Stone & Paper Investors, LLC v. Richard Blanch ( 2020 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
STONE & PAPER INVESTORS, LLC, )
individually and derivatively on behalf of)
CLOVIS HOLDINGS LLC, )
)
Plaintiff, )
)
v. ) C.A. No. 2018-0394-PAF
)
RICHARD BLANCH, VIVIANNA BLANCH, )
RED BRIDGE & STONE, LLC, BRIAN )
SKINNER, and SKINNER CAPITAL, LLC, )
)
Defendants, )
)
and )
)
CLOVIS HOLDINGS LLC, )
)
Nominal Defendant. )
_______________________________________ )
RICHARD BLANCH, RED BRIDGE & )
STONE, LLC, and CLOVIS HOLDINGS LLC, )
)
Counterclaim and Third-Party )
Plaintiffs, )
)
v. )
)
STONE & PAPER INVESTORS, LLC, JAD )
TRADING, LLC, DIAMOND CARTER )
TRADING, LLC, JOHN DIAMOND, )
KANOKPAN KHUMPOO, ALBERT CARTER, )
ELIZABETH CARTER, EISENBERG & )
BLAU, CPAS, P.C., DDK & COMPANY, LLP, )
and RICHARD EISENBERG, )
)
Counterclaim and Third-Party )
Defendants. )
MEMORANDUM OPINION
Date Submitted: March 26, 2020
Date Decided: June 29, 2020
Richard I. G. Jones, Jr., BERGER HARRIS LLP, Wilmington, Delaware; David
Lackowitz, Zaid Shukri, MOSES & SINGER LLP, New York, New York; Attorneys
for Plaintiff and Counterclaim Defendant Stone & Paper Investors, LLC and Third-
Party Defendants JAD Trading, LLC, Diamond Carter Trading, LLC, John
Diamond, Kanokpan Khumpoo, Albert Carter, and Elizabeth Carter.
Catherine Damavandi, NURICK LAW GROUP, LLC; Attorney for Defendants and
Counterclaim and Third-Party Plaintiffs Richard Blanch, Red Bridge & Stone, LLC,
and Clovis Holdings, Inc., and Defendant Vivianna Blanch.
Evan O. Williford, THE WILLIFORD FIRM LLC, Wilmington, Delaware; Attorney
for Defendants Brian Skinner and Skinner Capital, LLC.
FIORAVANTI, Vice Chancellor
This case presents a dispute among the members and managers of a Delaware
limited liability company that was created to produce and sell stone-based paper
products. The company’s non-managing member, Stone & Paper Investors, LLC
(“Stone & Paper”), alleges the company’s two managers breached their fiduciary
duties and the company’s limited liability company agreement by spending the
company’s capital on themselves while doing nothing to advance the company.
After the Court denied the defendants’ motion to dismiss the complaint, the company
and two of the defendants filed counterclaims and third-party claims alleging that
Stone & Paper and its affiliates spent the company’s capital on themselves, breached
the limited liability company agreement, committed fraud, converted company
funds, were unjustly enriched, and aided and abetted breaches of fiduciary duty.
This opinion resolves a motion to dismiss the counterclaims and third-party claims.
Under the plaintiff-friendly standard of Court of Chancery Rule 12(b)(6), the
Court concludes the counterclaims state claims for breach of contract and unjust
enrichment. The claims of fraudulent inducement, fraud, conversion, and aiding and
abetting a breach of fiduciary duty, however, are unsupported by any well-pleaded
allegations and are dismissed for failure to state a claim. Accordingly, the motion
to dismiss the counterclaims and third-party claims is granted in part and denied in
part as to the moving parties.1
I. FACTUAL BACKGROUND
The facts recited in this opinion come from Defendants Richard Blanch, Red
Bridge & Stone, LLC, and Nominal Defendant Clovis Holdings LLC’s Answer and
Affirmative Defenses to the Complaint, Counterclaim and Third Party Complaint
(the “Counterclaims” or “Countercl.”),2 the exhibit attached thereto, and the
document incorporated by reference into the Counterclaims.3
A. The Parties
Defendants Brian Skinner (“Skinner”) and Richard Blanch (“Blanch”) and
Third-Party Defendants John Diamond (“Diamond”) and Albert Carter (“Carter”)
have a history of business dealings. Among other ventures, Blanch, Skinner,
Diamond, and Carter had a business relationship with cosmetics company Maison
de Beaute, LLC (“Maison de Beaute”). In 2013, they collectively pursued a business
aimed at making paper out of stone. The entity created to conduct that business is
Clovis Holdings LLC (“Clovis” or the “Company”). Clovis is governed by a
1
As explained below, three of the Third-Party Defendants were never served with the
Counterclaims and have not appeared in this action.
2
Dkt. 64.
3
Richard Blanch, Red Bridge & Stone, LLC, and Clovis Holdings LLC are collectively
referred to as the “Counterclaim Plaintiffs.”
2
Limited Liability Company Operating Agreement as of January 1, 2014 (the “LLC
Agreement”).4
Blanch and Skinner are the two designated managers of Clovis under the LLC
Agreement. Clovis has three members: Red Bridge & Stone, LLC (“Red Bridge”)
and Skinner Capital, LLC (“Skinner Capital”) are common members, and Stone &
Paper is a preferred member. Blanch and Defendant Vivianna Blanch are affiliated
with Red Bridge. Skinner is affiliated with Skinner Capital.
Stone & Paper has two members: Diamond and non-party Carter Financial.
Diamond is a managing member of Stone & Paper. He is also a managing member
of Third-Party Defendants Diamond Carter Trading, LLC (“Diamond Carter
Trading”) and JAD Trading, LLC (“JAD Trading”). Third-Party Defendant
Kanokpan Khumpoo (“Khumpoo”), is a member of JAD Trading. She is also
married to Diamond.
Carter is a managing member of Carter Financial, and his wife, Elizabeth
Carter,5 is a member of Carter Financial. Carter is also a managing member of
4
Verified Compl. (“Compl.”) Ex. A (Dkt. 1). The LLC Agreement is incorporated by
reference into the Counterclaims. See Morrison v. Berry, 191 A.3d 268, 276 n.20 (Del.
2018) (“[W]hen a plaintiff expressly refers to and heavily relies upon documents in her
complaint, these documents are considered to be incorporated by reference into the
complaint; this is true even where the documents are not expressly incorporated into or
attached to the complaint.” (quoting Freedman v. Adams, 2012 WL 1345638, at *5 (Del.
Ch. Mar. 30, 2012), aff’d, 58 A.3d 414 (Del. 2013)).
5
Defendant Vivianna Blanch and Third-Party Defendant Elizabeth Carter will be referred
to by their full names. No disrespect is intended.
3
Diamond Carter Trading. Skinner was the Chief Operating Officer of Diamond
Carter Trading. Stone & Paper, Diamond Carter Trading, JAD Trading, Carter,
Diamond, Khumpoo, and Elizabeth Carter are collectively referred to as the
“Movants.”
Third-Party Defendants Eisenberg & Blau, CPAs (“Eisenberg & Blau”) and
its successor DDK & Company (“DDK”) are New York accounting firms that
provided accounting services to Stone & Paper and Clovis. Third-Party Defendant
Richard Eisenberg (“Eisenberg,” collectively with Eisenberg & Blau and DDK, the
“Eisenberg Parties”) is an accountant who managed Eisenberg & Blau and DDK.6
B. The Alleged Misappropriation of Clovis’s Funds
Stone & Paper contributed $3,500,000 to Clovis. That was the sole capital
investment in the Company. The parties agree the funds have been dissipated, but
they disagree as to what happened and who is to blame. Stone & Paper alleges that
Blanch and Skinner, the managers of the Company, breached their fiduciary and
contractual duties by spending the Company’s capital on personal expenses while
doing nothing to advance the Company.
6
Based on the docket, it appears that the Eisenberg Parties have not been served with the
Counterclaims and Third-Party Complaint, which would explain why they have not
appeared in this action. The only claim asserted against the Eisenberg Parties is for aiding
and abetting a breach of fiduciary duty.
4
The Counterclaims present a different narrative. They assert that Stone &
Paper’s complaint is merely a “cover up” for the Counterclaim Defendants’ own
misappropriation of Clovis’s funds.7 The Counterclaim Plaintiffs allege that Stone
& Paper’s capital contribution was in name only, and Stone & Paper treated the
assets of Clovis like a “private slush fund” for itself, Carter, Diamond, Elizabeth
Carter, Khumpoo, Diamond Carter Trading, and JAD Trading.8 The Counterclaims
allege that Stone & Paper “practically exercised board-level control” over Clovis, its
assets, and the preparation of its tax returns.9
Clovis did not directly pay all of its expenses. Instead, Clovis charged
expenses to an American Express card “managed” by Carter and held by Diamond
Carter Trading.10 Expenses for Carter, Diamond, Elizabeth Carter, Khumpoo,
Diamond Carter Trading, JAD Trading, and Maison de Beaute were comingled on
the same American Express card. When Diamond Carter Trading or JAD Trading
were low on funds, Clovis paid for Diamond Carter Trading and JAD Trading’s
American Express charges. Clovis’s funds were also used to make payments for
Diamond’s investment newsletter, an Amazon server used by Diamond Carter
Trading and JAD Trading, Diamond and Khumpoo’s personal internet and cable
7
Countercl. ¶¶ 85, 207.
8
Id. ¶ 78.
9
Id. ¶¶ 144, 188.
10
Id. ¶ 148.
5
service, charitable event sponsorships, and event tickets. The Counterclaims do not
specify whether Clovis paid for all of these items directly or did so indirectly by
reimbursing Diamond Carter Trading for charges on its American Express card.
Emails attached as an exhibit to the Counterclaims suggest the latter. The
Counterclaims allege Clovis paid more than $1,250,000 for American Express
charges “that were wholly unrelated to Clovis Holdings.”11 The Counterclaims do
not allege the dates or amounts of any of the alleged payments or American Express
charges.
The Counterclaims allege that Stone & Paper directly paid itself $10,000
monthly for a total of $110,000 from Clovis’s bank account despite providing no
services or other consideration to Clovis in return. The Counterclaims also allege
that Diamond Carter Trading and JAD Trading “took approximately $2,000,000
from Clovis Holdings for themselves.”12 The Counterclaims lack any factual
allegations describing this alleged taking of $2 million from Clovis’s funds.
The Counterclaim Plaintiffs attached to their Counterclaims a selection of
emails among Blanch, Skinner, Diamond, Carter, and Clovis’s accountants. The
emails appear to indicate that one of Clovis’s managers, Skinner, authorized several
American Express card reimbursements to Diamond Carter Trading. On August 9,
11
Id. ¶ 205.
12
Id. ¶ 169.
6
2015, Skinner, who was also the Chief Operating Officer of Diamond Carter
Trading, explained to the Company’s accountants, “here are the Clovis charges that
I put on the [Diamond Carter Trading] credit card…total of $56,876.54[.] [I]n 2014
Clovis paid $50000.00 directly to Amex on behalf of [Diamond Carter Trading].” 13
On August 31, 2015, Eisenberg asked Skinner whether a charitable donation should
be placed on the books for Clovis or Diamond Carter Trading; Diamond responded,
copying Skinner, that the donation may be placed on the books for Diamond Carter
Trading.14 On July 22, 2016, Skinner participated in an email exchange regarding
the allocations of American Express charges between Diamond Carter Trading and
Clovis.15 On February 23, 2018, Skinner explained he previously decided to have
Clovis pay American Express charges on behalf of Diamond Carter Trading, JAD
Trading, and others:
I think 2015 we had a high [Diamond Carter Trading] Amex bill..which
we decided to pay with Clovis and then use Clovis to pay the Amex
going forward (even if it was a [Diamond Carter Trading] charge
since [Diamond Carter Trading] had little funds . . . All charges for
[Diamond Carter Trading], Clovis, JAD [Trading] (Berg newsletter)
and a few times Maison [de Beaute] came from the Clovis checking
over the last few years.16
13
Id. Ex. 1 at 13 (Aug. 9, 2015 Email Chain).
14
Id. at 15 (Aug. 31, 2015 Email Chain).
15
Id. at 22 (July 22, 2016 Email Chain).
16
Id. at 39 (Mar. 20, 2018 Email Chain) (emphasis added).
7
The Counterclaims further allege that the Eisenberg Parties aided and abetted
certain of the Movants in draining Clovis of its assets and, as discussed below,
allowing Diamond to control the Company’s tax returns while keeping Skinner and
Blanch in the dark. The emails attached to the Counterclaims, however, show that
Skinner authorized numerous transactions on behalf of Clovis and informed
Eisenberg about them.
C. Clovis’s Tax Returns
From Clovis’s founding until December 2017, the Eisenberg Parties prepared
Clovis’s tax returns. The Counterclaims allege that Eisenberg had a close
relationship with Stone & Paper and would often communicate with Diamond about
Clovis’s tax returns rather than Clovis’s managers—Blanch and Skinner. The emails
attached to the Counterclaims, however, show Diamond forwarding his emails from
Eisenberg to Skinner.17 The Counterclaims accuse Stone & Paper, Diamond Carter
Trading, and JAD Trading of conspiring with the Eisenberg Parties to interfere with
the preparation of Clovis’s tax returns. For example, Stone & Paper is alleged to
have reneged on a prior agreement to reclassify certain guaranteed payments to
Blanch as loans, and then causing the Company to file a 2015 tax return that did not
17
See id. at 18 (Sept. 13, 2015 Email Chain) (Diamond forwarding Eisenberg’s questions
regarding Clovis’s tax returns to Skinner. Skinner responds, “[Eisenberg] should direct
questions about Clovis to me. Makes no sense to relay the answers.”).
8
reflect the loan reclassification. The Counterclaims allege the tax return was later
amended to reflect the payments as loans, as originally agreed.
The accounting firm of Citrin Cooperman replaced DDK for the Company’s
2017 tax filing. The Counterclaims contend that Stone & Paper continued to
exercise “board-level control” in the preparation of Clovis’s 2017 tax returns,
including by Diamond asking Citrin Cooperman not to file the tax return or to make
final decisions with Clovis until he had an opportunity to review certain issues with
his accountant.18 An email attached to the Counterclaims, however, reflects that
Citrin Cooperman invited Diamond’s participation in the preparation of Clovis’s
2017 tax return by asking Diamond about a loan between Diamond Carter Trading
and Clovis.19 Diamond responded, “I need some time to review these points with
my accountant. Please don’t file the 2017 Clovis tax return or make any final
decisions regarding these points until we give our comments.”20 The emails attached
to the Counterclaims show that Citrin Cooperman took instruction for completing
and filing Clovis’s 2017 tax return from Blanch and Skinner, not Diamond.21
Citrin Cooperman also informed Blanch that Diamond had been listed as a
managing member of Clovis on the Company’s 2014, 2015, and 2016 tax returns
18
Id. ¶¶ 188-89.
19
Id. Ex. 1 at 38 (Mar. 20, 2018 Email Chain).
20
Id.
21
See id. at 32-33 (Mar. 20, 2018 Email Chain).
9
even though only Blanch and Skinner were the sole managers of Clovis. The
Counterclaims do not allege any damages resulting from any of the Movants’
involvement in Clovis’s tax returns.
D. This Litigation
On May 31, 2018, Stone & Paper filed its Complaint. The Complaint asserted
multiple claims: a direct claim against Blanch and Skinner for breaches of the LLC
Agreement; derivative claims on behalf of Clovis against Blanch and Skinner for
breaches of the LLC Agreement and for breaches of fiduciary duty; and a derivative
claim against Skinner Capital, Red Bridge, and Vivianna Blanch for aiding and
abetting breaches of fiduciary duties. Skinner and Skinner Capital answered the
Complaint, while Blanch, Vivianna Blanch, Red Bridge, and Clovis moved to
dismiss the Complaint. On May 31, 2019, this Court denied the motion to dismiss.
On July 24, 2019, the Counterclaim Plaintiffs filed the Counterclaims. On
September 27, 2019, the Movants moved to dismiss the Counterclaims (the “Motion
to Dismiss”). On March 25, 2020, this Court held oral argument on the Motion to
Dismiss.
II. ANALYSIS
The Movants seek dismissal on two grounds. First, they argue the Court lacks
personal jurisdiction over Diamond Carter Trading and Khumpoo. Second, they
contend the Counterclaims must be dismissed in their entirety for failure to state a
10
claim. The Movants argue, in the alternative, that absent dismissal of the
Counterclaims in their entirety, the Court should order the Counterclaim Plaintiffs
to provide a more definite statement. The Movants have also moved to strike certain
allegations in the Counterclaims as immaterial, impertinent, and scandalous.
A. Motion to Dismiss for Lack of Personal Jurisdiction
Diamond Carter Trading and Khumpoo—non-Delaware residents—have
moved to dismiss under Court of Chancery Rule 12(b)(2) for lack of personal
jurisdiction. The Court is required to first decide whether it has jurisdiction over
Diamond Carter Trading and Khumpoo before it may consider other grounds for
dismissal of the claims against them. Branson v. Exide Elecs. Corp., 625 A.2d 267,
269 (Del. 1993).
When a defendant moves to dismiss a complaint pursuant to Court of
Chancery Rule 12(b)(2), the plaintiff bears the burden of showing a
basis for the court’s exercise of jurisdiction over the defendant. The
court engages in a two-step analysis: the court must first determine that
service of process is authorized by statute and then must determine that
the exercise of jurisdiction over the nonresident defendant comports
with traditional due process notions of fair play and substantial justice.
In ruling on a Rule 12(b)(2) motion, the court may consider the
pleadings, affidavits, and any discovery of record. If, as here, no
evidentiary hearing has been held, plaintiffs need only make a prima
facie showing of personal jurisdiction and “the record is construed in
the light most favorable to the plaintiff.”
Ryan v. Gifford, 935 A.2d 258, 265 (Del. Ch. 2007) (quoting Cornerstone Techs.,
LLC v. Conrad, 2003 WL 1787959, at *3 (Del. Ch. Mar. 31, 2003)).
11
The Counterclaim Plaintiffs rely upon one provision of Delaware’s long-arm
statute to establish personal jurisdiction over Diamond Carter Trading and
Khumpoo: 10 Del. C. § 3104(c)(1).22 Section 3104(c)(1) allows the Court to
exercise personal jurisdiction over any nonresident who “in person or through an
agent . . . [t]ransacts any business or performs any character of work or service in
the State[.]” “To establish personal jurisdiction pursuant to Section 3104(c)(1), a
plaintiff must demonstrate both that: (1) the nonresident transacted some sort of
business in the state, and (2) the claim being asserted arose out of that specific
transaction.” Highway to Health, Inc. v. Bohn, 2020 WL 1868013, at *3 (Del. Ch.
Apr. 15, 2020) (internal punctuation omitted). In order for this Court to exercise
jurisdiction under Section 3104(c)(1), some act must actually occur in Delaware.
Id.; Mobile Diagnostic Gp. Hldgs., LLC v. Suer, 972 A.2d 799, 804 (Del. Ch. 2009).
“Diamond Carter Trading is a New York limited liability company with a
principal place of business in New York, New York.”23 The Counterclaim Plaintiffs
argue that Diamond Carter Trading is subject to personal jurisdiction in Delaware
because it engaged in transactions with Clovis, a Delaware entity.24 The
Counterclaim Plaintiffs do not allege that any of the transactions described in the
22
Countercl. Pls.’ Ans. Br. 19 (Dkt. 93).
23
Countercl. ¶ 92.
24
Countercl. Pls.’ Ans. Br. 20 (citing Countercl. Ex. 1).
12
Counterclaims or in Exhibit 1 to the Counterclaims took place in Delaware. Without
any factual allegations that an act occurred in Delaware, this Court cannot exercise
personal jurisdiction over Diamond Carter Trading under Section 3104(c)(1). See
Mobile Diagnostic, 972 A.2d at 804.25
The Counterclaims do not allege—and the Counterclaim Plaintiffs do not
argue—that Khumpoo personally engaged in any act in Delaware. Instead, the
Counterclaim Plaintiffs’ only basis for personal jurisdiction over Khumpoo is that
she holds a membership interest in JAD Trading. The Counterclaim Plaintiffs argue
this is sufficient to establish personal jurisdiction over Khumpoo because JAD
Trading is alleged to have committed wrongdoing in Delaware.26 Contrary to the
Counterclaim Plaintiffs’ argument, however, the Counterclaims do not allege that
25
The Counterclaim Plaintiffs separately argue that “if jurisdictional discovery were to be
conducted, it would be revealed that Albert Carter is a resident of Delaware, and would
have transacted business on behalf of Diamond Carter Trading in this state.” Countercl.
Pls.’ Ans. Br. 20. This allegation does not appear in the Counterclaims. The Counterclaim
Plaintiffs have not introduced any evidence into the record to support this allegation, and
the Counterclaim Plaintiffs made no effort to conduct jurisdictional discovery.
Accordingly, these allegations are mere speculation and cannot form the basis for personal
jurisdiction over Diamond Carter Trading. See Picard v. Wood, 2012 WL 2865993, at *2
(Del. Ch. July 12, 2012) (not crediting allegations that defendant “may regularly conduct
business in Delaware” as sufficient to justify jurisdictional discovery). Even if this
unpleaded allegation can be credited, the Counterclaim Plaintiffs still fail to show a nexus
between general transactions of business by Diamond Carter Trading and the
Counterclaims, thereby failing the second requirement for establishing personal
jurisdiction under Section 3104(c)(1). See Highway to Health, 2020 WL 1868013, at *3
(observing that under Section 3104(c)(1), the claim being asserted must arise out of the
specific transaction that occurred in Delaware).
26
Countercl. Pls.’ Ans. Br. 20.
13
JAD Trading committed any acts in Delaware. JAD Trading’s principal place of
business is in Florida. JAD Trading is subject to personal jurisdiction in this action
because it is a Delaware LLC. Khumpoo’s mere membership in a Delaware entity
is not a basis to confer personal jurisdiction. See In re Gen. Motors (Hughes)
S'holder Litig., 2005 WL 1089021, at *22 (Del. Ch. May 4, 2005) (mere ownership
of stock is insufficient to establish personal jurisdiction under Section 3104(c)(1)),
aff’d, 897 A.2d 162 (Del. 2006); Picard, 2012 WL 2865993, at *1 (“It is well-settled
under Delaware law that mere membership in a Delaware limited partnership, absent
additional considerations, is insufficient to confer personal jurisdiction.”). The
Counterclaim Plaintiffs have not made a prima facie showing that the Court has
personal jurisdiction over Khumpoo.
Because the Counterclaim Plaintiffs have not established a statutory basis for
personal jurisdiction over Diamond Carter Trading and Khumpoo, the Court need
not address whether jurisdiction over them would satisfy due process. The
Counterclaims alleged against Diamond Carter Trading and Khumpoo are dismissed
for lack of personal jurisdiction under Court of Chancery Rule 12(b)(2).
B. Motion to Dismiss for Failure to State a Claim
The pleading standards governing a motion to dismiss under Court of
Chancery Rule 12(b)(6) are minimal. Central Mortg. Co. v. Morgan Stanley Mortg.
Cap. Hldgs. LLC, 27 A.3d 531, 536 (Del. 2011). On a motion to dismiss for failure
14
to state a claim:
(i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are well-pleaded if they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the non-moving party; and ([iv]) dismissal is inappropriate
unless the plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible to proof.
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (internal citations and
quotation marks omitted); accord Central Mortg., 27 A.3d at 536. Although the
Court must accept as true the well-pleaded allegations in the Counterclaims, the
Court “need not accept inferences or factual conclusions unsupported by specific
allegations of fact.” Transdigm Inc. v. Alcoa Glob. Fasteners, Inc., 2013 WL
2326881, at *4 (Del. Ch. May 29, 2013). “[A] trial court is required to accept only
those ‘reasonable inferences that logically flow from the face of the complaint’ and
‘is not required to accept every strained interpretation of the allegations proposed by
the plaintiff.’” In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 168 (Del.
2006) (quoting Malpiede v. Townson, 780 A.2d 1075, 1082 (Del. 2001)).
“Moreover, a claim may be dismissed if allegations in the complaint or in the
exhibits incorporated into the complaint effectively negate the claim as a matter of
law.” Malpiede, 780 A.2d at 1083.
1. The Counterclaims State a Claim for Breach of the LLC
Agreement.
15
Count I of the Counterclaims asserts that Stone & Paper violated Clovis’s LLC
Agreement by “engag[ing] in a myriad of self-interested transactions to plunder the
assets of Clovis Holdings, and transfer those assets to other entities and persons,”
including the other Movants.27 The Movants argue that Count I must be dismissed
because the Counterclaim Plaintiffs have failed to allege any contractual duty on the
part of Stone & Paper that has been breached.28
“[T]o survive a motion to dismiss for failure to state a breach of contract
claim, the plaintiff must demonstrate: first, the existence of the contract, whether
express or implied; second, the breach of the obligation imposed by that contract;
and third, the resultant damage to the plaintiff.” VLIW Tech., LLC v. Hewlett-
Packard Co., 840 A.2d 606, 612 (Del. 2003).
The Movants argue Count I should be dismissed because the Counterclaims
do not identify a specific provision of the LLC Agreement that Stone & Paper has
allegedly breached.29 The Movants acknowledge, however, that any claim alleging
27
Countercl. ¶ 216.
28
Movants’ Opening Br. 13 (Dkt. 83).
29
At oral argument, counsel for the Counterclaim Plaintiffs identified Sections 4.7, 4.8,
4.9, 5.1, and 6.1 of the LLC Agreement as provisions that have been allegedly breached.
Oral Arg. Tr. 41-47 (Dkt. 143) (Damavandi). The Counterclaims do not give rise to a claim
for breach of any of these sections. Section 4.7 states procedures for succession in the
event that Blanch or Skinner cease to be a manager of the Company. Compl. Ex. A § 4.7.
The Counterclaims do not plead that either Blanch or Skinner ever ceased being managers
of the Company. Cf. Countercl. ¶ 89 (“Counterclaim and Third Party Plaintiff Richard
Blanch is a Manager of Clovis Holdings; Brian Skinner is the other Manager of Clovis
Holdings.”). Thus, the Counterclaims have failed to state a breach of Section 4.7 because
16
Stone & Paper misappropriated Clovis’s funds by receiving a return of its capital
contribution would be governed by Section 9.6 of the LLC Agreement.30 Section
9.6 provides, in pertinent part, that “Stone & Paper [] may request the return of its
initial Capital Contribution provided such amounts are available and approved by
the Board consisting of at least two (2) Managers.”31
Although the factual allegations in the Counterclaims are not a model of
clarity, in viewing the Counterclaims and the documents incorporated by reference
as a whole, the Court concludes that the allegations put the Counterclaim Defendants
Blanch and Skinner never ceased to be managers of the Company. Section 4.8 grants the
managers permission to engage in activities outside of those relating to the Company and
explains that neither the Company nor members have the right to share or participate in the
managers’ outside activities. Compl. Ex. A § 4.8. Section 4.9 states that the managers will
receive reimbursement from the Company for reasonable out-of-pocket expenses. Id. §
4.9. Sections 4.8 and 4.9 thus only govern the relationship between the managers and the
Company and do not impose any obligations on Stone & Paper. Section 5.1 lists “Major
Decisions” that require written approval by the board and the preferred members and
contains no language imposing obligations on Stone & Paper. Id. § 5.1 (“Major Decisions”
include consolidation, instituting bankruptcy proceedings, settling any claims against a
member, entering into employment agreements, borrowing money other than in the
ordinary course of business, and admitting new members). Similarly, Section 6.1 is a
limitation of liability clause stating that members of the Company shall not be obligated
for debts of the Company solely by reason of being a member of the Company. Id. § 6.1.
Section 6.1 does not impose any obligations on Stone & Paper.
30
In their opening brief, the Movants contend that the breach of contract and unjust
enrichment claims “rel[y] on the same factual basis, and seek the same damages,” and are
premised upon Stone & Paper misappropriating Clovis’s funds “by receiving a return of
some [of] its initial capital contribution.” Movants’ Opening Br. 34. They then argue that
any claim concerning a return of capital is governed by Section 9.6 of the LLC Agreement.
Id.
31
Compl. Ex. A § 9.6.
17
on notice of the breach of contract claim. VLIW Tech., 840 A.2d at 611 (“An
allegation, though vague or lacking in detail, is nevertheless ‘well-pleaded’ if it puts
the opposing party on notice of the claim being brought against it.”).
Under the plaintiff-friendly standard of Rule 12(b)(6), the Counterclaims
adequately allege that Stone & Paper engaged in self-interested transactions by
taking assets from Clovis without authority. The Counterclaims allege Stone &
Paper misappropriated Clovis’s funds to pay Diamond Carter Trading’s American
Express charges for items not pertaining to Clovis. Diamond is a managing member
of Diamond Carter Trading, JAD Trading, and Stone & Paper. The Counterclaims
allege that Diamond Carter Trading and JAD Trading “took approximately
$2,000,000 from Clovis Holdings for themselves.”32 The parties acknowledge that
the only capital in the Company came from Stone & Paper’s $3,500,000 initial
capital contribution. Thus, it is reasonably conceivable that Stone & Paper engaged
in self-interested transactions that removed a portion of its initial capital contribution
from the Company without the requisite approval under, and therefore in breach of,
Section 9.6 of the LLC Agreement.
Drawing all reasonable inferences in Clovis’s favor, the Court cannot
conclude at this stage that Clovis “would not be entitled to recover under any
32
Id. ¶ 169.
18
reasonably conceivable set of circumstances susceptible to proof” on its claim for
breach of contract. Savor, 812 A.2d at 897; see VLIW Tech., 840 A.2d at 611 (“In
alleging a breach of contract, a plaintiff need not plead specific facts to state an
actionable claim. Rather, a complaint for breach of contract is sufficient if it
contains ‘a short and plain statement of the claim showing that the pleader is entitled
to relief.’ Such a statement must only give the defendant fair notice of a claim and
is to be liberally construed.”); see also Frank Investments Ranson, LLC v. Ranson
Gateway, LLC, 2016 WL 769996, at *6-7 & n.64 (Del. Ch. Feb. 26, 2016)
(“Although the Complaint is far from a model of clarity, it contains facts which,
when viewed in a light most favorable to Plaintiffs, make it reasonably conceivable
that there was mutual assent,” [and] “the Court cannot conclude that the Complaint
fails to meet Rule 12(b)(6)’s threshold on the question of whether there was mutual
consent.”).
2. The Counterclaims Fail to State Claims for Fraudulent
Inducement and Fraud.
Counts II and III allege claims for fraudulent inducement and fraud against
Stone & Paper, Carter, and Diamond. “Under Delaware law, the elements of fraud
and fraudulent inducement are the same.” Great Hill Equity P’rs IV, LP v. SIG
Growth Equity Fund I, LLLP, 2018 WL 6311829, at *31 (Del. Ch. Dec. 3, 2018).
To survive a motion to dismiss, a plaintiff asserting a fraud-based claim must
sufficiently plead:
19
(1) that defendant made a false representation, usually one of fact; (2)
with the knowledge or belief that the representation was false, or with
reckless indifference to the truth; (3) with an intent to induce the
plaintiff to act or refrain from acting; (4) that plaintiff's action or
inaction was taken in justifiable reliance upon the representation; and
(5) damage to the plaintiff as a result of her reliance on the
representation.
GreenStar IH Rep, LLC v. Tutor Perini Corp., 2017 WL 5035567, at *10 (Del. Ch.
Oct. 31, 2017) (quoting Fortis Advisors LLC v. Dialog Semiconductor PLC, 2015
WL 401371, at *6 (Del. Ch. Jan. 30, 2015)), aff’d, 186 A.3d 799 (Del. 2018).
Allegations of fraud must be pleaded with particularity. Ct. Ch. R. 9(b). An
allegation of fraud is legally sufficient under Rule 9(b) if it informs the parties of the
precise transactions at issue and the fraud alleged to have occurred in those
transactions, so as to place the parties on notice of the precise misconduct with which
they are charged. Kahn Bros. & Co., Inc. Profit Sharing Plan & Tr. v. Fischbach
Corp., 1989 WL 109406, at *4 (Del. Ch. Sept. 19, 1989); see also ABRY P’rs V, L.P.
v. F & W Acq. LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006) (“Essentially, the plaintiff
is required to allege the circumstances of the fraud with detail sufficient to apprise
the defendant of the basis for the claim.”). A claimant can satisfy Rule 9(b) by
alleging “(1) the time, place, and contents of the false representation; (2) the identity
of the person making the representation; and (3) what the person intended to gain by
making the representations.” ABRY, 891 A.2d at 1050.
The gravamen of the fraud and fraudulent inducement claims is that Stone &
20
Paper, Diamond, and Carter made material misrepresentations to Red Bridge and
Blanch regarding: (a) the intent of Stone & Paper’s $3,500,000 capital contribution
to Clovis, (b) the intended management of Clovis under the LLC Agreement, and
(c) their insisting that Vivianna Blanch be the sole owner of Red Bridge. According
to the Counterclaims, Blanch and Red Bridge “would not have entered into a
business relationship at all with Stone & Paper, John Diamond, and Albert Carter, if
Red Bridge and Richard Blanch had known that Clovis’s capitalization and [LLC]
Agreement were illusory.”33
The allegations in support of Counts II and III do not satisfy Court of
Chancery Rule 9(b).34 They do not plead the time, place, and contents of any
allegedly false representations. This lack of particularity is “fatal to the fraud
counterclaim as a matter of law.” GreenStar, 2017 WL 5035567, at *11 (dismissing
fraud claim where complaint failed to how, when, and where the alleged fraudulent
statements were made, to whom they were made, and how they were fraudulent);
see also MHS Capital LLC v. Goggin, 2018 WL 2149718, at *9 (Del. Ch. May 10,
2018) (“Rule 9(b) is not satisfied by the allegation that, at some unspecified time
between MHS’s investment in 2009 and the usurpation of business opportunities in
33
Id. ¶ 243.
34
The Counterclaim Plaintiffs’ brief does not address Rule 9(b). Instead, it asserts—with
no citation to any legal authority—that “Counts II and III were sufficiently pleaded in
accordance with Ct. Ch. R. 12(b)(6).” Countercl. Pls.’ Ans. Br. 15.
21
April 2015, Goggin made false representations and omitted material facts.”).
The allegation that Stone & Paper never intended to permit Skinner and
Blanch to serve as the managers of Clovis is conclusory. The LLC Agreement
provides for a two-member board of managers.35 The LLC Agreement expressly
names Blanch and Skinner as the managers.36 The Counterclaims allege that Skinner
and Blanch served as managers of Clovis at all times. There are no allegations that
Stone & Paper ever served as a manager or held itself out as a manager of Clovis.
The Court concludes that the well-pleaded allegations of the Counterclaims do not
support a reasonable inference that Stone & Paper had the authority to act as a
manager of Clovis. Therefore, the representation that Skinner and Blanch would be
the managers of Clovis was not false. Thus, it could not be the basis of a claim for
fraud. See Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126, 139-40 (Del. Ch.
2009) (rejecting fraud claim where representation was accurate when made).37
35
Compl. Ex. A §4.1(a).
36
Id. § 1.1(v).
37
Although the Counterclaims add the word “omissions” to the term “misrepresentations,”
the alleged omissions are merely the failure to disclose that the representations upon which
the Counterclaim Plaintiffs relied was false. In other words, the Counterclaim Plaintiffs
are simply recharacterizing misrepresentations as omissions. See generally Prairie Cap.
III, L.P. v. Double E Hldg. Corp., 132 A.3d 35, 51-55 & n.1 (Del. Ch. 2015) (discussing
how misrepresentations are reframed as omissions). There is no allegation that the
agreement to enter into the LLC Agreement was anything other than an arms’ length
transaction. Therefore, there was no affirmative duty for Carter or Diamond to speak. See
id. at 52 (“Because a party in an arms’ length contractual setting begins the process without
any affirmative duty to speak, any claim of fraud in an arms’ length setting necessarily
depends on some form of representation. A fraud claim in that setting cannot start from an
22
Counts II and III fail for the additional reason that they are an improper
attempt to bootstrap the breach of contract claim in Count I into fraudulent
inducement and fraud claims. With the exception of the allegations concerning the
demand that Vivianna Blanch serve as the sole member of Red Bridge, there are no
allegations of fraud in the Counterclaims distinct from the breach of contract
Counterclaims other than conclusory assertions that false representations were
involved. The breach of contract claim is based on the assertion that Stone & Paper
acted as a board-level manager and misappropriated the funds it invested in Clovis.
The fraud claims allege that Stone & Paper, Diamond, and Carter never intended
that Blanch and Carter would be the managers of Clovis and that Stone & Paper
removed the funds that it invested in Clovis.
A claimant “cannot ‘bootstrap’ a claim of breach of contract into a claim of
fraud merely by alleging that a contracting party never intended to perform its
obligations.” Narrowstep, Inc. v. Onstream Media Corp., 2010 WL 5422405, at *15
(Del. Ch. Dec. 22, 2010) (internal citations and quotation marks omitted); see also
MicroStrategy Inc. v. Acacia Research Corp., 2010 WL 5550455, at *17 (Del. Ch.
Dec. 30, 2010) (“[A] plaintiff cannot state a claim for fraud simply by adding the
term ‘fraudulently induced’ to a complaint or alleging that the defendant never
omission.”). The Counterclaim Plaintiffs do not argue that there is any difference between
the alleged misrepresentations and omissions.
23
intended to comply with the agreement at issue at the time the parties entered into
it.”). “Couching an alleged failure to comply with the [LLC Agreement] as a failure
to disclose an intention to take certain actions arguably inconsistent with that
agreement is exactly the type of bootstrapping this Court will not entertain.” BAE
Sys. N. Am. Inc. v. Lockheed Martin Corp., 2004 WL 1739522, at *8 (Del. Ch. Aug.
3, 2004).
The remaining alleged misrepresentation is not asserted as a breach of
contract. The Counterclaims allege that Stone & Paper, Carter, and Diamond
insisted that Vivianna Blanch be the sole member of Red Bridge in order to protect
the assets of Clovis from Blanch’s creditors. That assertion does not state a claim
for fraud because it is not alleged to have been a false statement of fact. See York
Linings v. Roach, 1999 WL 608850, at *3 (Del. Ch. July 28, 1999) (dismissing fraud
claims where the counterclaim did not allege the representations were false at the
time they were made).
For the above reasons, this Court concludes that Counts II and III of the
Counterclaims fail to state a claim for fraud.
3. The Counterclaims Fail to State a Claim for Conversion.
Count IV of the Counterclaims generally alleges that the Movants converted
24
Clovis’s “financial assets.”38 The Movants are alleged to have done so by
“transferr[ing] and divert[ing] Clovis Holdings’ assets to themselves, directly or
indirectly, without the consent of Clovis Holdings.”39 Conversion is “any distinct
act of dominion wrongfully exerted over the property of another, in denial of [the
plaintiff’s] right, or inconsistent with it.” Drug, Inc. v. Hunt, 168 A. 87, 93 (Del.
1933). “Generally, the necessary elements for a conversion under Delaware law are
that a plaintiff had a property interest in the converted goods; that the plaintiff had a
right to possession of the goods; and that the plaintiff sustained damages.” Goodrich
v. E.F. Hutton Gp., Inc., 542 A.2d 1200, 1203 (Del. Ch. 1988).
Although all three Counterclaim Plaintiffs assert this claim, Count IV only
alleges the conversion of funds belonging to Clovis. There are no well-pleaded
allegations that any Counterclaim Defendant converted anything belonging to
Blanch or Red Bridge,40 and Blanch and Red Bridge allege no factual or legal basis
38
Countercl. ¶ 257.
39
Id. ¶ 259.
40
The conversion count asserts a conclusory allegation that Red Bridge and Blanch were
deprived of “their rights and interests in Clovis Holdings and its assets.” Countercl. ¶ 258.
Blanch is not a member of Clovis and has not alleged any facts to support an assertion that
he has any rights or interests in Clovis or its assets. Nor is there any allegation that Red
Bridge’s membership interests were reduced or that Red Bridge had any individual right to
the Company’s assets. A member of a limited liability company has no interest in the
specific assets owned by the limited liability company. 6 Del. C. § 18-701; see also In re
Opus E., L.L.C., 480 B.R. 561, 575 (Bankr. D. Del. 2012) (explaining that just as a
shareholder has no personal or individual right of action against a third party for acts
causing interest to a corporation, a member (or the member’s trustee) does not have a
property interest in the limited liability company’s property).
25
for their possessory right to Clovis’s financial assets.41 Thus, Blanch and Red Bridge
fail to allege the first two elements of a conversion claim. See Weiss v. Leewards
Creative Crafts, Inc., 1993 WL 155493, at *6 (Del. Ch. Apr. 29, 1993) (dismissing
conversion claim where the plaintiff failed to show his cognizable property right and
right to possession of the allegedly converted goods), aff’d, 633 A.2d 372 (Del.
1993). Accordingly, Blanch and Red Bridge fail to state a claim as to them
personally.
As to Clovis, the conversion claim fails because it is a claim for the payment
of money.
Generally, an action in conversion will not lie to enforce a claim for the
payment of money . . . . [T]he narrow exception recognized in other
jurisdictions . . . allows a claim for conversion of money “only when it
can be described or identified as a specific chattel, but not where an
indebtedness may be discharged by the payment of money generally.”
Thus, “an action for conversion of money will lie only where there is
an ‘obligation to return the identical money’ delivered by the plaintiff
to the defendant.”
Kuroda v. SPJS Hldgs., L.L.C., 971 A.2d 872, 890 (Del. Ch. 2009) (quoting
Goodrich, 542 A.2d at 1203); see also Xu Hong Bin v. Heckmann Corp., 2009 WL
3440004, at *13 (Del. Ch. Oct. 26, 2009) (same). The Counterclaim Plaintiffs do
not plead that the conversion claim falls within the narrow exception that the
Movants have an obligation to return the “identical money” alleged misused.
41
The Counterclaim Plaintiffs did not address this argument in their answering brief. See
Countercl. Pls.’ Ans. Br. 15-16.
26
Therefore, the conversion claim cannot be enforced.
In their answering brief, the Counterclaim Plaintiffs seek to recast Count IV,
arguing that the alleged use of Clovis’s funds to purchase a newsletter, a computer
server, and event tickets constituted acts of conversion and that Clovis now
maintains a property interest in those goods and services.42 The Counterclaim
Plaintiffs’ attempt to amend their Counterclaims through their brief is improper.
“Arguments in briefs do not serve to amend the pleadings.” Cal. Pub. Emps. Ret.
Sys. v. Coulter, 2002 WL 31888343, at *12 (Del. Ch. Dec. 18, 2002). A plaintiff
“cannot supplement the complaint through its brief.” MCG Capital Corp. v. Maginn,
2010 WL 1782271, at *5 (Del. Ch. May 5, 2010); see also Orman v. Cullman, 794
A.2d 5, 28 n.59 (Del. Ch. 2002) (“Briefs relating to a motion to dismiss are not part
of the record and any attempt contained within such documents to plead new facts
or expand those contained in the complaint will not be considered.”). Accordingly,
Count IV of the Counterclaims is dismissed for failure to state a claim for
conversion.
4. The Counterclaims, in Part, Fail to State a Claim for Unjust
Enrichment.
In Count V of the Counterclaims, Clovis, Red Bridge, and Blanch assert a
claim for unjust enrichment against all of the Movants. Count V alleges that
42
Countercl. Pls.’ Ans. Br. 16.
27
Movants “obtained benefits to which they were not entitled, including excessive
compensation and diversion of Clovis Holdings’ assets to themselves.”43 The
Counterclaim Plaintiffs assert that the Movants “have been solely enriched by their
actions, at the expense of Clovis Holdings, Red Bridge and Richard Blanch” and that
“[i]t would be inequitable” for the Movants “to retain the improperly obtained
benefits, for which there was no consideration.”44 The Movants argue the unjust
enrichment claims must be dismissed because: (1) the parties’ relationship is
governed by contract, which precludes an unjust enrichment claim; (2) the
allegations are conclusory; and (3) Red Bridge and Blanch have not alleged any
impoverishment as to themselves.45
Unjust enrichment is the “unjust retention of a benefit to the loss of another,
or the retention of money or property of another against the fundamental principles
of justice or equity and good conscience.” Nemec v. Shrader, 991 A.2d 1120, 1130
(Del. 2010). The elements of unjust enrichment are (i) an enrichment, (ii) an
impoverishment, (iii) a relation between the enrichment and impoverishment, (iv)
the absence of justification, and (v) the absence of a remedy provided by law. Id.;
Jackson Nat. Life Ins. Co. v. Kennedy, 741 A.2d 377, 393 (Del. Ch. 1999); Cantor
43
Countercl. ¶ 266.
44
Id. ¶ 268.
45
Movants’ Opening Br. 33-37.
28
Fitzgerald, L.P. v. Cantor, 724 A.2d 571, 585 (Del. Ch. 1998). Courts developed
unjust enrichment as a theory of recovery to remedy the absence of a formal contract.
ID Biomedical Corp. v. TM Tech., Inc., 1995 WL 130743, at *15 (Del. Ch. Mar. 16,
1995); see also The Frederick Hsu Living Tr. v. ODN Hldg. Corp., 2017 WL
1437308, at *42 (Del. Ch. Apr. 14, 2017) (“As its name implies, unjust enrichment
is a flexible doctrine that a court can deploy to avoid injustice.”).
Count V does not allege facts to support a claim that either Red Bridge or
Blanch has been impoverished by the enrichment of the Movants.46 As with the
conversion claim, the unjust enrichment claim alleges misappropriation of Clovis’s
funds, not funds belonging to Red Bridge or Blanch. Accordingly, the unjust
enrichment claims asserted by Blanch and Red Bridge are dismissed for failure to
allege that Blanch and Red Bridge were impoverished.
The Movants also argue the unjust enrichment claims must be dismissed
because the parties’ relationship is governed by contract. They argue the unjust
enrichment claim relies upon the same factual basis as the breach of contract claim.47
46
The Counterclaim Plaintiffs did not address this argument in their answering brief. See
Countercl. Pls.’ Ans. Br. 16-17.
47
Movants’ Opening Br. 34. Compare Countercl. ¶ 216 (Count I) (alleging “Stone & Paper
engaged in a myriad of self-interested transactions to plunder the assets of Clovis Holdings,
and transfer those assets to other entities and persons, such as Diamond Carter Trading,
JAD Trading, [Diamond, Khumpoo, Carter,] and Elizabeth Carter”), and ¶ 217 (“Stone &
Paper investors were contractually prohibited from engaging in such wrongful conduct.
Each of the transactions moving funds from Clovis Holdings for the benefit of Diamond
Carter Trading, JAD Trading, [Diamond, Khumpoo, Carter,] and Elizabeth Carter were
29
The Movants argue, therefore, that the contract is the sole measure of Counterclaim
Plaintiffs’ rights.
In evaluating the unjust enrichment claim, the Court must first determine
whether a contract governs the parties’ relationship. If a contract comprehensively
governs the relevant relationship between the parties, then the contract must provide
the measure of the plaintiff’s rights, and any claim of unjust enrichment will be
denied. Great Hill Equity P’rs IV, LP v. SIG Growth Equity Fund I, LLLP, 2014
WL 6703980, at *27 (Del. Ch. Nov. 26, 2014). “[T]his Court routinely dismisses
unjust enrichment claims that are premised on an ‘express, enforceable contract that
controls the parties’ relationship’ because damages is an available remedy at law for
breach of contract.” Veloric v. J.G. Wentworth, Inc., 2014 WL 4639217, at *19 (Del.
Ch. Sept. 18, 2014) (quoting Kuroda, 971 A.2d at 891); see also, e.g., Doberstein
v. G-P Indus., Inc., 2015 WL 6606484, at *6 (Del. Ch. Oct. 30, 2015) (dismissing
unjust enrichment claim under Rule 12(b)(6) where plaintiff had not “identified any
factual basis for her unjust enrichment claim independent of the allegations relating
to her breach of contract claim” and “the Agreement provides the measure of
[plaintiff’s] rights here”). Furthermore, a plaintiff cannot use “a claim for unjust
void and must be rescinded”), with Countercl. ¶ 266 (Count V) (“Stone & Paper Investors
[and the other Movants] obtained benefits to which they were not entitled, including
excessive compensation and diversion of Clovis Holdings’ assets to themselves”), ¶ 267
(“Stone & Paper Investors [and the other movants] have been solely enriched by their
actions, at the expense of Clovis Holdings, Red Bridge and Blanch”).
30
enrichment to extend the obligations of a contract to [persons] who are not parties to
the contract.” Kuroda, 971 A.2d at 892.
Based upon the allegations of the Counterclaims and the arguments presented
at this stage of the proceedings, the Court concludes that, with one exception, the
Counterclaim Plaintiffs have not identified a factual basis for the unjust enrichment
claim independent of the allegations supporting the breach of contract claim. The
essence of the unjust enrichment claim is that the Movants removed funds from
Clovis and diverted those funds to themselves. That is the same basis for the breach
of contract claim, which the Court has concluded could constitute a breach of Section
9.6 of the LLC Agreement. The one exception concerns the allegation that “Stone
& Paper [] paid itself $10,000 monthly in ACH payments . . . from Clovis Holdings’
bank account, for a total of $110,000[,] . . . despite providing no services or other
consideration to Clovis Holdings in return.”48 As to this allegation of unjust
enrichment, the Court cannot conclude at this stage that the LLC Agreement
48
Countercl. ¶¶ 165-66. The Counterclaim Plaintiffs also contend that the unjust
enrichment claim does not fail when the contract itself arose from wrongdoing such as a
breach of fiduciary duty or fraud. Countercl. Pls.’ Ans. Br. 17. This argument is
unpersuasive. First, as explained earlier in this opinion, the Counterclaim Plaintiffs have
failed to state a claim for fraudulent inducement or fraud. Second, they have not argued
that the LLC Agreement was the product of a breach of fiduciary duty. Therefore, this case
differs from other situations where the unjust enrichment claim may survive because “the
validity of the contract is in doubt or uncertain,” RDUC Peninsula Millsboro, LLC v.
Mayer, 2014 WL 4261988, at *5 (Del. Ch. Aug. 29, 2014), or that “the contract itself is the
unjust enrichment,” PR Acquisitions, LLC v. Midland Funding, LLC, 2018 WL 2041521,
at *14 (Del. Ch. Apr. 30, 2018).
31
comprehensively governs the relationship between Clovis and Stone & Paper. See
MCG Capital, 2010 WL 1782271, at *24 (allowing an unjust enrichment claim to
survive dismissal where the parties’ contract does not appear to govern the payment
challenged). Thus, the allegation that Stone & Paper received monthly payments for
no consideration in return supports a claim for unjust enrichment against Stone &
Paper. See In re Molycorp, Inc. S’holder Deriv. Litig., 2015 WL 3454925, at *35
(Del. Ch. May 27, 2015) (“Unjust enrichment claims fail where a validly negotiated
contract governs the contested matter, although the Court can be wary of granting a
motion to dismiss when it is not clear that the contract governs the entire dispute.”);
Narrowstep, 2010 WL 5422405, at *16 (finding complaint alleged sufficient facts
for the court to plausibly infer that contract documents did not comprehensively
govern the relationship between the parties as to some issues). Therefore, the unjust
enrichment claim as to $110,000 in compensation to Stone & Paper cannot be
dismissed.49
The remainder of Count V is dismissed as to all other Movants because their
alleged enrichment arises solely from the contractual relationship between Clovis
and Stone & Paper. Other than the allegations concerning the “excessive
49
If it is later determined that the LLC Agreement comprehensively governs the
relationship between Clovis and Stone & Paper, the unjust enrichment claim is subject to
dismissal for failure to satisfy the fifth element of the claim. See Nemec, 991 A.2d at 1130-
31 (Del. 2010) (affirming dismissal of unjust enrichment claim where relationship was
governed by contract).
32
compensation” to Stone & Paper, the unjust enrichment count alleges that all of the
Movants diverted Clovis’s assets to themselves. The allegations of asset transfers
from Clovis that form the basis of the unjust enrichment claim are contract claims
governed by the LLC Agreement. Accordingly, the unjust enrichment claim as to
all Movants other than Stone & Paper must be dismissed. Kuroda, 971 A.2d at 892;
see also AM Gen. Hldgs. LLC v. Renco Gp., Inc., 2013 WL 5863010, at *38 (Del.
Ch. Oct. 31, 2013) (“[C]ontractual remedies remain the sole remedies even if the
claim of unjust enrichment is alleged against a party who is not a party to the
contract.”).50
5. The Counterclaims Fail to State a Claim for Aiding and
Abetting a Breach of Fiduciary Duty.
Count VI of the Counterclaims alleges that all of the third-party defendants
aided and abetted Stone & Paper’s breaches of fiduciary duty to Clovis. The
elements of a claim for aiding and abetting a breach of fiduciary duty are: (1) the
existence of a fiduciary relationship, (2) a breach of the fiduciary's duty, (3) knowing
participation in that breach by the defendants, and (4) damages proximately caused
by the breach. Malpiede, 780 A.2d at 1096.
“[I]t is well settled that only managing members or controllers owe fiduciary
50
Because the unjust enrichment claims against the non-Stone & Paper Movants are
dismissed based on the contractual relationship Stone & Paper and Clovis, the Court does
not address the argument that the unjust enrichment allegations are conclusory and fail to
state a claim.
33
duties by default in LLCs.” Beach to Bay Real Estate Ctr. LLC v. Beach to Bay
Realtors Inc., 2017 WL 2928033, at *5 (Del. Ch. July 10, 2017). Put differently,
“[m]anagers and managing members owe default fiduciary duties; passive members
do not.” Feeley v. NHAOCG, LLC, 62 A.3d 649, 662 (Del. Ch. 2012). The
Counterclaim Plaintiffs fail to show how Stone & Paper, as a non-managing
member, owed fiduciary duties to Clovis. The Counterclaim Plaintiffs ask the Court
to find that Stone & Paper usurped the role of a manager to Clovis through its actions
of “practically exercis[ing] board-level control” over the Company.51 As explained
above, that allegation is conclusory. It is also contradicted by the allegations in the
Counterclaims that Blanch and Skinner are and have always been the only managers
of Clovis.52 Accordingly, the Counterclaims lack well-pleaded allegations that
Stone & Paper assumed the role of a managing member of Clovis with attendant
fiduciary duties to Clovis. Because the Counterclaims fail to allege a fiduciary duty
that could serve as the grounds for an underlying breach of fiduciary duty, the aiding
and abetting claim fails as a matter of law. E.g., Weil v. Morgan Stanley DW Inc.,
877 A.2d 1024, 1039 (Del. Ch. 2004) (“[H]aving failed to state an underlying claim
51
Countercl. ¶ 144, see also id. ¶ 188 (alleging Stone & Paper, through Diamond,
“exercised board-level control in the preparation of the tax returns at Citrin Cooperman”).
52
Countercl. ¶ 89 (“Counterclaim and Third Party Plaintiff Richard Blanch is a Manager
of Clovis Holdings; Brian Skinner is the other Manager of Clovis Holdings.”); see also
Oral Arg. Tr. 44 (Damavandi).
34
for breach of fiduciary duty against Morgan Stanley itself, Weil’s aiding and abetting
claim against HarrisDirect necessarily fails.”), aff’d, 894 A.2d 407 (Del. 2005);
Thermopylae Capital P’rs, L.P. v. Simbol, Inc., 2016 WL 368170, at *18 (Del. Ch.
Jan. 29, 2016) (“[A]n aiding and abetting claim is predicated on an underlying breach
of fiduciary duties. Here, because I find that [the breach of fiduciary duty claim]
fails to adequately allege a breach of duty, I must also dismiss [the aiding and
abetting claim] for failure to state a claim.”); Globis P’rs, L.P. v. Plumtree Software,
Inc., 2007 WL 4292024, at *15 (Del. Ch. Nov. 30, 2007) (“As this Court has
determined that the Complaint fails to state a claim for any underlying breach of
fiduciary duty, BEA cannot be liable for aiding and abetting such a breach.”).
Accordingly, Count VI is dismissed as to the Movants.53
C. The Motion for a More Definite Statement and Motion to Strike
Certain Allegations Are Denied.
The Movants have moved for an order requiring the Counterclaim Plaintiffs
to provide a more definite statement in the event the Motion to Dismiss is not granted
in its entirety. They have also moved to strike certain allegations in the
Counterclaims as immaterial, impertinent, and scandalous. Both motions are denied.
53
The only claim asserted against the Eisenberg Parties is for aiding and abetting a breach
of fiduciary duty. Although this opinion addresses only the Movants’ motion to dismiss,
the grounds for dismissing the aiding and abetting claim against the Movants would equally
apply to the Eisenberg Parties as well.
35
Court of Chancery Rule 12(e) states, in pertinent part: “If a pleading to which
a responsive pleading is permitted is so vague or ambiguous that a party cannot
reasonably be required to frame a responsive pleading, the party may move for a
more definite statement before interposing the party’s responsive pleading.” Ct. Ch.
R. 12(e).
Rule 12(e) is designed to remedy problems of unintelligibility, not a lack of
detail. Balin v. Amerimar Realty Co., 1993 WL 542452, at *6 (Del. Ch. Dec. 23,
1993). A complaint is sufficiently definite, and relief under Rule 12(e) will be
denied, if the complaint “give[s] the opposing party fair notice of the nature of the
claim.” Id. at *5. Many of the allegations in the Counterclaims are vague and
conclusory, but they are not unintelligible. They sufficiently provide the
Counterclaim Defendants fair notice of the nature of the breach of contract and
unjust enrichment claims. “If [the Counterclaim Defendants] find that certain
allegations in the [Counterclaims] require more detail, [they] should seek to narrow
and clarify the issues through discovery, not by requesting a more definite
statement.” Standard General L.P. v. Charney, 2016 WL 1735155 (Del. Ch. Apr.
29, 2016) (citing Spanish Tiles, Ltd. v. Hensey, 2005 WL 3981740, at *2 (Del. Super.
Mar. 30, 2005)). Accordingly, the motion for a more definite statement is denied.
The Movants have also moved to strike paragraphs 135-143, 161, 232 and
250-53 of the Counterclaims under Court of Chancery Rule 12(f) on the grounds that
36
they are immaterial, impertinent, and scandalous. Pursuant to Rule 12(f), “the Court
may order stricken from any pleading any insufficient defense or any redundant,
immaterial, impertinent, or scandalous matter.” Ct. Ch. R. 12(f).
Motions to strike are disfavored, and are “granted sparingly and only when
clearly warranted with all doubt being resolved in the nonmoving party’s favor.”
Salem Church Assocs. v. New Castle Cty., 2004 WL 1087341, at *2 (Del. Ch. May
6, 2004). Stated affirmatively, a motion to strike is granted if the challenged
averments are: (1) not relevant to an issue in the case; and (2) clearly shown to be
unduly prejudicial. Id.
Mindful that doubts are resolved against the Movants, the Court denies the
motion to strike. The Movants understandably take umbrage at these allegations,
but the Court cannot conclude that they are wholly irrelevant. The Movants may
ultimately discredit these assertions in their entirety, but they “arguably have some
relevance” to understanding the relationships among certain parties and the
motivation behind some of the alleged conduct giving rise to the Counterclaims. See
Quereguan v. New Castle Cty., 2010 WL 2573856, at *6 (Del. Ch. June 18, 2010)
(denying motion to strike allegations claimed to be impertinent, scandalous, and
immaterial). The Movants have not clearly shown undue prejudice. If the
Counterclaims are later determined to be frivolous or brought in bad faith, the Court
has the inherent authority to shift fees. Blue Hen Mech., Inc. v. Christian Bros. Risk
37
Pooling Tr., 117 A.3d 549, 558 (Del. 2015). The motion to strike is denied.
III. CONCLUSION
For the foregoing reasons, the Motion to Dismiss the Counterclaims is
GRANTED as to Counts II, III, IV, and VI in their entirety as to the Movants, and
as to Count V in part. The Motion to Dismiss is DENIED as to Count I and Count
V, in part. The foregoing dismissed claims are dismissed with prejudice pursuant to
Court of Chancery Rule 15(aaa). The motions for a more definite statement and to
strike certain allegations are denied.
IT IS SO ORDERED.
/s/ Paul A. Fioravanti, Jr.
Vice Chancellor
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