137–144.) In Count Two of the Complaint, Matlack alleges that MoCo breached a contract between the organizations to provide accounting and auditing services, and that this breach caused Matlack the loss of valuable assets and funds, lost opportunities to develop its business, and lost opportunities to stop Parillo from creating losses, which exceed $1 million dollars. (Compl.¶ 145–151.) Penn alleges in Count Three of the Complaint that it was a third-party beneficiary of the contract between Matlack and MoCo. (Compl.¶ 157.) It further alleges that it relied on MoCo's financial statements, that MoCo knew Penn would rely on the statements, that the circumstances of MoCo's retention by Matlack indicate that MoCo intended Penn to be a beneficiary of MoCo's auditing agreement with Matlack, and that Penn was damaged by an amount in excess of $1 million when MoCo breached its contract. (Compl.¶ 158, 159.) Count Four of the Complaint is an allegation of negligent misrepresentation against MoCo by each of the plaintiffs. Plaintiffs allege that MoCo negligently supplied false information to the plaintiffs, that plaintiffs relied upon the statements, and that this reliance caused damages in excess of $1 million. (Compl.¶ 160–170.) Case 3:16-cv-00137-RDM Document 73-1 Filed 05/08/17 Page 2 of 10 Matlack Leasing, LLC v. Morison Cogen, LLP, Not Reported in F.Supp.2d (2010) 2010 WL 114883 © 2017 Thomson Reuters. No claim to original U.S. Government Works. 3 In Count Five of the Complaint, plaintiffs allege that MoCo fraudulently misrepresented Matlack's financial condition in the 2001 through 2006 audits. Plaintiffs justifiably relied on this misrepresentation, which caused damages in excess of $1million. (Compl.¶ 171–177.) Finally, Count Six of the Complaint is a claim by the plaintiffs that MoCo and Burns aided and abetted Parillo's breach of fiduciary duty, an act that caused damages to the plaintiffs in excess of $1 million. (Compl.¶ 178–186.) III. JURISDICTION Matlack is a limited liability company organized under the laws of Pennsylvania. (Compl.¶ 9). Neither the Supreme Court or the Third Circuit has addressed the question of how to determine the citizenship of a limited liability company. Kimberly–Clark Pennsylvania, LLC v. Delaware Reg' l Water Quality Control Auth., 527 F.Supp.2d 430,432–433 (E.D.Pa.2007). However, in Carden v. Arkoma Assocs., the Supreme Court held that a limited partnership shares the citizenship of each of its partners. 494 U.S. 185, 195–96, 110 S.Ct. 1015, 108 L.Ed.2d 157 (1990). Subsequently, the Third Circuit explained that “it is clear that Carden tells us that a court must take into account not less than all of the entities' members when determining the citizenship of an artificial entity.” Emerald Investors Trust v. Gaunt Parsippany Partners, 492 F.3d 192, 205 (3d Cir.2007). *4 Currently, Matlack's sole member is Penn, a Delaware Corporation with its principal place of business in New York. (Compl.¶ 8). The citizenship of corporations, unlike the citizenship of limited liability companies, is specified by statute. According to 28 U.S.C. § 1332(c), corporations are citizens of the states in which they are incorporated and of the states in which they have their principal place of business. Accordingly, Penn is a citizen of both Delaware and New York. Because, under Carden and Emerald Investors, Matlack is a citizen of all of the states of which its members are citizens, Matlack is a citizen of both Delaware and New York. There is no dispute that plaintiff Krishnamurti is a citizen of New York. (Compl.¶ 7.) MoCo is a limited liability partnership, (Compl.¶ 10), and, like Matlack, it is an artificial entity whose citizenship is determined by reference to the citizenship of all of its members. Each of its members, including defendant Burns, is a citizen of either New Jersey or Pennsylvania. Because the dispute concerns an amount controversy greater than $75,000 and there is complete diversity between the parties—plaintiffs Matlack and Penn are citizens of New York and Delaware and plaintiff Krishnamurti is a citizen of New York, (Compl.¶ 7), while defendants are citizens of New Jersey and Pennsylvania— the Court has jurisdiction pursuant to 28 U.S.C. § 1332(a). IV. LEGAL STANDARD Rule 12(b) (6) of the Federal Rules of Civil Procedure provides that, in response to a pleading, a defense of “failure to state a claim upon which relief can be granted” may be raised by motion. In analyzing a motion to dismiss pursuant to Rule 12(b)(6), the Court “accept[s] all factual allegations as true, [and] construe[s] the complaint in the light most favorable to the plaintiff....” Phillips v. County of Allegheny, 515 F.3d 224, 231, 233 (3d Cir.2008) (quoting Pinker v. Roche Holdings Ltd., 292 F.3d 361, 374 n. 7 (3d Cir.2002)). “To survive a motion to dismiss, a civil plaintiff must allege facts that ‘raise a right to relief above the speculative level....’ ” Victaulic Co. v. Tieman, 499 F.3d 227, 234 (3d Cir.2007) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). In other words, a complaint must contain “sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, ––– U.S. ––––, ––––, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Twombly, 550 U.S. at 570). To satisfy the plausibility standard, a plaintiff's allegations must show that defendant's liability is more than “a sheer possibility.” Id. “Where a complaint pleads facts that are ‘merely consistent with a defendant's liability, it ‘stops short of the line between possibility and plausibility of entitlement to relief.’ ” Id. (quoting Twombly, 550 U.S. at 557). In Twombly, the Supreme Court utilized a “two-pronged approach” which it later formalized in Iqbal. Iqbal, 129 S.Ct. at 1950; Fowler v. UPMC Shadyside, 578 F.3d 203, 210–11 (3d Cir.2009). Under this approach, a district court first identifies those factual allegations which constitute nothing more than “legal conclusions” or “naked assertions.” Twombly, 550 U.S. at 555, 557. Such allegations are “not entitled to the assumption of truth” and must be disregarded. Iqbal, 129 S.Ct. at 1950. The court then assesses “the ‘nub’ of the plaintiff['s] complaint —the well-pleaded, nonconclusory factual allegation [s] ... Case 3:16-cv-00137-RDM Document 73-1 Filed 05/08/17 Page 3 of 10 Matlack Leasing, LLC v. Morison Cogen, LLP, Not Reported in F.Supp.2d (2010) 2010 WL 114883 © 2017 Thomson Reuters. No claim to original U.S. Government Works. 4 —to determine” whether it states a plausible claim for relief. Id. V. DISCUSSION A. Count I—Matlack's Claim of Professional Negligence Against Burns and MoCo *5 Defendants argue that Matlack's claim for professional negligence shouldbe dismissed, first, because Parillo's unlawful conduct as the sole actor in charge of the company must be imputed to Matlack, whose claim is thus barred by the doctrine of in pari delicto; and, second, because Parillo's knowledge of the alleged monetary injury to Matlack must also be imputed to the company, a conclusion that renders Matlack's claim barred by the statute of limitations. Matlack responds that Parillo's conduct cannot be imputed to Matlack because Parillo was not acting in Matlack's interest. Both of defendants' arguments are insufficient to justify dismissal ofplaintiff's claim because both depend on a fact-specific inquiry ill-suited to resolution by motion to dismiss. “[I]n pari delicto, which literally means ‘in equal fault,’ is rooted in the common-law notion that a plaintiff's recovery maybe barred by his own wrongful conduct.” Pinter v. Dahl, 486 U.S. 622, 632, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988). The Third Circuit has called the doctrine of in pari delicto a “murky area of law,” an “ill-defined group of doctrines that prevents courts from becoming involved in disputes in which the adverse parties are equally at fault.” Official Comm. of Unsecured Creditors of Allegheny Health, Educ. and Research Foundation v. PricewaterhouseCoopers, LLP, No. 07–1397, 2008 WL 3895559, at *5 (3d Cir. July 1, 2008) (hereinafter “AHERF”). 2 Despite this murkiness, the Third Circuit has illuminated at least one principle: whether the doctrine applies depends on whether an agent's (Parillo) alleged wrongdoing can be imputed to the principal (Matlack). See Official Committee of Unsecured Creditors v. R.F. Lafferty & Co., Inc., 267 F.3d 340, 355 (3d Cir.2001). Imputation of a corporate officer's wrongdoing to the corporation may occur if the officer's wrongful conduct is (1) in the course of his employment and (2) for the corporation's benefit. Id. at 358. Each of these elements requires a fact-sensitive inquiry that renders dismissal of the claim prior to discovery inappropriate. Cf. In re Le–Nature's Inc v. Wachovia Capital Markets, Inc., No. 09–mc–00162, 2009 WL 3571331, at *6 n. 10 (W.D.Pa. Sept.16, 2009) (noting that no matter the legal rule used to determine imputation, “the question turns upon facts, and thus, to grant a motion to dismiss without discovery on the matter would be premature”). Determining whether Parillo's knowledge should be imputed to Matlack for the purposes of applying the statute of limitations is a similarly fact-intensive inquiry that need not be conducted at this stage of the litigation. The dispositive issue in a motion to dismiss is whether, assuming the allegations in plaintiffs' Complaint are true, plaintiffs have stated a claim to relief “that is plausible on its face.” Iqbal, 129 S.Ct. at 1949. The Court concludes that they have. Defendant's arguments go to critical issues of fact that must be developed in the record. B. Counts II & III—Breach of Contract and Third– Party Beneficiary Claims *6 Counts II and III of the Complaint each assert claims under a theory of contract. In order to state a claim under this theory, a plaintiff “must raise an issue as to whether it specifically instructed the defendant to perform a task that the defendant failed to perform.” Sherman Indus. Inc. v. Goldhammer, 683 F.Supp. 502, 506 (E.D.Pa.1988). Plaintiffs' Complaint does not accomplish this task. Defendants' motion raises a fundamental issue: what distinguishes a claim of negligence, asserted in Count I, from claims of breach of contract, asserted in Counts II and III? This question can be answered by reference to three basic legal premises. First, failure to perform a service with a certain level of care typically constitutes a claim of negligence, not breach of contract. See, e .g., Hoyer v. Frazee, 323 Pa.Super. 421, 470 A.2d 990, 992– 93 (Pa.Super.Ct.1984) (determining that a standard of care claim is a negligence claim and not a contract claim), abrogated on other grounds by Bailey v. Tucker, 533 Pa. 237, 621 A.2d 108 (Pa.1993) as recognized by Gorski v. Smith, 812 A.2d 683, 693 (Pa.Super.Ct.2002). Second, a contractual provision to act with a required level of care “cannot constitute a specific contractual promise.” Official Comm. of Unsecured Creditors of Corell Stell v. Fishbein and Co., P.C., No. 91–4919, 1992 WL 196768, at *6 (E.D.Pa. Aug.10, 1992). Finally, the duty to act according to the Generally Accepting Auditing Standards (GAAS) arises by law and is separate and Case 3:16-cv-00137-RDM Document 73-1 Filed 05/08/17 Page 4 of 10 Matlack Leasing, LLC v. Morison Cogen, LLP, Not Reported in F.Supp.2d (2010) 2010 WL 114883 © 2017 Thomson Reuters. No claim to original U.S. Government Works. 5 independent of duties imposed by contract. Robert Wooler Co. v. Fidelity Bank, 330 Pa.Super. 523, 479 A.2d 1027, 1031 (Pa.Super.Ct.1984). The logical conclusion of these premises is that a valid contract claim must allege more than just a violation of a pre-existing legal duty—such as the duty to follow GAAS. See Fishbein, 1992 WL 196768, at *6. Accordingly, a claim that a defendant has failed to follow standard accounting practices raises a claim in tort, not contract, even if that obligation is also in the contract. In order to maintain an action under both theories, plaintiffs must show that defendants violated provisions of the contract separate and independent of the duty to act according to GAAS. Koken v. Deloitte & Touch, LLP, relied upon by plaintiffs, is not to the contrary. 825 A.2d 723 (Pa.Commw.Ct.2003). In Koken, the liquidator of Reliance Insurance Company filed suit against an accounting firm, Deloitte, and one of Deloitte's principals, alleging various tort and breach of contract claims. The Court allowed both types of claims to proceed. It did so, however, only because the defendant in Koken “made specific promises to Reliance in regard to its loss reserves that Reliance relied upon to its detriment.” Id. at 728. Specifically, Deloitte allegedly failed to provide the agreed-upon services, giving rise to the contract claim, and also failed to provide services according to GAAS, giving rise to the tort claim. See id. at 729–30 (listing various contractual duties, other than the duty under GAAS, that gave rise to the contract claim). *7 A comparison of the complaints in Koken and Fishbein makes the above principles clearer. In Fishbein, the plaintiff simply pleaded the breach of a contracted-for duty to provide services in accordance with professional standards; in Koken, by contrast, the plaintiff pleaded the breach of specific contractual provisions unrelated to the duty of care. Koken, 825 A.2d at 729–30. Under these circumstances, the Koken plaintiffs had stated an independent, free-standing contract claim, but the Fishbein plaintiffs had not. Id. The difference is one of specificity: the Koken plaintiff alleged violations of contract separate and independent from the duty of professional care. As in Fishbein, plaintiffs' Complaint fails to allege violations of contractual provisions separate and independent from a provision to provide services according to professional standards. For instance, the Complaint states that under the terms of the contract between Moco and Matlack, MoCo “agreed to plan and perform its work with due professional care and in accordance with professional standards, including, but not limited to auditing standards generally accepted in the United States.” (Compl.¶ 149). The Complaint goes on to provide a laundry-list of examples demonstrating MoCo's failure to meet professional standards. (Compl.¶ 150). None of these examples references the text of the contract between MoCo and Matlack. Without such references, Count II fails to state a claim and is, accordingly, dismissed. Count III, like Count II, avers simply that MoCo breached its contract with Matlack by failing to provide services in accordance with professional standards. (Compl.¶ 156). Without identifying an express contractual duty, separate and independent of a contracted-for duty to act in accordance with standards of professional care, Penn cannot state a claim sounding in contract. For the same reasons articulated with regard to Count II, Count III is dismissed. D. Count IV—Plaintiffs' Negligent Misrepresentation Claim Against MoCo In Bilt–Rite Contractors, Inc. v. Architectural Studio, the Pennsylvania Supreme Court adopted Section 552 of the Restatement (Second) of Torts “as the law in Pennsylvania in cases where information is negligently supplied by one in the business of supplying information, such as an architect or design professional, and where it will be used and relied upon by third persons, even if the third parties have no direct contractual relationship with the supplier of information.” 866 A.2d 270, 287 (Pa.2005). The parties dispute the scope of this holding. Defendants argue that the respective claims of Penn and Krishnamurti should be dismissed because Bilt–Rite applies only to architects and design professionals; for all other businesses, privity is required. Plaintiffs respond that Bilt–Rite is not so narrow. They argue that Bilt–Rite applies to all services in the business of supplying information, of which architects are but one example. *8 The Court agrees with plaintiffs. Bilt–Rite's holding is that a claim may lie “where information is negligently supplied by one in the business of supplying information, such as an architect or design professional.... “ Id. (emphasis added). The words “such as” make it clear that architects and other design professionals are but two examples of a larger category of service providers “in the Case 3:16-cv-00137-RDM Document 73-1 Filed 05/08/17 Page 5 of 10 Matlack Leasing, LLC v. Morison Cogen, LLP, Not Reported in F.Supp.2d (2010) 2010 WL 114883 © 2017 Thomson Reuters. No claim to original U.S. Government Works. 6 business of supplying information.” See United Nat'l Ins. Co. v. Aon Ltd., No. 04–539, 2008 WL 942577, at *2 n. 4 (E.D.Pa. April 7, 2008) (holding same). The Pennsylvania Supreme Court's recent decision in Excavation Techs., Inc. v. Columbia Gas Co. of Pennsylvania, No. 32 WAP 2008, 2009 WL 5103605 (Pa. Dec.29, 2009) is not to the contrary. In that case, the Pennsylvania Supreme Court declined to extend the Bilt–Rite exception to a utility company on the ground that it was “not in the business of providing information for pecuniary gain.” Id. at *3. In considering whether a utility company falls into the category of businesses providing information for pecuniary gain, the court confirmed that architects and design professional are not the exclusive members of that category. The Court concludes that, under Pennsylvania law, no privity is required to state a claim of negligent misrepresentation against a party in the business of supplying information. Because plaintiffs' Complaint alleges that defendants are in such a business, (Compl.¶ 161), the Court must now consider defendants' second basis for dismissal: the argument that even if Section 552 applies despite the lack of privity, plaintiffs have failed to state a claim under that section. Section 552(1) of the Restatement (Second) of Torts defines the tort of negligent misrepresentation. 3 To state a claim under this section, plaintiffs must show “(1) a misrepresentation of a material fact; (2) made under circumstances in which the misrepresenter ought to have known its falsity; (3) with intent to induce another to act on it; and (4) which results in injury to a party acting in justifiable reliance on the misrepresentation.” Bilt–Rite, 866 A.2d at 277. Defendants, drawing detailed comparisons between the factual scenario alleged in plaintiffs' Complaint on the one hand, and comments in the Restatement and analogous precedent on the other, argue that plaintiffs have failed to state a claim because Section 552 requires allegations that MoCo performed more than a routine audit. They argue that plaintiffs must also show that MoCo knew its audits would be relied upon by Penn and Krishnamurti and intended for its audits to be relied upon in Parillo's sale of his interest in Matlack. The Court is unpersuaded by defendants' arguments. Plaintiffs' Complaint alleges that “MoCo knew that Matlack intended to supply its work product ... to Plaintiffs,” (Compl.¶ 166), that “MoCo intended its audited financial statements for Matlack to influence any potential sale of Matlack or its membership interests,” (Compl.¶ 167) and that “MoCo knew that Matlack intended to use the audited financial reports prepared by MoCo to influence any sale of Matlack or its membership interests....” (Compl.¶ 168). Whether these allegations are true is a quintessential question of fact not appropriate for a motion to dismiss. *9 Assuming, as this Court must, that the allegations in the Complaint are true, plaintiff has alleged (1) a misrepresentation, (Compl.¶¶ 161–163); (2) made under circumstances in which the misrepresenter ought to have known its falsity, (Compl.¶ 132–136, 160); (3) with intent to induce another to act on it, (Compl.¶¶ 166–168); and (4) which results in injury to a party acting in justifiable reliance on the misrepresentation, (Compl.¶¶ 169–170). Defendants' arguments go to the merits of plaintiffs' claim and are more appropriately addressed after discovery has developed the factual record. E. Count V—Plaintiffs' Fraudulent Misrepresentation Claim Against MoCo To state a claim of fraudulent misrepresentation under Pennsylvania law, plaintiffs must allege “(1) a representation; (2) which is material to the transaction at hand; (3) made falsely, with the knowledge of its falsity or recklessness as to whether it is true or false; (4) with the intent of misleading another into relying on it; (5) justifiable reliance on the misrepresentation; and (6) resulting injury proximately caused by such reliance.” Bortz v. Noon, 556 Pa. 489, 729 A.2d 555, 560 (Pa.1999). Rule 9(b) requires that, when a plaintiff makes a claim of fraudulent misrepresentation, “the circumstances constituting fraud ... shall be stated with particularity,” but “[m]alice, intent, knowledge, and other condition of mind of a person may be averred generally.” The Third Circuit has explained that a plaintiff must plead “all of the essential factual background that would accompany ‘the first paragraph of any newspaper story'- that is, the ‘who, what, when, where, and how’ of the events at issue.” In re Rockefeller Ctr. Props., Inc. Sec. Litig., 311 F.3d 198, 216–217 (3d Cir.2002) (quoting In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1422 (3d Cir.1997)). Defendants seek dismissal on two grounds. First, they argue that Count V should be dismissed because the Complaint contains no allegations that MoCo knew, Case 3:16-cv-00137-RDM Document 73-1 Filed 05/08/17 Page 6 of 10 Matlack Leasing, LLC v. Morison Cogen, LLP, Not Reported in F.Supp.2d (2010) 2010 WL 114883 © 2017 Thomson Reuters. No claim to original U.S. Government Works. 7 when it prepared the audits, that Krishnamurti was interested or intended to buy Parillo's interest in Matlack. They assert, without citation to authority, that this omission makes it impossible to satisfactorily state the element of intent. Second, they argue that the Complaint does not meet the threshold level of particularity under Rule 9(b). With regard to the first argument, plaintiffs respond that they need not show actual, subjective intent. Instead, fraud can occur when a misrepresentation is made, for example, “in conscious ignorance of the truth,” B.O. v. C.O., 404 Pa.Super. 127, 590 A.2d 313, 316 (Pa.Super.Ct.1991), or by one who “had means of knowledge from which they were bound to ascertain the truth before making the misrepresentation,” La Course v. Kiesel, 366 Pa. 385, 77 A.2d 877, 880 (Pa.1951). The Court agrees. As noted in the previous section, paragraphs 166–171 of the Complaint allege that MoCo knew, or intended, that its audits would be relied upon by plaintiffs. Defendants' first argument provides no basis for dismissal. *10 The Court is similarly unpersuaded by defendants' second argument. “In the context of fraud against accountants, a plaintiff must demonstrate the manner in which the defendant departed from reasonable accounting practices.” Tredennick v. Bone, 323 F. App'x 103, 105 (3d Cir.2008) (non-precedential) (citing Christidis v. First Pennsylvania Mortg. Trust, 717 F.2d 96, 100 (3d Cir.1983)). Plaintiffs' Complaint accomplishes this task. Paragraphs 143, 150, and 173 allege, among other things, that defendants failed to include related party disclosures in Matlack's audited financial statements for fiscal years 2001–2005, and made only limited and inadequate disclosures in the 2006 audited financial statement; that defendants failed to give consideration to Matlack's annual budgets; and that defendants failed to complete standardized audit checklists regarding “supervision and review” and “related parties”—a failure that led defendants to neglect to obtain evidence sufficient to afford a reasonable basis for their opinions. These, and the related allegations in paragraphs 143,150 and 173, provide the “who, what, when, where, and how” of the events at issue, “placing the defendants on notice of the precise misconduct with which they are charged[.]” Seville Indus. Mach. Corp. v. Southmost Mach. Corp., 742 F.2d 786, 791 (3d Cir.1984) In addition, the Complaint contains allegations of gross negligence or recklessness sufficiently specific to overcome the burden imposed by Rule 9(b). The Complaint alleges that MoCo served as both Parillo's personal auditor and the auditor of the various Brite Clean entities, while serving in that same capacity for Matlack. (Compl.¶¶ 132–136). Despite this relationship, MoCo is alleged to have failed to include “related party information”—or to complete the checklists that would have allowed MoCo to gather that information—in its audits from 2001 through 2005. (Compl.¶¶ 143, 150, 173). The first prong of Iqbal requires that this court disregard “legal conclusions” or “naked assertions”; the second prong then requires an analysis of the “nub” of the Complaint–––“the well-pleaded non-conclusory factual allegations.” Iqbal,129 S.Ct. 1950. Disregarding conclusory labels and allegations of gross negligence or recklessness, the “nub” of the Complaint contains detailed factual allegations regarding Parillo's purported misappropriation of Matlack funds. It also alleges that MoCo knew or, as an accountant to both Parillo and his Brite Clean entities, should have known of these misappropriations, but that it nevertheless certified the Matlack's audits as presented the company's financial statements fairly in all material respects. Taken as a whole, these allegations are sufficiently detailed and particular to survive defendants' motion to dismiss. F. Count VI—Plaintiffs' Aiding and Abetting Breach of Fiduciary Duty Claim Against MoCo and Burns Defendants seek dismissal of Count VI of the Complaint first, because Pennsylvania does not recognize the tort of aiding and abetting a breach of fiduciary duty, and second, because even if it does, plaintiffs have failed to plead facts sufficient to state such a claim. Finally, they argue that Count VI must be dismissed because plaintiffs have failed to join Richard Parillo, a necessary party under Federal Rule of Civil Procedure 19(b). The Court finds no merit in any of these arguments. 1. The Tort of Aiding and Abetting Breach of Fiduciary Duty in Pennsylvania *11 As a threshold matter, the Court concludes that Pennsylvania recognizes the tort of aiding and abetting a breach of fiduciary duty, as defined by section 876 of the Restatement (Second) of Torts . 4 See Baker v. Family Credit Counseling Corp., 440 F.Supp.2d 392,417– Case 3:16-cv-00137-RDM Document 73-1 Filed 05/08/17 Page 7 of 10 Matlack Leasing, LLC v. Morison Cogen, LLP, Not Reported in F.Supp.2d (2010) 2010 WL 114883 © 2017 Thomson Reuters. No claim to original U.S. Government Works. 8 18 (E.D.Pa.2006); Pierce v. Rossetta Corp., No. 88– 5873, 1992 WL 165817, at * 8 (E.D.Pa. June 12, 1992). In Skipworth by Williams v. Lead Indus. Assoc., Inc., the Pennsylvania Supreme Court noted that it had not yet addressed Section 876. 547 Pa. 224, 690 A.2d 169 (1997). Nevertheless, it discussed whether the Skipworth plaintiff had provided facts sufficient to establish such a claim for the purposes of summary judgment. Id. at 174–75. Although Skipworth did not explicitly recognize a cause of action under Section 876, the opinion has since been interpreted as implicitly doing so by the Pennsylvania Commonwealth Court. See Koken, 825 A.2d at 731 (“[T]his Court is convinced by this language in Skipworth that Section 876 is a viable cause of action in Pennsylvania.”); see also Huber v. Taylor, 469 F.3d 67, 79 (3d Cir.2006) (implying that Pennsylvania recognizes the tort of aiding and abetting a breach of fiduciary duty). This Court agrees with the Koken court's reading of Skipworth. Having concluded that Pennsylvania recognizes the cause of action alleged in Count VI, the Court must now decide whether the Complaint contains allegations sufficient to state a plausible claim to relief. The elements of the tort of aiding and abetting breach of fiduciary duty are (1) a breach of fiduciary duty owed to another; (2) knowledge of the breach by the aider and abettor; and (3) substantial assistance or encouragement by the aider and abettor in effecting that breach. Pierce, 1992 WL 165817, at * 8; accord Koken, 825 A.2d at 732. The Complaint makes factual allegations sufficient to establish each element. Paragraph 180 of the Complaint states that Parillo owed Matlack fiduciary duties as its managing member; paragraph 181 alleges that Parillo breached this duty by, among other things, failing to make distributions in accordance with Matlack's Operating Agreement and by using distributions to fund the purchase of his own private businesses. The Complaint also contains allegations sufficient to establish that defendants had knowledge of the breach. In paragraphs 132 through 136, the Complaint alleges that MoCo and Burns served as Parillo's personal accountants and performed services for the Brite Clean entities, which were improperly financed by Matlack funds. Paragraphs 182 and 183 supplement these allegations by stating that defendants were willfully blind to Parillo's breaches. Finally, paragraph 184, read in the context of the allegations made in paragraphs 132 through 136, alleges that defendants failed to disclose, and continued to conceal, Parillo's use of Matlack distributions to fund the Brite Clean businesses, despite serving as BCI's accountants. These allegations contain facts sufficient to plausibly establish that defendants gave Parillo substantial assistance or encouragement. *12 Pennsylvania recognizes the tort of aiding and abetting a breach of fiduciary duty. The Court concludes that plaintiffs' Complaint contains facts sufficient to state such a claim. 2. Parillo as a Rule 19(b) Necessary Party Having determined that Pennsylvania recognizes the tort of aiding and abetting a breach of fiduciary duty, and that the Complaint contains facts sufficient to state such a claim, the Court must now address whether Count VI must nevertheless be dismissed pursuant to Federal Rule of Civil Procedure 12(b)(7) for failure to join Parillo as a necessary party under Rule 19(b). The Court concludes that it is not necessary to make Parillo a party to this action. Rule 19 creates a two-tiered mode of analysis. First, the Court must determine whether joinder of a person is necessary. If the person is necessary, then the Court must determine whether joinder is feasible. Bank of Am. Nat'l Turst and Sav. Ass'n v. Hotel Rittenhouse Assocs., 844 F.2d 1050, 1053–54 (3d Cir.1988). The moving party has the burden of showing why a person should be joined pursuant to Rule 19. United States v. Payment Processing Center, LLC, No. 06–0725,2006 WL 2990392, at *2 (E.D.Pa. Oct. 18, 2006). A person who is subject to service of process, and whose joinder would not deprive the Court of subject- matter jurisdiction (issues that neither party raises in their briefing), is necessary if, among things, he claims an interest “relating to the subject of the action and is so situated that disposing of the action in the person's absence” may do one of two things: either (i) “as a practical matter impair or impede the person's ability to protect the interest” or (ii) leave an existing party subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations because of the interest.” Fed.R.Civ.P. 19(a)(1)(B)(i), (ii). Case 3:16-cv-00137-RDM Document 73-1 Filed 05/08/17 Page 8 of 10 Matlack Leasing, LLC v. Morison Cogen, LLP, Not Reported in F.Supp.2d (2010) 2010 WL 114883 © 2017 Thomson Reuters. No claim to original U.S. Government Works. 9 Presumably invoking 19(a)(1)(B)(i), defendants argue that Parillo is necessary because any decision on plaintiffs' aiding and abetting claim requires a “legally binding” decision on whether Parillo breached his fiduciary duty. The Court disagrees. Defendants' bald assertion that Parillo's interests would be impaired or impeded is insufficient to meet their burden. Speculation about what may happen in a hypothetical future legal action between Parillo and unnamed, unknown parties does not demonstrate necessity under Rule 19. Rather, “[g]iven the vast range of potential insults and allegations of impropriety that may be directed at non-parties in civil litigation, a contrary view would greatly expand the universe of Rule 19(a) necessary parties.” Pujol v. Shearson Am. Express, Inc., 877 F.2d 132, 136 (1st Cir.1986) (Breyer, J.); see also Janney Montgomery Scott, Inc. v. Shepard Niles, Inc., 11 F.3d 399, 407 (3d Cir.1993) (rejecting argument that would “greatly expand the class of ‘necessary’ or compulsory parties Rule 19(a) creates”). Defendants must offer more than just speculation. See Pujol, 877 F.2d at 136 (“The mere fact ... that Party A, in a suit against Party B, intends to introduce evidence that will indicate that a non-party, C, behaved improperly does not, by itself, make C a necessary party.”). As the Third Circuit remarked when confronted with the same legal issue, the court “will not theorize in determining necessary party status about the potential preclusive effect of this action on a later lawsuit as this would be premature.” Janney Montgomery Scott, 11 F.3d at 410. Accordingly, defendants' motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(7) is denied. VI. CONCLUSION *13 Counts II and III of the Complaint fail to state a claim because they do not contain allegations that defendants violated a contractual duty separate and apart from the pre-existing legal duty governing professional accountants. Accordingly, defendants' motion is granted with regard to these counts. In all other respects, defendants' motion is denied. An appropriate order follows. ORDER AND NOW, this 13th day of January, 2010, upon consideration of Motion of Defendants Morison Cogen, LLP and James M. Burns, CPA to Dismiss Plaintiffs' Complaint for Failure to State a Claim Upon Which Relief Can be Granted and For Failure to Join a Party Under Rule 19 (Document No. 11, filed June 16, 2009); Plaintiffs' Brief in Opposition to Defendants' Motion to Dismiss Plaintiffs' Complaint (Document No. 14, filed July 6, 2009); and Reply Brief in Further Support of Motion of Defendants Morison Cogen, LLP and James M. Burns, CPA to Dismiss Plaintiffs' Complaint for Failure to State a Claim Upon Which Relief Can be Granted and For Failure to Join a Party Under Rule 19 (Document No. 18, filed July 31, 2009) IT IS ORDERED as follows: 1. That part of defendants' Motion to Dismiss which seek dismissal of Counts II and III of the Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) is GRANTED WITHOUT PREJUDICE; 2. That part of defendants' Motion to Dismiss which seeks dismissal of Counts I, IV, V and VI of the Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) is DENIED; 3. That part of defendants' Motion to Dismiss which seeks dismissal of Count VI of the Complaint pursuant to Federal Rule of Civil Procedure 12(b)(7) is DENIED. All Citations Not Reported in F.Supp.2d, 2010 WL 114883 Footnotes 1 These facts are taken from the Complaint and presented in the light most favorable to the plaintiffs. 2 In AHERF, the Third Circuit certified a question to the Supreme Court. “What is the proper test under Pennsylvania law for determining whether an agent's fraud should be imputed to the principal when it is an allegedly non-innocent third- party that seeks to invoke the law of imputation in order to shield itself from liability?” AHERF, 2008 WL 3895559, at *6. This is a different question that the one presented here. The question presented here is whether the claimed wrongdoing Case 3:16-cv-00137-RDM Document 73-1 Filed 05/08/17 Page 9 of 10 Matlack Leasing, LLC v. Morison Cogen, LLP, Not Reported in F.Supp.2d (2010) 2010 WL 114883 © 2017 Thomson Reuters. No claim to original U.S. Government Works. 10 of a partner who allegedly controlled a party, should bar that party from recovery once the partner who committed the claimed wrongdoing is no longer affiliated with the party. Because the questions are distinct, there is no reason to stay this case pending the Pennsylvania Supreme Court's answer to the question certified by the Third Circuit in AHERF. 3 (1) One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information. (2) ... [T]the liability stated in Subsection (1) is limited to loss suffered (a) by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it; and (b) through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction. 4 For harm resulting to a third person from the tortious conduct of another, one is subject to liability if he (a) does a tortious act in concert with the other or pursuant to a common design with him, or (b) knows that the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct himself, or (c) gives substantial assistance to the other in accomplishing a tortious result and his own conduct, separately considered, constitutes a breach of duty to the third person. Restatement (Second) of Torts § 876. End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works. Case 3:16-cv-00137-RDM Document 73-1 Filed 05/08/17 Page 10 of 10 Rittenhouse v. Shubert, Not Reported in F.Supp. (1989) 1989 WL 54030 © 2017 Thomson Reuters. No claim to original U.S. Government Works. 1 1989 WL 54030 Only the Westlaw citation is currently available. United States District Court, E.D. Pennsylvania. Thomas J. RITTENHOUSE and Lenore Muraoka Rittenhouse v. Louise Grace SHUBERT. CIV. A. No. 88–4682. | May 18, 1989. Attorneys and Law Firms Cornelius C. O'Brien, Jr., P.C., Joseph J. McGill, Philadelphia, Pa., for plaintiffs. Cy Goldberg, Philadelphia, Pa., for Louise Grace Shubert. MEMORANDUM AND ORDER Hannum, Senior District Judge. Introduction *1 This matter comes before the Court on the motion of defendant Louise Grace Schubert 1 for summary judgment. Because there are several genuine issues of material fact, summary judgment is inappropriate. Fed.R.Civ.P. 56(c). See Anderson v. Liberty Lobby Inc., 477 U.S. 242 (1986); Celotex Corp. v. Catrett, 477 U.S. 317 (1986). For the reasons stated below, defendant's motion will be denied. Background Jurisdiction in this matter is founded on diversity of citizenship and amount in controversy. Plaintiffs (“the Rittenhouses”) are individuals and residents of California. The defendant (“Ms. Schubert”) is a citizen and resident of Pennsylvania. Plaintiffs, in their Complaint, alleged that the amount sued upon exceeds the Court's Ten Thousand Dollar ($10,000.00) jurisdictional limit. Subject matter jurisdiction is accordingly conferred by 28 U.S.C. § 1332. This action was filed to recover damages for personal injuries allegedly sustained in an automobile accident involving Mr. Rittenhouse and Ms. Schubert that occurred on or about July 25, 1986 at approximately 11:45 a.m., in Tredyffrin Township, Chester County, Pennsylvania. As a result of this accident, Mr. Rittenhouse claims to have sustained various injuries. Based upon these injuries, Mr. Rittenhouse brought a claim against Ms. Schubert, through her insurer, Metropolitan Property and Liability Insurance Company (“Metropolitan”). Subsequently, Mr. Rittenhouse had a discussion with Metropolitan through its adjuster, Mr. Randell Pearson, regarding a draft in the amount of Seven Hundred Sixty– Six ($766.00) Dollars for payment of Mr. Rittenhouse's medical expenses. On the face of this draft was the following language: “bodily injury final payment for claims arising from accident on 7/25/86.” In his sworn deposition, Mr. Rittenhouse testified that Metropolitan, through its agent, advised him that he had to endorse this draft in order to get payment for the $766.00 bill and that the endorsement would not preclude him from all future claims. Thereafter, Mr. Rittenhouse endorsed and cashed the draft. This controversy focuses upon a taped telephone conversation between Mr. Rittenhouse and Mr. Pearson. Mr. Rittenhouse stated in his deposition that he had specifically clarified the nature of the release with Mr. Pearson during their discussion. He further claimed that even though Mr. Pearson was attempting to tape the conversation, Mr. Pearson often stopped and started the tape machine and did not tape several of the comments made in the discussion. As a result, it is contended that Metropolitan, through its agent, misrepresented the significance of any document received by Mr. Rittenhouse and specifically limited the significance of the release to the initial claim for the medical expenses. Mr. Rittenhouse was not represented by counsel at the time of this conversation. Ms. Schubert contended that the language of the draft was binding between the parties and that plaintiffs' claims should be barred because Mr. Rittenhouse released Ms. Schubert and her insurer from all future claims when he endorsed and cashed the draft issued by Metropolitan. The Court does not agree. For the reasons that follow, Ms. Schubert's motion for summary judgment will be denied. Discussion *2 As noted earlier, the issue presented here pertains to the nature of the release. More specifically, the question Case 3:16-cv-00137-RDM Document 73-2 Filed 05/08/17 Page 1 of 3 Rittenhouse v. Shubert, Not Reported in F.Supp. (1989) 1989 WL 54030 © 2017 Thomson Reuters. No claim to original U.S. Government Works. 2 is whether or not a genuine issue of material fact exists to deny defendant's motion for summary judgment. The parties and the Court agree that Pennsylvania law, rather than California law, obtains in this case. This Court is bound to follow the choice of law rules of the forum state, here Pennsylvania. Klaxon Co. v. Stentor Electric Manufacturing Co., Inc., 313 U.S. 487 (1941). Pennsylvania applies the law of the jurisdiction having the most significant qualitative contacts with the litigation. See generally Griffith v. United Airlines, Inc., 416 Pa. 1, 203 A.2d 796 (1964). Here, Pennsylvania undeniably has the most significant qualitative contacts with the insurance release at issue. The accident occurred in Pennsylvania, the release was drafted and endorsed in Pennsylvania, and the defendant's insurer conducts its business in Pennsylvania. Procedurally, this case is of course governed by federal law. Under the Federal Rules of Civil Procedure, summary judgment may be granted when “there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c). For a dispute to be “genuine,” the evidence must be such that a reasonable jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). To establish a genuine issue of material fact, the non-moving party must introduce evidence beyond the mere pleadings to create an issue of material fact on “an element essential to that party's case, and on which that party will bear the burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). The evidence presented must be considered in a light most favorable to the party opposing the motion and that party must receive the benefit of all reasonable inferences arising from that evidence. Gans v. Mundy, 762 F.2d 338, 341 (3d Cir.), cert. denied, 474 U.S. 1010 (1985). This Court has previously recognized the following axioms of law regarding a signed and executed release: Pennsylvania law clearly holds that a signed release is binding unless executed through fraud, duress, accident or mutual mistake. The intention of the parties governs the effect of the release, but this intention must be gathered from the language itself. The natural and ordinary meaning of this language will prevail unless one of the parties unequivocably proves fraud or mutual mistake. A document is presumed to accurately express the state of mind of the signing parties if it is signed and the signature is accurate. The burden of proving the invalidity of an agreement is on the party asserting invalidity. Young v. Robertshaw Controls Company, 430 F.Supp. 1265, 1268 (E.D.Pa.1977) (citations omitted). In the instant case, the telephone conversation between Mr. Rittenhouse and Mr. Pearson clearly raises genuine issues of fact as to the validity of the release and demonstrates an opposite intention of the parties regarding the release of all claims both present and future with reference to the subject accident. It is established law that a release normally encompasses “only such matters which may fairly be said to have been within the contemplation of the parties when the release was given.” Sparler v. Fireman's Insurance Company of Newark, New Jersey, 360 Pa.Super. 597, 601, 521 A.2d 433, 434–35 (1987). This rule gives effect to the intention of the parties, which is of paramount concern in construing a release. In doing so, the document is not interpreted with such rigidity as to create a contract contrary to the intention of the parties. Cockcroft v. Metropolitan Life Insurance Company, 125 Pa.Super. 293, 189 A. 687 (1937). Rather, a release may cover only such matters as can fairly be said to be within the contemplation of parties when executed. Estate of Bodnar, 472 Pa. 383, 372 A.2d 746 (1977). *3 The communication between the parties reflects very unfavorably on the conduct of Metropolitan's agent. In fact, such conduct, as represented, displays misrepresentation, possible fraud, duress, or at least mutual mistake. At a minimum, the conduct of Mr. Pearson indisputably raises a genuine issue of material fact as to the extent of the release. Under Pennsylvania law, a recipient of misrepresentation may avoid the contract by showing that the misrepresentation was either fraudulent or material. DeJoseph v. Tambelli, 392 Pa. 24, 139 A.2d 644 (1958). In the case at bar, the Court finds the misrepresentation to have been material; it is also possible that a fact-finder could find it fraudulent. Metropolitan's agent led Mr. Rittenhouse to believe that an agreement was being reached to pay the first claim with an understanding that Mr. Rittenhouse's right to make future claims would be reserved. Even if Mr. Pearson, the agent, was in fact unaware of the circumstances, he “had means of knowledge from which he was bound to ascertain the truth before making the representation.” LaCourse v. Kiesel, 366 Pa. 385, 390, 77 A.2d 877, 880 (1951). Misrepresentations made under Case 3:16-cv-00137-RDM Document 73-2 Filed 05/08/17 Page 2 of 3 Rittenhouse v. Shubert, Not Reported in F.Supp. (1989) 1989 WL 54030 © 2017 Thomson Reuters. No claim to original U.S. Government Works. 3 such circumstances have been held to be fraudulent as a matter of law. Even if the misrepresentation had not been fraudulent, the agreement may still be voidable because the misrepresentation was material. Germantown Manufacturing Company v. Rawlinson, 341 Pa.Super. 42, 491 A.2d 138 (1985). Where the misrepresentation is material, the party making the misrepresentation may believe his assertion to be true. Even so, the agreement is voidable by the recipient because the misrepresentation induced him to manifest invalid assent. Id. at 49, 491 A.2d at 142. In his deposition, Mr. Rittenhouse stated that the only reason he accepted the money to cover the costs of his medical expenses was because Metropolitan's agent insisted that Mr. Rittenhouse accept and endorse the draft in order to pay the first claim thereby inducing him to manifest assent. Neither Ms. Schubert nor her insurer, Metropolitan, challenge this scenario. Because the evidence clearly shows genuine issues as to material facts concerning the validity of the release, defendant's motion for summary judgment is denied. An appropriate Order follows. ORDER AND NOW, this 18th day of May, 1989, upon consideration of defendant's Motion for Summary Judgment (Docket Entry No. 8) and plaintiffs' Answer to Motion for Summary Judgment (Docket Entry No. 9), it is hereby ORDERED that defendant's Motion for Summary Judgment is DENIED. All Citations Not Reported in F.Supp., 1989 WL 54030 Footnotes 1 The defendant's name is spelled Shubert in the complaint. In all papers submitted by defense counsel, the spelling is Schubert. The Court adopts the spelling Schubert. End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works. Case 3:16-cv-00137-RDM Document 73-2 Filed 05/08/17 Page 3 of 3 Foster v. Northwestern Mut. Life, Not Reported in F.Supp.2d (2002) 2002 WL 31991114 © 2017 Thomson Reuters. No claim to original U.S. Government Works. 1 KeyCite Yellow Flag - Negative Treatment Distinguished by Agrotors, Inc. v. Ace Global Markets, M.D.Pa., February 24, 2014 2002 WL 31991114 Only the Westlaw citation is currently available. United States District Court, E.D. Pennsylvania. Timothy M. FOSTER Plaintiff, v. NORTHWESTERN MUTUAL LIFE, Defendant. No. 02–CV–2211. | July 26, 2002. MEMORANDUM AND ORDER VANANTWERPEN, J. *1 This diversity case arises from Plaintiff's suit to recover for commission payments that Defendant, his former employer, allegedly wrongfully withheld in breach of the parties' contract, employing tortious fraud and misrepresentation, in violation of Pennsylvania's Wage Payment and Collection Law, 43 P.S. § 260.1 et seq. Defendant now moves to dismiss Plaintiff's fraud and misrepresentation count for failure to state a claim, under Fed.R.Civ.P. 12(b)(6), invoking the Economic Loss Doctrine and Pennsylvania's “gist of the action” test. In short, Defendant argues that Plaintiff's claims are adequately addressed by his contract and statutory claims and that his tort claims are inappropriate, inasmuch as the remedy he seeks concerns purely contractual, economic losses. Alternatively, Defendant moves for a more definite statement under Fed.R.Civ.P. 12(e), arguing that Plaintiff's Complaint does not state his fraud and misrepresentation claims with sufficient particularity, as required under Fed.R.Civ.P. 9(b). Though we must be wary of Plaintiff's tort claims where his losses are purely financial, we believe that Plaintiff has adequately stated a claim that Defendant intentionally and fraudulently made deductions from his commission payments, such that the parties may begin discovery on this question. After discovery, we will entertain a summary judgment motion as to the tort claims if the information gathered during discovery does not suggest that Defendant's conduct was intentional and fraudulent, and if Plaintiff's damages were pure contract losses or those contemplated under Pennsylvania's wage law. STANDARD OF REVIEW & APPLICABLE LAW On a Rule 12(b)(6) motion, we are required to accept well- pleaded allegations as true. Morse v. Lower Merion Sch. Dist., 132 F.3d 902, 906 (3 rd Cir.1997). When federal jurisdiction is based on diversity of citizenship under 28 U.S.C. § 1332, federal courts must, “[e]xcept in matters governed by the Federal Constitution or by Acts of Congress, ... [apply] the law of the State.” Erie Railroad v. Tompkins, 304 U .S. 64, 78, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). Though we apply federal procedural rules, the forum state's laws govern substantively. See Commissioner of Internal Revenue v. Bosch's, 387 U.S. 456, 465, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967). In this case, the governing standards are Pennsylvania's, as established by the Pennsylvania Supreme Court. As the Third Circuit explained, applying Erie, “While the Federal Courts should properly employ its [sic] own rules of procedure to secure the just, efficient and prompt determination of all claims inherent in any litigation before it, nevertheless the ultimate results reached must be such as accord with the substantive jurisprudence of the State of the forum.” (Citations omitted.) Smith v. Whitmore, 270 F.2d 741, 745 (3 rd Cir.1959). Lower state court decisions are persuasive, but not binding, on the federal court's authority; if the State's highest court has not spoken on a particular issue, the “federal authorities must apply what they find to be the state law after giving ‘proper regard’ to relevant rulings of other courts of the State.” Id.; see also Polselli v. Nationwide Mut. Fire Ins., 126 F.3d 524, 528 (3d. Cir.1997); Scranton Dunlop, Inc. v. St. Paul Fire & Marine Ins. Co., 2000 WL 1100779, at *1 (E.D.Pa.Aug.4, 2000) (“Since this is a matter of state law that has not been decided by the Pennsylvania Supreme Court, a prediction must be made as to how that court would rule if confronted with the same facts.”). DISCUSSION Case 3:16-cv-00137-RDM Document 73-3 Filed 05/08/17 Page 1 of 3 Foster v. Northwestern Mut. Life, Not Reported in F.Supp.2d (2002) 2002 WL 31991114 © 2017 Thomson Reuters. No claim to original U.S. Government Works. 2 I. Economic Loss Doctrine *2 Based on lower Pennsylvania court decisions supporting the Economic Loss Doctrine (see, e.g., REM Coal Co. v. Clark Equip. Co., 386 Pa.Super. 401, 563 A.2d 128, 132 (1989)), the Third Circuit has predicted that Pennsylvania's Supreme Court would apply the Doctrine in certain situations. King v. Hilton–Davis, 855 F.2d 1047, 1053–54 (3d Cir.1988). Defendant argues that the recent Third Circuit opinion in Werwinski v. Ford Motor Co., 286 F.3d 661 (3 rd Cir.2002) stands for the proposition that “the Economic Loss Doctrine bars both intentional and negligent misrepresentation actions arising from a contractual relationship.” Def. Mot. at p. 4. This overstates Werewinski' s holdings. The Third Circuit explained: The economic loss doctrine is designed to place a check on limitless liability for manufacturers and establish clear boundaries between tort and contract law. Carving out an exception for intentional fraud would eliminate that check on liability and blur the boundaries between the two areas of law, thus exposing manufacturers to substantially greater liability. Werwinski, 286 F.3d at 680–681. We cannot transfer the Third Circuit's reasoning in the manufacturer-consumer setting into the employer- employee context without additional interpretation. Defendant provides and we find no case law suggesting any justification for such a leap in reasoning. On the contrary, the Third Circuit has observed that the Economic Loss Doctrine does not readily apply outside the context of product liability cases. Bohler–Uddeholm American, Inc. v. Ellwood Group, Inc., 247 F.3d 79, 104 FN11 (3 rd Cir.2001), cert. denied, Ellwood City Forge Co. v. Bohler–Uddeholm America Inc., 122 S.Ct. 1173, 152 L.Ed.2d 116. Pennsylvania courts have recognized the torts of fraud and misrepresentation in the employment context (Martin v. Hale Products, Inc., 699 A.2d 1283, 1287 [Pa.Super.,1997] ), and Defendant has provided no indication that the Commonwealth wholly precludes tort actions between contracting parties. Indeed, contracting parties may sue each other in tort when they allege damages beyond the scope of their agreement. See, e.g., Bohler–Uddeholm, 247 F.3d at 104. Thus, we believe the Economic Loss Doctrine is inapplicable in this case. II. Gist of the Action Test The “gist of the action” test may be more relevant. The Third Circuit has explained: Under the “gist of the action” test, “to be construed as a tort action, the [tortious] wrong ascribed to the defendant must be the gist of the action with the contract being collateral.... [T]he important difference between contract and tort actions is that the latter lie from the breach of duties imposed as a matter of social policy while the former lie for the breach of duties imposed by mutual consensus.” Redevelopment Auth. of Cambria County v. International Ins. Co., 454 Pa.Super. 374, 685 A.2d 581, 590 (1996) (en banc) (quoting Phico Ins. Co. v. Presbyterian Med. Servs. Corp., 444 Pa.Super. 221, 663 A.2d 753, 757 (1995)). In other words, a claim should be limited to a contract claim when “the parties' obligations are defined by the terms of the contracts, and not by the larger social policies embodied in the law of torts.” Bash v. Bell Telephone Co., 411 Pa.Super. 347, 601 A .2d 825, 830 (1992). Bohler–Uddeholm American, Inc. v. Ellwood Group, Inc., 247 F.3d at 103–104. *3 While Werwinski and Bohler–Uddeholm hold that we must avoid opening the floodgates to tort liability in every contract action, the decisions do not say that contract employees like Plaintiff can never allege tortious fraud and misrepresentation against their employers or ex- employers. Indeed, as Plaintiff observes in his response to Defendant's motion, Werwinski recognizes a “limited exception to the economic loss doctrine for fraud-in- the-inducement claims if the fraud is extraneous to the contract and not interwoven with the breach of the contract.” Id. at 676; Pl. Response at p. 3. Without discovery, we do not know whether Plaintiff will be able to show that he was fraudulently induced to accept incomplete commission payments, as he alleges. Plaintiff may show that he accepted such deductions based on misrepresentations by Defendant, even if such Case 3:16-cv-00137-RDM Document 73-3 Filed 05/08/17 Page 2 of 3 Foster v. Northwestern Mut. Life, Not Reported in F.Supp.2d (2002) 2002 WL 31991114 © 2017 Thomson Reuters. No claim to original U.S. Government Works. 3 interchanges were not specifically covered in the contract. Such a showing would implicate the “larger social policies” of a tort action (e.g., society's desire to avoid fraudulent inducement in the employment context), and would justify extending this case beyond the contractual allegations. Hence, at this early stage, we will allow Plaintiff to maintain his fraud and misrepresentation claims, though we advise the parties to be cognizant of the “gist of the action” test as they conduct discovery. III. Motion for a More Definite Statement Defendant is correct that under Fed.R.Civ.P. 9(b), fraud allegations must be pled with particularity. Here, Plaintiff has indicated that Defendant intentionally made material misrepresentations each time it deducted sums from his commission payments since he terminated his employment with Defendant. Thus, the parameters are adequately defined: Plaintiff and Defendant know that during discovery they must explore each commission payment since Plaintiff's resignation, ascertaining what was deducted, whether it was legitimate, and—most importantly for Plaintiff's fraud/misrepresentation claims —whether Defendant intentionally made illegitimate deductions which it represented as legitimate. At this stage, we find no need for Plaintiff to plead more definite statements as to the alleged fraud and misrepresentation. CONCLUSION We will deny Defendant's 12(b)(6) and 12(e) motions, finding that Plaintiff may proceed with his fraud and misrepresentation claims and that he has alleged these claims with sufficient particularity to enable the parties to begin discovery. If Plaintiff is unable to establish through discovery any fraud or misrepresentation beyond the contractual context, we will entertain an appropriate summary judgment motion by Defendant applying the “gist of the action” test. An order consistent with this Memorandum follows. ORDER AND NOW, this 25 th of July, 2002, the Defendant's Motion to Dismiss and, in the alternative, Motion for a More Definite Statement, filed July 5, 2002, is DENIED for the reasons explained in the foregoing Memorandum. All discovery problems shall immediately be brought to the attention of Magistrate Judge Arnold C. Rapoport by letter or other informal means. Defendant shall file an Answer to Plaintiff's Complaint within twenty-one (21) days of the date of this Order. All Citations Not Reported in F.Supp.2d, 2002 WL 31991114 End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works. Case 3:16-cv-00137-RDM Document 73-3 Filed 05/08/17 Page 3 of 3
