Kathleen Morgan v. David Carpenter ( 2014 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
KATHLEEN MORGAN, )
)
Plaintiff, )
)
v. ) C.A. No. 9324-ML
)
DAVID CARPENTER, )
)
Defendant. )
MASTER‟S REPORT
(Motion to Dismiss)
Date Submitted: September 30, 2014
Final Report: December 18, 2014
Kathleen Morgan, prose, Plaintiff.
James S. Green, Sr., Esquire and Jared T. Green, Esquire, of SEITZ VAN OGTROP &
GREEN, P.A., Wilmington, Delaware; Attorneys for Defendant.
LEGROW, Master
The plaintiff, whose wholly-owned corporation previously owned three successful
sandwich franchises in Delaware, alleges that a former business associate breached an
oral agreement, committed fraud, was unjustly enriched, and interfered with her business
relations, among other things. The plaintiff, however, seeks only monetary damages and
all but one of her claims are legal in nature. Because I conclude that the plaintiff fails to
state a claim as to the only equitable claim alleged in the complaint, I recommend that the
Court dismiss that claim with prejudice and dismiss the remaining claims without
prejudice so the plaintiff may transfer the case to the Superior Court.
BACKGROUND
The following facts are drawn from the complaint and its exhibits, giving the
plaintiff the benefit of all reasonable inferences. The plaintiff, Kathleen Morgan, is the
sole shareholder of Turkeys Inc. (“Turkeys”), a Delaware corporation that – before the
events at issue in this case – owned three Capriotti‟s franchises: Capriotti‟s Newark,
Capriotti‟s Kirkwood, and Capriotti‟s Hockessin.1 The defendant, David Carpenter, was
a business associate of Ms. Morgan. Mr. Carpenter is one member of BDK Enterprises
LLC (“BDK”), which is a Delaware limited liability company. 2 Mr. Carpenter
previously invested in Turkeys‟ franchises and was a partner with Ms. Morgan and/or
Turkeys in two Capriotti‟s franchises in Sussex County.3
1
Verified Compl. ¶ 37.
2
Id. ¶ 39; Morgan v. Carpenter, C.A. No. 9324-ML (Sept. 30, 2014) (TRANSCRIPT)
(hereinafter “Tr.”) at 31 (Ms. Morgan acknowledging that Mr. Carpenter is not the sole member
of BDK).
3
Verified Compl. ¶¶ 41-42; Tr. at 22-23.
1
The allegations underlying Ms. Morgan‟s current complaint (the “Complaint”)
arise from earlier litigation in this Court involving Ms. Morgan, another individual, Marc
Ham, and their respective entities (the “APA Litigation”). In May 2011, Mr. Ham and an
entity called Ham & Turkeys, LLC (“H&T”) filed an action against Ms. Morgan and
Turkeys seeking specific performance of an asset purchase agreement (the “APA”). 4
Under the APA, Turkeys and Ms. Morgan purportedly agreed to transfer to H&T all of
Turkeys‟ assets, including the three Capriotti‟s franchises, in exchange for $750,000 and
a 49% stake in H&T. 5 Shortly after the APA Litigation was filed, Turkeys and Ms.
Morgan entered into third party funding agreement (the “TPF Agreement”) with BDK,
under which BDK agreed to pay up to $250,000 to fund the defense of the APA
Litigation.6 In return for BDK‟s agreement to fund the litigation, Turkeys and Morgan
executed a promissory note, secured by Turkeys‟ assets, along with an option (the
“Option”) that gave BDK a right
to purchase the Kirkwood Highway and Limestone Road franchises (each a
„Target Store‟ and collectively the „Target Stores‟) including all assets of
each Target Store (e.g., physical assets and equipment, accounts receivable,
property leases, franchise rights, etc.), up to a maximum purchase price of
$1,000,000 in the aggregate, inclusive of any funds advanced for litigation
or other expenses.7
Ms. Morgan alleges that this Option was the product of a misunderstanding
between herself and BDK, because Ms. Morgan thought the Option gave BDK the right
4
See Ham v. Morgan, C.A. No. 6495-VCL.
5
Verified Compl. Ex 3. See also Morgan v. Scott, 2014 WL 4698487, at *1 (Del. Sept. 22,
2014) (describing APA).
6
Verified Compl. Ex. 3.
7
Id. Ex. 3 at 2-3.
2
to purchase one, rather than two, of Turkeys‟ franchises.8 She asserts that she and Mr.
Carpenter entered into a verbal agreement (the “Oral Agreement”) on August 1, 2011
whereby Mr. Carpenter agreed to cancel the TPF Agreement, including the Option, if Ms.
Morgan paid Mr. Carpenter $110,409.50 and also paid the attorneys‟ fees BDK owed
under the TPF Agreement.9 Ms. Morgan contends the TPF Agreement, including the
Option, was “legally annulled” by this Oral Agreement and that she relied on the Oral
Agreement when she settled the APA Litigation on August 15, 2011.10 The stipulated
settlement signed by the parties to the APA Litigation required Turkeys and Ms. Morgan
to pay Mr. Ham and H&T $1,050,000.00 in exchange for Turkeys retaining 100%
ownership of its assets.11
Shortly after the settlement of the APA Litigation, Ms. Morgan contends she
tendered payment to Mr. Carpenter as required by their Oral Agreement, but Mr.
Carpenter refused to accept the payment and later enforced the Option, acquiring control
of Turkeys‟ Newark and Kirkwood Highway franchises.12
Ms. Morgan alleges in the Complaint seven causes of action and seeks monetary
damages in the amount of $3.5 million, plus such other and further relief as the Court
deems just. The counts of the Complaint may be summarized as follows:
- Count I, although styled as a claim for “Breach of Contract Specific Performance,”
does not actually seek specific performance and instead is a standard breach of
contract claim in which Ms. Morgan alleges Mr. Carpenter breached their Oral
8
Id. ¶ 10.
9
Id. ¶¶ 15-16.
10
Id. ¶¶ 11, 18.
11
Id. ¶¶ 18-20 & Ex. 3.
12
Id. ¶¶ 25-28.
3
Agreement to cancel the TPF Agreement and owes her damages caused by that
breach.13
- In Count II, Ms. Morgan alleges that Mr. Carpenter tortiously interfered with her
“business relations” by causing “the termination of the expected relationship with
Diane Rizzo and expected settlement outcome of return of all three franchises to
[Ms. Morgan].”14 According to Ms. Morgan, she had the “assurance and confidence
in Diane Rizzo as source of strong arm, witness and money, should the need arise, to
meet terms of „Settlement Term Sheet‟” in the APA Litigation, but Mr. Carpenter
interfered with that relationship by stating he was going to exercise the Option rather
than cancel the TPF Agreement.15
- In Count III, Ms. Morgan asserts a claim for “Abuse of Process,” alleging Mr.
Carpenter (1) had an ulterior purpose for entering into the TPF Agreement, (2)
“attempted to force [the Option] before trial, [sic] and during incidences when [Mr.
Carpenter] intentionally interfered with [the] use of incriminating evidence obtained
by [Ms. Morgan] against [Mr. Ham],” and (3) “played out litigation in ways
threatening to sustenance of goodwill and stability of [Ms. Morgan and Turkeys].”16
- Count IV is a claim for equitable fraud in the inducement relating to the TPF
Agreement. In support of this claim, Ms. Morgan alleges that Mr. Carpenter made a
number of false representations to Ms. Morgan in an effort to induce her to enter into
the TPF Agreement, and that Ms. Morgan and Mr. Carpenter were in a “special
relationship” by virtue of the other business partnerships in which they were
engaged.17
- Count V is a claim that Mr. Carpenter breached the implied covenant of good faith
and fair dealing in the TPF by acting in bad faith and using the APA Litigation for
“self-indulgence” and by unfairly and inequitably enforcing the Option.18
- In Count VI, Ms. Morgan alleges that Mr. Carpenter committed negligence by
failing to cancel the TPF.19
- In Count VII, Ms. Morgan contends Mr. Carpenter was unjustly enriched by the
transfer of the two franchises when the Option was exercised. Ms. Morgan alleges
13
See Tr. at 31 (Ms. Morgan acknowledging that she is not seeking specific performance);
Verified Compl. ¶¶ 45-50.
14
Verified Compl. ¶ 54.
15
Id. ¶¶ 27, 43, 51-57.
16
Id. ¶¶ 58-63.
17
Id. ¶¶ 64-71.
18
Id. ¶¶ 72-79.
19
Id. ¶¶ 80-85. The Complaint mistakenly numbers this claim as Count IV, but it is the sixth
count in the Complaint.
4
that Mr. Carpenter unjustly acquired title to the two franchises and Ms. Morgan was
harmed in the process.20
On March 11, 2014, Mr. Carpenter filed a motion to dismiss the Complaint on the
basis that the Court lacked subject matter jurisdiction and the Complaint failed to state a
claim upon which relief could be granted. The parties briefed that motion and argument
was held on September 30, 2014. Shortly after argument, Ms. Morgan filed a
“Supplement to Hearing” in which Ms. Morgan stated that “a remedy of [Mr.
Carpenter‟s] breach of contract would be the return of the two franchises that were
stripped away from [Ms. Morgan].” 21 This relief is not sought in the Complaint,
however, nor does Ms. Morgan explain the legal basis on which she would be entitled to
that relief.
ANALYSIS
This Court will dismiss a complaint under Court of Chancery Rule 12(b)(1) if it
appears from the record that the Court lacks subject matter jurisdiction over the claims.
This Court is one of limited jurisdiction and only may acquire subject matter jurisdiction
over a claim if: (1) the claim invokes an equitable right, (2) the claim seeks equitable
relief when there is no adequate remedy at law, or (3) there is a statutory grant of
jurisdiction permitting this Court to resolve the claim.22 If the Court has jurisdiction over
at least one claim, it may in its discretion hear the remaining claims between the parties
20
Id. ¶¶ 82-87. The Complaint mistakenly numbers this claim as Count V, but it is the seventh
count in the Complaint.
21
See Supplement to Hearing dated Oct. 2, 2014.
22
Candlewood Timber Gp., LLC v. Pan Am. Energy, LLC, 859 A.2d 989, 997 (Del. 2004);
Medicis Pharm. Corp. v. Anacor Pharm., Inc., 2013 WL 4509653, at *3 (Del. Ch. Aug. 12,
2013); Christiana Town Ctr. LLC v. New Castle Cnty., 2003 WL 21314499, at *3 (Del. Ch. Jun.
6, 2003).
5
under the “clean-up” doctrine, even if the remaining claims involve legal rights and
remedies.23 The plaintiff bears the burden of establishing this Court‟s jurisdiction.24
At oral argument, Ms. Morgan conceded that she is seeking only monetary
damages, rather than any form of equitable relief. The “Supplement to Hearing” Ms.
Morgan filed on October 2, 2014 attempts to introduce a request for equitable relief,
apparently through some form of rescission of the TPF Agreement, the Option, or the
transfer of the two franchises to BDK. Even if that request had been included in Ms.
Morgan‟s complaint, however, it would not form a basis for this Court to exercise
jurisdiction over the case because the Court cannot enter an order for rescission against
Mr. Carpenter. It is BDK, not Mr. Carpenter, that was a party to the TPF Agreement,
exercised the Option, and took title to the franchises. Put another way, whether Ms.
Morgan has a viable claim against BDK entitling her to rescission, it is not a remedy she
can obtain from Mr. Carpenter, who is the only defendant named in this action.
Accordingly, Ms. Morgan‟s belated attempt to add a prayer for equitable relief is not
sufficient to confer jurisdiction on this Court.
With the exception of Ms. Morgan‟s claim for equitable fraud in the inducement,
the balance of the claims in the complaint do not assert an equitable right or a claim over
which this Court has statutory jurisdiction. If, however, Ms. Morgan states a claim for
equitable fraud, this Court may in its discretion retain jurisdiction over the remaining
claims in the complaint. Mr. Carpenter argues that Ms. Morgan‟s claim for fraud in the
23
Willis v. PCA Pain Ctr. of Va., Inc., 2014 WL 5396164, at *2 (Del. Ch. Oct. 20, 2014).
24
Medicis Pharmaceutical Corp., 2003 WL 4509652, at *3; Getty Ref. & Mktg. Co. v. Park Oil,
Inc., 385 A.2d 147, 149 (Del. Ch. 1978).
6
inducement fails to state a claim under Rule 12(b)(6) because Ms. Morgan failed to plead
the existence of a fiduciary relationship between herself and Mr. Carpenter. In evaluating
a motion to dismiss under Rule 12(b)(6), this Court accepts the well-pleaded factual
allegations in the complaint as true, accepts even the vague allegations as well-pleaded if
they provide the defendant notice of the claim, draws all reasonably inferences in favor of
the plaintiff, and dismisses the claim only if there is not a reasonably conceivable set of
circumstances, susceptible of proof, under which the plaintiff could recover.25
Equitable fraud is broader than common law fraud and “allows courts of equity to
address fraud in all of its forms, unhampered by the formalism that traditionally limited
the common law courts.”26 To state a claim for equitable fraud, however, a plaintiff must
plead special equities, typically the existence of a special relationship between the parties
or the availability of equitable remedies.27 In the complaint, Ms. Morgan alleges that she
and Mr. Carpenter were in a fiduciary relationship by virtue of their partnership in two
Capriotti‟s franchises in Sussex County. At argument, however, she unequivocally
disclaimed any reliance on that partnership as a basis for alleging a fiduciary relationship
and explained that the fiduciary relationship with Mr. Carpenter was created by virtue of
the TPF Agreement.28
In other words, Ms. Morgan contends that Mr. Carpenter fraudulently induced her
to enter into the TPF Agreement and that the special relationship required to state a claim
25
Central Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 537 (Del.
2011).
26
Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126, 144 (Del. Ch. 2009).
27
Zutrau v. Jansing, 2014 WL 3772859, at *14 (Del. Ch. July 31, 2014).
28
See Tr. at 25-26.
7
for equitable fraud arose from that Agreement. There are at least two problems with that
argument. First, and most fundamentally, even if Ms. Morgan is correct that the TPF
Agreement created a fiduciary relationship between her and Mr. Carpenter, that
relationship could not have arisen until the TPF Agreement was signed, and therefore it
could not have existed at the time Mr. Carpenter allegedly induced Ms. Morgan to sign
the Agreement. Second, the TPF Agreement was not between Ms. Morgan and Mr.
Carpenter, but between Ms. Morgan, Turkeys, and BDK. Even if the agreement created a
special relationship between the parties, that relationship was between Ms. Morgan and
Turkeys on the one hand and BDK on the other hand. Mr. Carpenter‟s status as a
member of BDK could not bring him into a fiduciary relationship with Ms. Morgan.
The remaining claims alleged in the complaint do not provide any independent
basis for this Court to retain jurisdiction. Count I is a breach of contract claim seeking
monetary damages, which falls squarely within the jurisdiction of the Superior Court.29
Ms. Morgan‟s tortious interference and negligence claims,30 Counts II and VI, are legal
claims that – assuming Ms. Morgan proves the necessary elements of those claims – may
be remedied by an award of monetary damages.31 Similarly, the abuse of process claim
alleged in Count III is a legal claim for which there is an adequate remedy at law. 32
Finally, although this Court has jurisdiction to hear claims for breach of the implied
29
See Candlewood Timber Gp, LLC v. Pan Am. Energy, LLC, 859 A.2d 989, 998 (Del. 2004).
30
This claim appears to be one for ordinary negligence, rather than negligent misrepresentation.
To the extent Ms. Morgan was attempting to plead a claim for negligent misrepresentation, over
which this Court would have jurisdiction, that claim is equivalent to a claim for equitable fraud
and would fail for the reasons discussed above.
31
See Int’l Bus. Machines Corp. v. Comdisco, Inc., 602 A.2d 74, 79 (Del. Ch. 1991) (citing
Bowl-Mor Co., Inc. v. Brunswick Corp., 297 A.2d 61 (Del. Ch. 1972)).
32
Nicotra v. Rowe, 2000 WL 389988, at *4 (Del. Ch. Mar. 17, 2000).
8
covenant of good faith and fair dealing and for unjust enrichment when equitable
remedies are sought in connection with those claims, jurisdiction properly lies in the
Superior Court when the only requested relief is for monetary damages.33 Because Ms.
Morgan‟s remaining claims are purely legal in nature and may adequately be remedied by
an award of money damages, and because Ms. Morgan‟s sole equitable claim fails to
state a claim upon which relief can be granted, this Court has no basis to retain
jurisdiction over this action.
CONCLUSION
For the foregoing reasons, I recommend that the Court enter an order dismissing
Count IV (Equitable Fraud in the Inducement) with prejudice for failure to state a claim
under Rule 12(b)(6), and dismiss the remaining counts without prejudice for lack of
subject matter jurisdiction under Rule 12(b)(1) in order to allow Ms. Morgan to transfer
her legal claims to the Superior Court under 10 Del. C. § 1902. This is my final report
and exceptions may be taken in accordance with Rule 144.
Respectfully submitted,
/s/ Abigail M. LeGrow
Master in Chancery
33
See Kostyszyn v. Martuscelli, 2014 WL 3510676 (Del. Ch. July 14, 2014) (dismissing claim
for breach of implied covenant because no equitable remedy was sought) (Master‟s Report);
TWA Res. v. Complete Prod. Servs., Inc., 2013 WL 1304457 (Del. Super. Mar. 28, 2013)
(exercising jurisdiction over implied covenant claim); Landry v. Mabe Bridge & Shore, Inc.,
2012 WL 5944388 (Del. Super. Nov. 26, 2012) (same); Alltrista Plastics, LLC v. Rockline
Indus., Inc., 2013 WL 5210255, at *10 (Del. Super. Sept. 4, 2013) (holding that the Superior
Court has jurisdiction to hear claims for unjust enrichment); Bettis v. Premier Pool & Property
Mgmt., LLC, 2012 WL 4662225, at *4 (Del. Ch. Sept. 26, 2012) (Court of Chancery may decline
to hear unjust enrichment claim where plaintiff has adequate remedy at law).
9