Wypie Investments, LLC v. Homschek ( 2018 )

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
WYPIE INVESTMENTS, LLC, a
Delaware limited liability company,
Plaintiff,
v. C.A. No. Nl4C-08-l40 WCC CCLD
WAYNE HOMSCHEK, individually,
PIE FACE HOLDINGS PTY
LIMITED, an Australian company,
and PIE FACE HOLDINGS, INC. a
Delaware corporation,
\/\./\/\/\./\_/\_/\/VVVV\_/V
Defendants.
Submitted: March 22, 2018
Decided: March 28, 2018
Defendants Wayne Homschek and Pie Face Holdings PTY Limited’s Motion
to Dismiss - GRANTED in Part and DENIED in Part
MEMORANDUM OPINION
Joel Friedlander, Esquire, Christopher M. Foulds, Esquire, Friedlander & Gorris,
P.A., 1201 N. Market Street, Suite 2200, Wilmington, DE. Jennifer G. Altman,
Esquire, Pilsbury Winthrop Shaw Pittman LLP, 333 SE 2nd Avenue, Suite 2000
Miami, FL. Attorneys for Plaintiff.
Wayne Homschek, 400 Chambers Street, Apt. 8D, New York, NY 10282. Pro Se
Defendant.
CARPENTER, J.
Before the Court is a Motion to Dismiss Plaintiff WyPie Investments, LLC’s
(“Plaintiff” or “WyPie”) Second Amended Complaint filed on behalf of Defendants
Wayne Homschek (“Mr. Homschek”) and Pie Face Holdings PTY Limited
(“Global”) (collectively, “Homschek Defendants” or “Defendants”). The remaining
Defendant Pie Face Holdings, Inc. (“PF USA”), did not participate in the Homschek
Defendants’ Motion to Dismiss. On September 7, 2016, this Court granted a Motion
to Withdraw as Counsel filed by then-counsel for the Homschek Defendants.l Over
a significant time period, this Court has granted a number of extensions in order to
allow the Homschek Defendants to retain new counsel. To date, no defense counsel
has entered an appearance Because, under Delaware law, artificial entities must be
represented by counsel, this Court granted Plaintiff’s Motion for Default Judgment
as to Global’s liability pursuant to Superior Court Civil Rule 55(b)(2) on January l l,
2017.2 Since that time, the Court was informed that Mr. Homschek and Plaintiff
were making an effort to resolve this dispute without further litigation and delayed
deciding this motion. Given the Homschek Defendants’ apparently unfortunate
l The Court also acknowledges that counsel for Defendant PF USA, like Global, was permit to
withdraw on June l, 2016, and since then PF USA has not retained new counsel, nor has the
Plaintiff filed default judgment against this entity.
2 WyPie v. Homschek, Del. Super., ID No. 60055865, Carpenter, W. (Jan. ll, 2017) (ORDER)
(“All of the factual allegations against Global in WyPie’s Second Amended Complaint shall be
accepted as true.... WyPie has judgment against Global in an amount to be determined by the
Court at...Some later date.”). See Parfi Holding AB v. Mirror Image Internet, Inc., 2006 WL
903578, at *2 n.4 (Del. Ch. April 3, 2006) (“In Delaware, artificial entities must be represented by
counsel.”).
economic circumstances, the Court encouraged the parties’ continued attempt at
settling the matter. Unfortunately, while there is a disagreement among the parties
as to the status of the negotiation, it now appears to the Court the attempts to resolve
the dispute have been unsuccessful and the parties have hit an impasse As such,
this is the Court’s decision on the pending Motion to Dismiss Plaintiff’ s Second
Amended Complaint.
I. BACKGROUND
A. Pie Face
This commercial dispute arises out of the failed expansion of Australian cafe
chain, Pie Face, into the U.S. fast food market. Pie Face specializes in savory pies,
espresso, coffee, and baked goods.3 Mr. Homschek and his wife co-founded the
brand in 2003 and formed Global under the laws of Australia to operate the
business.4 The couple was actively involved in managing Global, with Mr.
Homschek serving as the company’s CEO, and both he and his wife assuming
positions on Global’s Board of Directors.5
Global operated Pie Face branded stores across Australia according to a “hub
and spoke” model.6 Pursuant to this framework, most food products were
3 Second Am. Compl. (“SAC”) 11 15.
4 Ia'. 1111 13, 15-16. “Homschek, upon information and belief, was at all times material hereto a
resident of New York City, New York, and was previously a resident of Australia.” Id. 11 12.
5 Id. 111 12, l7. Mr. Homschek’s wife, Betty Fong, was Global’s Chief Operating Officer.
6 161.'|11115_16.
manufactured and stored at Central Kitchen Facilities (“CKF”), the “hubs,” and then
distributed exclusively to Pie Face retail stores, the “spokes.”7 With approximately
70 company-owned and franchised stores across Australia, Global sought to expand
the Pie Face brand internationally.8
On April 27, 201 l, Global formed co-Defendant Pie Face Holdings, lnc. (“PF
USA”).9 PF USA is a Delaware corporation and Global’s wholly-owned
subsidiary.10 The early stages of PF USA’S development and operations were
financed with loans from Global, which would “be principally repaid through the
issuance of l ,447 shares of PF USA common stock to Global.”ll A number of Global
executives would be relocated to the United States to develop and manage PF USA,
including Mr. Homschek, who would serve as PF USA’s CEO and as Chairman of
the company’s Board of Directors.12
PF USA’s business model “focused initially on developing and operating Pie
Face stores throughout New York City” pursuant to the “hub and spoke” strategy.13
As of June 2012, PF USA had developed a CKF in Brooklyn and one retail store in
7 Id. 11 l6.
8 Id. 1111 3, 17.
9 Together Wayne Homschek, Pie Face Holdings PTY Limited, and Pie Face Holdings, Inc. are
the Defendants.
10 sAC 11 17.
ll Id. 11 2l.
12 1611 17.
13 Id. 11 19.
Manhattan.14 The Company also signed leases for three additional stores and made
offers on five other potential locations.15
B. The First Investment
As additional capital was needed by PF USA,16 the Defendants sponsored and
promoted a private placement of shares of the common stock of PF USA pursuant
to a Private Placement Memorandum (“PPM”) and Subscription Agreement
(collectively, “Offering Documents”).17 The documents were prepared by Global’s
CFO at Mr. Homschek’s direction.18
Sometime in early 2012, Mr. Homschek was introduced to Steven Wynn
(“Mr. Wynn”).19 After learning about and tasting the product, Mr. Wynn expressed
an interest in investing in PF USA.20 After reviewing the Offering Documents, the
parties executed a First Subscription Agreement (“FSA”) and a Shareholders’
Agreement (“SHA”), both of which are dated June 8, 2012,21 Ultimately, based on
the representations contained in these documents, Mr. Wynn agreed to invest $15
14 Ia'.
15 Ia'.11 20.
1GSAC 1111 1, 22.
17 Id.18 Id. 1111 4, 22-23 (identifying Global’s CFO as Robert Dardano, CPA).
19 Ia'. 1111 1, 22 (noting that the pair were introduced by a “mutual acquaintance”). The Complaint
alleges Mr. Homschek set out to raise capital for PF USA, acting “individually and as an officer
and director of both Global and PF USA.” Ia'. 11 22. Steven Wynn is a real estate businessman
known for his involvement in the casino and hotel industry.
20 Id. 1111 1, 8.
21SAC 1111 22-23, Ex. A [hereinafter PPM], Ex. B [hereinafier FSA], and Ex. C [hereinafter SHA].
5
million in PF USA through his investment vehicle, WyPie (the Plaintiff in this
matter), in exchange for 1,200 shares of PF USA common stock valued at $12,500
per share.22
In “evaluating the suitability of [the] investment,” Plaintiff was prevented, per
§ 3.1(c) of the FSA, from relying on any external representations or information,
“other than the PPM.”23 In addition to communicating the details of the offering, the
PPM provided information for prospective investors relating to the Company’s
background, business model, governance, use of proceeds, capitalization, etc.24 The
PPM also contained financial projections for 2012 and 2013, including revenue
estimates, from which costs were deducted to arrive at earnings before interest,
taxes, depreciation and amortization (“EBITDA”).25
By executing the FSA, Mr. Wynn affirmed, on behalf of WyPie, that he
reviewed the Offering Documents and understood that all assumptions and
projections were “for purposes of illustration only.”26 He affirmed that no
22 Id. 1111 2, 19-21, 30. The initial investment was made through Wynn Family Limited Partnership
(“WFLP”). Ia'. 1111 2 n.1, 11. WyPie is a Delaware Limited Liability Company created specifically
for Wynn’s personal investment in PF USA. Id. “On December 23, 2013, [WFLP] assigned its
shares in PF USA to its wholly owned subsidiary, WyPie. At that time, WyPie invested an
additional $5,000,000 in PF USA.” Id. 11 11. For simplicity, WFLP and WyPie are referred to
collectively as “WyPie.”
23 FSA § 3.1(c).
24 PPM at i (table of contents).
25 Ia'. at A-2.
26 FSA § 5(d) (and warning “no assurance [was] given that actual results [would] correspond” with
the PPM’s illustrations).
”27
representations had been made “as to the Company’s future performance, and
acknowledged that he was counseled by legal, financial, and tax professionals in
connection with the June 2012 investment; and that counsel reviewed and negotiated
the PPM and FSA.28 Per § 6.7, the FSA and the SHA, discussed further infra, these
documents constituted “the entire agreement of the parties. . .with respect to the [First
Investment]” and superseded “any and all prior or contemporaneous”
representations or agreements29
C. T he Shareholders ’ Agreem ent
Simultaneous with the execution of the FSA, the SHA was entered “by and
among” PF USA and its shareholders: Plaintiff`, Global, Mr. Homschek, and Chris
Sieger.30 The SHA proclaimed to represent the parties’ understanding “with respect
to their relationship in their capacity as shareholders of the Company, and the
governance and management of the Company.”31 In pertinent part, the SHA provides
that the Shareholders agreed with one another to “exercise all voting rights and
powers of control available. . .in relation to the Company so as to give full effect to
the [SHA’s] terms and conditions.”32 Additionally, the agreement reflected that PF
27 Id. § 3.1(c).
28 Id. § 3.1(e).
29 Id. § 6.7.
30 SHA at 25, Schedule 1. Mr. Homschek signed on behalf of PF USA, as “President,” and Global,
as CEO. Id. at 25. The signature page designates Plaintiff as “INVESTOR.” Id.
31 Id. at 1.
32 Id. § 8.2.
USA would be managed by a six-member Board of Directors, that two of those
members would be appointed by Plaintiff,33 and that Mr. Homschek would serve as
the Board’s Chairman.34 As Chairman, Mr. Homschek would be required to “act
impartially and pay regard to the interests of the Company.”35
Of particular relevance to this litigation are the provisions of the SHA
governing PF USA’s financial information Per § 10.2, PF USA would “reasonably
permit” all shareholders and directors to inspect the assets of the Company and any
documents relating to its business and accounts and to “discuss the Company’s
affairs, finances, and accounts with the Company’s officers and auditor (if any).”36
PF USA would be required to maintain “full, accurate and proper books of account
and other records relating to [its] transactions, Business, and affairs.”37 The SHA
also mandated that the Company prepare and distribute: (1) “full and accurate”
management reports with profit and loss statements, balance sheets, and cash flow
statements to the Board on a quarterly basis;38 and (2) “a complete set of. . .financial
accounts” with “a profit and loss statement, cash flow statement, and balance sheet”
33 Id. §§ 5.1, 5.2. The Board was comprised of Homschek, Ms. Fong, Mr. Sieger, and Alun Evans.
Id. § 5.1. Pursuant to § 5.2, Plaintiff appointed Andrea Wynn, who was later replaced by Steven
Dezli and Kevin McCollum. See SAC, Ex. l [hereinafter SSA] at Ex. 1.
34 SHA § 6.1.
35 Id.
36 Id. § 10.2 (a) _ (c).
37 sAC 1 24; sHA § 13.1.
38 SHA § 13.2. See also SAC 11 25 (alleging that “WyPie had to beg, plead and cajole Defendants
for financial data and, when such data was received, it was typically incomplete and, as detailed
below, rife with material misrepresentations regarding the affairs of PF USA”).
8
to shareholders annually.39 lmportantly, the SHA stated that the Company’s profit
and loss statements and balance sheets would be prepared “in accordance with
[GAAP] and standards consistently applied.”40
D. The Second Investment
By 2013, PF USA was continuing to struggle to generate the cash required to
sustain operations and, lacking sufficient reserve funds, Mr. Homschek turned again
to Mr. Wynn for additional capital.41 On December 23, 2013, WyPie invested an
additional $5 million in exchange for 400 shares of PF USA common stock pursuant
to a Second Subscription Agreement (“SSA”).42 The $5 million was contractually
restricted, however, in that PF USA would be required to allocate $2.5 million of the
proceeds “to fund[ing] continuing operations” and use the remainder for the
“development of additional. . .stores.”43
The SSA incorporated by reference the “unaudited balance sheet, income
statement and statement of cash flows of the Company for the fiscal year ended June
30, 2013.”44 Once again, this financial information was allegedly prepared by
Global’s CFO under Mr. Homschek’s supervision.45 Section 2.7 of the SSA
39 SHA § 13.3.
40 Ia'. § 13.4.
41 sAC 11 55.
42 1d.1111 55, 63.
43 Id. 11 63.
44 Id. (quoting SSA § 2.7).
45 Id. 1111 56-57 (“Homschek directed that the financial accounting reporting function for PF USA
be controlled by Global in Australia and not accessible to the other stockholders.”).
9
represented and warranted that the financial information was “prepared in
accordance with the books and records of the Company” and “present[ed] fairly, in
all material respects, the financial condition of the Company at the respective dates
hereof.”46 Like the FSA, the SSA contained an integration clause stating that it and
the SHA constituted PF USA and Plaintiff’s “entire agreement” with respect to the
transaction.47
E. T he 2014 Audit
In January 2014, Plaintiff learned that Homschek Defendants had allegedly
failed to comply with the SHA’s provisions with respect to PF USA’s financial
information and “insisted an independent auditor be engaged.”48 It was ultimately
revealed, on February 18, 2014, that Homschek Defendants had improperly
capitalized expenses in excess of $5 million on PF USA’s financial reports for all
periods prior to 2014,49
According to Plaintiff, as a result:
46 Id. 11 58.
47 SSA § 6.7.
48 sAC 11 64.
49 Id. 1111 64-65 (“WyPie insisted an independent auditor be engaged. . ..”). According to Plaintiff,
at the meeting “a draft audit report. . .was presented that included an approximate $5,000,000 audit
adjustment. The audit adjustment highlighted, for the first time, that for all periods prior to 2014,
Defendants improperly capitalized in excess of $5 million on PF USA’s financial reports for store
openings, equipment purchases and the like. Those items should have been expensed, not
capitalized.” Id. 11 65.
10
[T]he financials were consequently subject to a 2013 audit adjustment
whereby such amount was completely written down (causing total
assets to decrease from approximately $20 million to $15 million. . .).50
This audit adjustment was a direct write-down to PF USA’s retained
earnings and never appeared as an expense on the books of PF USA.
Moreover, Defendants never caused the preparation or presentation by
PF USA of restated financial statements for the applicable covered
periods showing the effect of expensing the $5,000,000, which allowed
this amount to remain undetected. 31
In other words, the audit revealed that “the financial statements attached to the [SSA]
overstated assets by approximately $5,000,000 (or 45%) and understated the
Company’s 2013 losses by $1.2 million (or 37%).”52
As a result of this discovery, Mr. Homschek, Global, and WyPie, among
others, on June 25, 2014 “entered into an agreement. . .permitting WyPie to elect a
majority of the Board and eliminated all of the supermajority voting requirements
with respect to Board and shareholder matters for PF USA.”33 Since that time,
Plaintiff has exercised majority control of the Company.34
On July 9, 2014, the Board voted to return $2,025,000 of Plaintiff’ s
$5,000,000 investment because, as PF USA no longer intended to develop additional
stores, and the SSA’s directive as to the use of those proceeds would not be
50 Id. 11 65.
31 Id. 11 66.
32 Pl.’s Answ. Br. in Opp’n to Defs.’ Mot. to Dismiss at 8-9 (citing SAC 1111 59, 62-67).
33 sAC 11 68.
34 Id. 11 11.
11
fulfilled.33 “The Board acknowledged that at the time of WyPie’s investment on
December 23, 2013, the value of 100% of PF USA was determined to be no more
than $2,500,000 by an independent appraiser.”56 At present, WyPie owns 50.03% of
PF USA’s issued and outstanding stock and “[t]he bulk of the remaining outstanding
shares are owned by Global, with smaller amounts owned by Mr. Homschek and
others individually.”57
F. T he Instant Litigation
PF USA was allegedly “shuttered” as a result of Defendants’ conduct, leaving
WyPie “with a 50.03% equity holding worth virtually nothing.”58 As a result, WyPie
commenced the instant litigation on August 22, 2014.59 The Second Amended
Complaint (“Complaint”), filed December 2, 2015, asserts claims for fraudulent
inducement, fraud, negligent misrepresentation, and breach of contract against PF
USA, Global, and Mr. Homschek, individually. It also contains a tortious
interference claim against the Homschek Defendants. As mentioned in the
introduction to this Opinion, this Court granted Plaintiff’ s Motion for Default
33 Id. 11 69.
36 Ia'.
37 ld. 11 70.
38 Id. 11 72.
39 Plaintiff originally sought to pursue claims of fraudulent inducement, rescission, negligent
misrepresentation, and unjust enrichment. Plaintiff then amended the Complaint to add claims for
fraud and conversion (“First Amended Complaint”). Defendants filed a Motion to Dismiss the
First Amended Complaint and following a hearing on October 19, 2015, the Court reserved
decision. Plaintiff then filed the current version of the Complaint.
12
Judgment against Global in January 2017.60 Prior counsel for the Homschek
Defendants filed the instant Motion to Dismiss which was held in abeyance until it
was clear new counsel was not entering the case and settlement negotiations had
been unsuccessful
II. STANDARD OF REVIEW
Pursuant to Delaware Superior Court Civil Rule 12(b)(6), the Court will
dismiss a complaint if it “fail[s] to state a claim upon which relief can be granted.”61
Dismissal is limited to those cases in which the Court determines “with reasonable
certainty that, under any set of facts that could be proven to support the claims
asserted, the plaintiff would not be entitled to relief.”62 In deciding the Homschek
Defendants’ motion, the Court must assume as true the well-pleaded allegations of
the Complaint,63 and afford Plaintiff “the benefit of all reasonable inferences that
can be drawn from [their] pleading.”64 While the Court must generally decline
60 Since the Motion to Dismiss was filed before the default judgment was entered against Global,
to avoid confusion the Court will continue to use “Homschek Defendants” referenced in the
briefings, even though the decisions will have limited applicability to Global, It may also provide
guidance as to the damages that should be found against Global. However, to any extent the Motion
is granted as to Homschek Defendants, such ruling only applies to Mr. Homschek and the default
judgment against Pie Face Holding PTY Limited would take priority.
61 Super. Ct. Civ. R. 12(b)(6).
62 See Furnari v. Wallpang, Inc., 2014 WL 1678419, at *3 (Del. Super. Ct. April 16, 2014) (citing
Clinton v. Enterprise Rent-A_Car Co., 977 A.2d 892, 895 (Del. 2009)).
63 See Solomon v. Pathe Commc ’ns Corp., 672 A.2d 35, 38-39 (Del. 1996). See also VLIW Tech.,
LLC v. Hewlett-Packard Co., 840 A.2d 606, 611 (Del. 2003); Precision Air v. Standard Chlorine
of Del., 654 A.2d 403, 406 (Del. 1995) (explaining that complaint is “well-plead” so long as it puts
the opposing party on notice of the claim brought against it).
64See In re USACafes, L.P. Litig., 600 A.2d 43, 47 (Del. Ch. 1991).
13
review of matters outside the complaint, documents that are integral to or
incorporated by reference in the complaint may be considered.63 “[A] complaint
may, despite allegations to the contrary, be dismissed where the unambiguous
language of documents upon which the claims are based contradict the complaint's
allegations.”66
III. DISCUSSION
A. Fraud
The Homschek Defendants have moved to dismiss the fraud allegations found in
Counts 1 and II of the Complaint. To state a claim for fraud, a plaintiff must plead
facts supporting an inference that:
(1) the defendant falsely represented or omitted facts that the defendant
had a duty to disclose; (2) the defendant knew or believed that the
representation was false or made the representation with a reckless
indifference to the truth; (3) the defendant intended to induce the
plaintiff to act or refrain from acting; (4) the plaintiff acted in justifiable
reliance on the representation; and (5) the plaintiff was injured by its
reliance.67
Under Superior Court Civil Rule 9(b), a plaintiff must plead fraud with
particularity.68 “The purpose of [Rule 9(b)] is to apprise the adversary of the acts or
03 See In re Sc_znta Fe Pac. Corp. S ’holder Litig., 669 A.2d 59, 70 (Del. 1995).
60 See H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 139 (Del.Ch. 2003)).
67 See Abr_'y P'rs V, L.P. v. F & WAcquisition LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006).
63 Super. Ct. Civ. R. 9(b),
14
omissions by which it is alleged that a duty has been violated.”69 To plead fraud with
the particularity required by Rule 9(b), a plaintiff must include the “time, place,
contents of the alleged fraud, as well as the individual accused of committing the
fraud”.70
The first two Counts of the Complaint, though styled as two separate claims,
Count I fraud in the inducement and Count II fraud, both assert that all Defendants,
Mr. Homschek, Global, and PF USA, “knowingly, or with reckless regard for the
truth, made repeated materially false and misleading statements regarding PF
USA.”71 But for those representations, Plaintiff maintains it would not have entered
the FSA, SHA, or SSA and Defendants’ fraud has since caused WyPie damages
including the loss of its investment in PF USA.72
The fraud alleged regarding the initial June 2012 investment is based on
representations contained in the FSA and the PPM. 73 Consistent with the provisions
of the FSA, Plaintiff was entitled to rely on the PPM in evaluating its initial
69 Mancino v. Webb, 274 A.2d 711, 713 (Del. super. Ct. 1971).
70 See TrueBlue, lnc., v. Leea's Equily Partners IV, LP, 2015 WL 5968726, at *6 (Del. Super. Ct.
Sept. 25, 2015) (quoting Universal Capital Mgmt., Inc. v. Micco World, Inc., 2012 WL 1413598,
at *2 (Del. Super. Ct. Feb. 1, 2012)).
71 SAC 1111 81, 89 (including “providing financial reports that substantially and materially
overstated income for monthly, quarterly and annual periods ending on or before November 30,
2013,” and “providing financial and operational forecasts wherein financial projections and
performance were substantially and materially misstated”).
12 Id. 1111 84, 91.
73 Pl.’s Answ. Br. in Opp’n to Defs.’ Mot. to Dismiss at 6, 8.
15
investment in PF USA.74 Plaintiff claims the PPM, as prepared by Global and Mr.
Homschek, materially misrepresented: (1) PF USA’s projected financial
performance; (2) the CKF’s capacity to supply 30-40 stores; (3) how investment
proceeds would be used; and (4) Global’s status as “an established leader” with
“strong store economics” and a “proven track record.”73 According to Plaintiff, the
false representations were made knowingly and with the sole intention of inducing
WyPie’S 815 million investment.76
As for the Second Investment, Plaintiff alleges financial statements for the
period ending June 30, 2013, as prepared by Global under Mr. Homschek’s
supervision and incorporated in the SSA, intentionally overstated PF USA’s assets
by $5 million and understated losses by $1.2 million.77 This discrepancy was
allegedly achieved by Homschek Defendants’ improper capitalization of certain
costs. In § 2.7 of the SSA, PF USA represented to WyPie that the incorporated
statements “present[ed] fairly, in all material respects, the financial condition of the
Company.”78 The SSA’s integration clause defined the “Entire Agreement” to
include the terms of the SHA, under which the Company’s balance sheets were
required to conform with GAAP. Thus, Plaintiff claims it reasonably relied on the
14 sAC 11 30 (citing FSA § 3.1(0)).
13 ld. 1111 38-39.
16 Id. 1111 78, 87.
11 Id. 1111 57_59, 62.
13 ld.; ssA § 2.7.
16
financial information attached to the SSA and that, had it known the Company’s true
financial condition, it would not have invested the additional $5 million.79
The Homschek Defendants move to dismiss Plaintiff’ s fraud counts on the
grounds that WyPie has failed to identify any “false facts” in the underlying
documents that support an inference of fraud, Rather, the alleged representations
amount to puffery or forward looking statements, neither of which are actionable as
fraud. Further, Homschek Defendants contend Plaintiff’s fraud claim must fail in
light of various buyer representation and disclaimer provisions appearing throughout
the transaction documents.30
While the Court finds Mr. Homschek’s conduct to be outrageous, in the
context of the contractual provisions relied upon by Plaintiff, it must agree with the
Homschek Defendants. The Complaint largely fails to allege justifiable reliance on
any false statement of material fact insofar as the First lnvestment is concemed. First,
“a company’s optimistic statements praising its own ‘skills, experience, and
19 sAC 1111 57-59, 67.
80 The Homschek Defendants also appear to argue that, as Global and Homschek are not parties to
the PPM, FSA, or SSA, they cannot be liable for the misrepresentations allegedly contained
therein. Defs.’ Mot. to Dismiss at 36. At this stage, the Court will not dismiss the fraud claims on
this basis. See Anvil Holding Corp. v. Iron. Acq. Co., 2013 WL 2249655, at *6-7 (Del. Ch.
May 17, 2013). The allegations of the Complaint, which the Court accepts as true, suffice at this
juncture to tie the fraud claims to conduct engaged in by Mr. Homschek, both individually and on
behalf of Global. See Aviation West Charters, LLC v. Freer, 2015 WL 5138285, at *5-6 (Del.
Super. Ct. July 2, 2015).
17
resources’ are ‘mere puffery and cannot form the basis for a fraud claim.”’31 Thus,
the PPM’s description of Global as “an established leader” with “strong store
economics” and a “proven track record,” even if misleading, does not amount to a
false representation of material fact.32 ln fact, it appears the business model of the
venture in Australia was quite successful. Nor could a sophisticated investor like
Mr. Wynn, advised by an impressive team of legal and financial counsel, have
reasonably relied on such “boasts and blandishments” about Global in the PPM in
deciding to invest in PF USA.83
The PPM’s representations concerning the expected capacity of the CKF and
projected financial results do not fare much better as they concern future events
and/or statements of opinion.84 Plaintiff claims that the PPM falsely represented that
the CKF was “fully functional” and that the Company “expect[ed]” it to be “capable
of supplying about 30-40 stores. . .without significant additional capital
expenditures.”83 ln addition, Plaintiff alleges that the PPM’s financial projections
31 See Airborne Health, Inc. v. Squid Soap, LP, 2010 WL 2836391, at *7-8 (Del. Ch. July 20,
2010) (quoting Solow v. Aspect Res., LLC, 2004 WL 2694916, at *3 (Del. Ch. 2004)). “Puffery is
a ‘vague statement’ boosting the appeal of a service or product that, because of its vagueness and
unreliability, is immunized from regulation.” Id. (quoting David A. Hoffman, T he Best Pujj”erfy
Article Ever, 91 Iowa L. Rev. 1395, 1397 (2006)).
32 See id. (finding fraud claim based on statements about company’s “very strong brand name,”
“established market presence,” and “unprecedented levels of customer loyalty” “classically vague
statements that a commercial party routinely makes during deal-making courtship” rather than
false representations of material fact).
33 See id. at *8. It is also worth noting that the PPM explicitly and repeatedly cautioned WyPie not
to rely on Global ’s performance when evaluating its investment in PF USA. PPM 1-2, 12, & 16.
34 See Great Lakes Chem. Corp. v. Pharmacia Corp., 788 A.2d 544, 554 (Del. Ch. 2001).
33 PPM at 3, A-l.
18
improperly capitalized expense items and thereby artificially inflated the forecasted
EBITDA.36 Plaintiff argues “accounting rules” required the Homschek Defendants
to deduct expenses from revenue in calculating the projected financials.
lt is well settled in Delaware that “[p]redictions about the future cannot give
rise to actionable common law fraud[,]. . . [n]or can expressions of opinion.”37 While
Plaintiff alleges the CKF was incapable of supplying “eight stores” at the time the
representation was made, it alleges elsewhere throughout the Complaint that “[p]rior
to June 8, 2012, PF USA developed only one retail store. . ..”33 The language of the
PPM likewise supports that, at the time the expectations for the CKFs had been
represented to Mr. Wynn in the PPM, PF USA was only operating one retail store.89
The representations in the PPM thus clearly related to the Company’s future
expectations for the CKF.90
30 SAC 1111 33-35; Pl.’s Answ. Br. in Opp’n to Defs.’ Mot. to Dismiss at 6.
37See Great Lakes Chem. Corp., 788 A.2d at 554. See also Grunstein v. Silva, 2009 WL 4698541,
at *13 (Del. Ch. July 16, 2009) (citing Esso Standard Oil Co. v. Cunningham, 114 A.2d 380, 383
(Del. Ch. 1955) (“Opinions and statements as to probable future results are not generally fraudulent
even though they related to material matters....”)).
33 SAC 11 19 (emphasis added).
39 PPM 3125. See also H-M Wexford LLC v. Encorp, lnc., 832 A.2d 129, 139 (Del.Ch. 2003) (“[A]
complaint may, despite allegations to the contrary, be dismissed where the unambiguous language
of documents upon which the claims are based contradict the complaint’s allegations.”); Binks v.
DSL.net, Inc., 2010 WL 1713629, at *5 (Del. Ch. April 29, 2010) (“[A] court need not blindly
accept as true all allegations, nor must it draw all inferences from them in the plaintiffs’ favor
unless they are reasonable inferences.”) (internal quotation marks omitted).
90 lt is also worth noting that the PPM defines any statement addressing “projected...capital
expenditures (including the amount and nature thereof`)” as “forward looking statements” “subj ect
to a variety of risk that could cause actual results to differ materially from those projected....”
PPM at vi.
19
In an attempt to characterize the allegedly misleading projections as
misrepresentations of existing fact, Plaintiff cites the PPM’s representation that PF
USA “believed” it had a “reasonable basis” in making the projections.91 This
argument is unavailing. The statement concerning the Company’s “belief” is nothing
more than an “expression of opinion that the projections were adequately supported”
and thus, does not amount to actionable fraud.92
Even assuming the PPM’s financial projections and statements concerning the
CKF could be deemed actionable misrepresentations, it is clear Plaintiff would not
have been justified in relying on the representations The Court recognizes that §
3.1(c) of the FSA permitted Plaintiff to rely on the PPM in making its investment
decision.93 However, such reliance must also be said to have been “reasonable” in
order to sustain a claim for fraud, The language of the FSA and PPM quite clearly
91 Pl.’s Answ. Br. in Opp’n to Defs.’ Mot. to Dismiss at 6, 11-12 (quoting PPM at A-l and citing
Financial Accounting Standards Board Codification 720-15-25 and Australian Accounting
Standards Board 138-69 (2015)). According to Plaintiff:
This was not an accident, as Defendants did the same thing at Global. According to
Jirsch Sutherland, the Administrator appointed in connection with Global’s
Australian bankruptcy proceeding (which not surprisingly occurred just after
WyPie filed this lawsuit in the Fall of 2014 shortly after discovering Defendants’
fraudulent conduct), Global’s “[f]inancial assets . . . includ[ing] Franchise
development costs, store opening costs” were “amorti[z]ed on a systematic basis
matched to the future economic benefits over the useful life of the proj ec .”
SAC 11 35 (quoting Administrator’s Report to Creditors, at 13 (Dec. 18, 2014) (attached as Exhibit
K)).
92 See Great Lakes Chem. Corp. v. Pharmacia Corp., 788 A.2d 544, 554 (Del. Ch. 2001) (finding
Company’s statement that its “current financial posture justified the projections” amounted to an
expression of opinion, not fraud).
93 FSA § 3.1(c).
20
eliminate “forward looking statements,” such as the financial and operational
projections, from the purview of information upon which Plaintiff could have
“reasonably relied” in deciding whether to invest in PF USA.94
The PPM conspicuously cautioned that any investment in PF USA would
entail “a high degree of risk,” that all estimates and projections were “highly
speculative” and subject to “significant uncertainties and contingencies,” and that
“[no representation is made... that [PF USA] can or will attain such [projected]
results.]”93 To the contrary, the PPM stated “[actual results are likely to vary, perhaps
materially, from the projections.]”96
In the FSA, Plaintiff represented that it reviewed and understood these and
other risks associated with the investment.97 Section 5.1(d) of the FSA further
reflects Plaintiff’ s understanding that any assumptions and/ or projections in the PPM
were “for purposes of illustration only” and that the Company made “no
assurance . .that actual results [would] correspond” with those forecasted.98 Indeed,
94 See generally H-M Wexfora' LLC, 832 A.2d at 142-43 (“Even if the [Private Placement
Memorandum provided to Wexford] [] were[sic] considered for purposes of the misrepresentation
claims, the financial information and projections section of the PPM contains an explicit disclaimer
regarding the projections printed in bold type, stating that the projections had not been reviewed
and no assurances were given with regard to the projections, and, furthermore, the projections
should be read in conjunction with the enumerated risk factors and schedules discussing the
projections attached thereto.”).
93 Defs.’ Mot. to Dismiss at 21 (emphasis in original) (quoting PMM at ii-iii, 8).
96 Id. (emphasis in original).
97 FSA § 4.
93 Id. § 5(d).
21
Plaintiff concedes it expressly represented that it invested fully aware that PF USA
made “no representations to the Company’s future performance.”99 ln addition,
Plaintiff represented in the FSA that it was investing in PF USA despite likely
inaccuracies in the Company’s financial forecast due to “limited operating history”
and despite the risk that expense projections could be “materially
underestimated.”100 The PPM specifically forewarned that the “financial projections
and information set forth...[there]in were not prepared...[in] compliance with
[GAAP] and have not been examined, reviewed or complied by independent public
accountants.”101
Mr. Wynn is a knowledgeable and experienced investor who entered the FSA
based on information he understood to be speculative and incomplete, and fully
aware that an investment by WyPie in PF USA would be a risky one.102 Yet, by
signing the FSA, WyPie represented that the decision to invest was guided by a team
of legal and financial professionals who reviewed and negotiated both the PPM and
FSA.103 Plaintiff represented it and its advisors had the opportunity “to evaluate the
merits and risks of [the] investment,” to obtain additional information from the
Company, and “to verify the accuracy of the information provided...by the
99 Pl.’s Answ. Br. in Opp’n to Defs.’ Mot. to Dismiss at 22 (citing FSA § 3.1(c)).
100 FSA § 3.1(d) - (e) (attributing forecasting difficulties to the “limited” history upon which costs
could be estimated).
101 PPM at A-l (emphasis added).
169 FSA § 3.1 (e) - (g).
163 ld. § 3.1(e).
22
Company.”104 Given the nature of the alleged representations and the clear language
of the PPM and FSA, Plaintiff cannot now claim fraud based on the PPM’s financial
projections or expectations for the CKF.
Plaintiff also alleges the PPM misrepresented the use of net proceeds and
concealed that PF USA was paying for Mr. Homschek’s lavish personal expenses.103
According to PPM, investment proceeds would “generally” be used “for working
capital and growth purposes in the discretion of the Board.”106 While the PPM
indicated that Mr. Homschek would earn a salary of $150,000, it did not disclose
that PF USA would use investment proceeds to make rental payments of up to
$19,000/month for Mr. Homschek’s Manhattan apartment in addition to allocating
thousands of dollars toward his children’s private education.107 Plaintiff claims that,
had these costs been accounted for, the “Corporate Costs” projected in the PPM
would have increased dramatically.103 Plaintiff claims the Homschek Defendants
knew the figure was false at the time it was communicated to Mr. Wynn, because
Mr. Homschek was “foisting these personal expenses on the Company.”109
104 Ia'. § 3.1 (e) - (h).h
103 Pl.’s Answ. Br. in Opp’n to Defs.’ Mot. to Dismiss at 13.
106 SAC 11 46 (quoting PPM at 33 (emphasis added)).
107 Id. 1111 46-48. PF USA allegedly first paid $14,500/month for the apartment which was at some
later unspecified date “upgraded” to $19,000/month. Ia'.
103 Ia'. 1111 49-51.
109 Pl.’s Answ. Br. in Opp’n to Defs.’ Mot. to Dismiss at 14; SAC 11 48 (claiming Defendants
foisted all of these costs on the Company and intentionally concealed that fact from Mr. Wynn
“because no one. . .would have invested in a start-up company knowing. . .[it] was ...paying
$300,000 a year for the CEO’s apartment and children’s school, particularly where, as here, that
23
Homschek Defendants contend Plaintiff cannot sustain a claim of fraud based
on the alleged omissions relating to Mr. Homschek because the PPM expressly
disclosed that PF USA intended to:
(i) use the investment proceeds to pay back Global’s loans to PF USA
in excess of $3 million outstanding , (ii) reimburse Global for out of
pocket expenses and pro rata time of Global executives and employees
spent working on and developing PF USA, and (iii) leverage the
members of Global’s senior management team, which included
both. . .Homschek and [his wife], in connection with the start-up phase
of PF USA.110
Thus, according to the Homschek Defendants, WyPie was “clearly on notice” of the
payment arrangement Additionally, the Motion asserts that “[i]n the context of
Wynn’s $15-million initial investment,” the costs relating to Mr. Homschek were
relatively minimal and “immaterial” to Plaintiff"s evaluation of the First
lnvestment.1 1 1
While the Court finds the payments made to Mr. Homschek for personal
expenses to be distasteful, the PPM does provide that the initial investment by WyPie
was to be utilized at the discretion of the Board and would cover executive expenses.
Unfortunately for WyPie, they did not take steps to protect this investment from
expenses they would consider inappropriate but instead left that decision to the
CEO was paid $600,000 between Global and PF USA and also received stock without any capital
investment. . .”).
110 Defs.’ Reply Br. at 11-12; Defs.’ Mot. to Dismiss at 30 (citing PPM at 7, 28, 30, & 33-35).
111 Defs.’ Reply Br. at 12-13.
24
Board of which Mr. Homschek exercised significant control. Had Plaintiff desired
more control over how the proceeds of its initial investment would be used, it would
seem prudent and reasonable to have included a contractual restriction to that effect.
That said, it does appear the expenses of the nature complained about by Plaintiff
needed Board approval before investment funds could be used for them. lt is unclear
to the Court the extent the Board was aware of these expenses and approved them or
whether they were concealed and were directed to Mr. Homschek’s personal use
without their knowledge lt is also reasonable that WyPie was relying upon the
Board to exercise reasonable oversight of such expenses. As a result, at the moment
the Court will allow discovery on this issue and will not grant dismissal based on
allegations in the Complaint. lf it appears after discovery that Mr. Homschek’s
diversion of the investment for personal use was done with the full knowledge and
approval of the Board, the fraud claim would not go forward.
Nor will the Court dismiss Plaintiff’ s claim for fraud in connection with the
Second Investment. Plaintiff alleges the SSA incorporated fraudulent financial
statements which were allegedly prepared by Global’s CFO under Mr. Homschek’s
direction.112 According to Plaintiff, the Homschek Defendants knew PF USA was
not generating sufficient cash flow and manipulated the financials so as to conceal
the true state of the Company’s affairs. Plaintiff maintains that it would not have
111 sAC 1111 57-58.
25
contributed the additional $5 million had it known PF USA’s true financial
condition.113 Despite these allegations, Homschek Defendants move to dismiss the
claim, contending (1) Plaintiff disclaimed reliance on the financial statements, and
(2) the statements are not false or misleading
First, the Court cannot find Plaintiff “disclaimed reliance” on the June 2013
financial statements. Rather, as Plaintiff points out, it appears WyPie was
contractually entitled to rely on the financials at issue because they are incorporated
in and attached to the SSA.114 Further, the contract’s integration clause provides that
the “Entire Agreement” consisted of the SSA and the SHA. Among the SSA’s
provisions is a representation by the Company that “to its actual knowledge” (which
§ 2.19 defines as the actual knowledge of Mr. Homschek, among others), there had
been no breaches of the SHA by any party thereto and that all parties were in
compliance with their obligations as of the SSA’s execution date.115 Given the
language of the SSA and § 13 of the SHA, Plaintiff could have reasonably relied on
the financial statements incorporated in the SSA as fairly depicting the Company’s
financial condition and calculated in accordance with GAAP.
113 Id.1111 57-59, 67.
114 SSA §§ 2.7, 6.10. The Court notes that § 2.7 is one of nineteen representations and warranties
made by PF USA in the SSA. This stands in stark contrast to the FSA, where the Company made
but two representations and warranties, all of which related to PF USA’s organization, corporate
power, and authority to issue stock.
113 Id. § 2.16
26
The second ground Homschek Defendants advance for dismissal is that
Plaintiff failed to plead that the SSA’s financial information was “misleading.”116
“An essential element of a claim for fraud is that the alleged victim be ignorant of
the true facts that are misrepresented.”117 The Court acknowledges, and Plaintiff
does not seem to dispute, that the unaudited 2013 financials list “US Development
Costs,” “Pre-Opening Costs,” “US Marketing Costs,” etc. as assets.113 lt is also clear
to the Court that Plaintiff, once again, represented it, and its financial and legal
counsel, received, reviewed, and understood the SSA and any other information
pertaining to the December 2013 investment.119 Nevertheless, the Court is not
inclined to dismiss Plaintiff’ s fraud claim as it relates to the SSA at this juncture
Plaintiff pleads that Mr. Homschek insisted “the financial accounting reporting
function for PF USA be controlled by Global in Australia and not accessible to the
other stockholders.”120 lt seems reasonable to infer, given these allegations, that
Plaintiff demanded SSA § 2.7 as contractual assurance that the financial statements
upon which it was relying fairly and accurately reflected the Company’s financial
condition, The Motion to Dismiss Counts l and ll regarding the First lnvestment and
the PPM financials and CFK predictions is GRANTED. However, the Homschek
116 Defs.’ Reply Br. at 13-14.
117 Debakey Corp. v. Raytheon Serv. Co., 2000 WL 1273317, at *25 (Del. Ch. Aug. 25, 2000).
113 SSA at Tab 4D.
1191d. § 3.1(1).
120 Ia'. (emphasis added).
27
Defendants’ Motion to Dismiss Counts l and ll regarding the First lnvestment and
any omissions or representations about the personal use of the funds is DENIED.
Similarly, Homschek Defendants’ Motion to Dismiss regarding the Second
lnvestment is DENIED.
B. Breach of Contract
ln the Complaint, Plaintiff alleges the Homschek Defendants have breached
the SHA, FSA, and the SSA in an effort to induce Plaintiff to invest in the PF USA.
More specifically, Plaintiff argues the Defendants breached the FSA and SSA when
Defendants provided inaccurate financial statements and did not use the proceeds in
accordance with SSA listed uses. Plaintiff also asserts that the Homschek Defendants
breached SHA by: (1) “failing to provide timely financial statements that were full,
fair, accurate, and compliant with [GAAP]”121 and (2) by using their “control over
the financial reporting of PF USA to cause the generation and presentation of
inaccurate financial statements.”122
Homschek Defendants refute the Plaintiff"s breach of contract claims, as Mr.
Homschek was not a party to the SHA, FSA, or the SSA, nor was Global a party to
either the FSA or SSA. Defendants argue Mr. Homschek and Global can face no
personal liability because only Pie Face Holdings, lnc. signed the FSA and SSA.123
1911d. at §§ 13.1-13.4.
122 SHA §§ 8.2, 6.1; SAC 1111 94-96.
123 Defs.’ Mot. to Dismiss at 38.
28
Defendants further assert that the only agreement the Homschek Defendants could
possibly be accused of breaching is the SHA.124 However, Homschek Defendants
urge the Court to dismiss the Plaintiff" s breach of contract claim regarding the SHA
because (1) Mr. Homschek is not a party to the SHA; (2) the obligations allegedly
breached were those of PF USA, not Global or Mr. Homschek; and (3) Plaintiff
failed to provide PF USA with notice and an opportunity to cure the alleged breaches
as was required under the terms of the SHA.123
The Plaintiff fails to dispute in its Response to the Defendants’ Motion to
Dismiss that Homschek Defendants are not signatories to the FSA and SSA. lnstead,
Plaintist reply focuses solely on why the Homschek Defendants are both parties
and signatories to the SHA. As a result, the Court finds that Plaintiff’ s Breach of
Contract claims regarding the FSA and SSA have been conceded by Plaintiff and do
not warrant further discussion.
However, the Court does find that both Mr. Homschek and Global are parties
to the SHA. Mr. Homschek is a signatory to the SHA126 and the SHA states that it
was “entered into. . .by and among” PF USA and PF USA’s shareholders as “listed
on Schedule 1.”127 Schedule 1 expressly designates Mr. Homschek, in his individual
114 1a a137-38.
125 Id
126 Ia'. at 25.
131 sHA at 1.
29
capacity, as a PF USA shareholder in addition to Plaintiff and Global.123 Thus, the
Court finds the Homschek Defendants, like the other shareholders, were bound by
the terms of the SHA.129
To the extent Count lll relates to the financial and accounting provisions
outlined in § 13 of the SHA, it cannot proceed against the Homschek Defendants.
These provisions expressly obligate “the Company” to take certain measures in
maintaining, preparing, and distributing PF USA’s financial information to its Board
of Directors and shareholders.130 Thus, Plaintiff is limited to seeking recourse for
any of breach of §§ 13.1-13.4 from PF USA.
This logic does not extend, however, to the claims for breach of §§ 8.2 and
6.1 of the SHA. The Complaint identifies Global as PF USA’s controlling
shareholder at all times relevant to this litigation and Mr. Homschek as director,
Chairman of the Board, and CEO of the Company.131 Pursuant to § 8.2, “[e]ach
Shareholder agree[d] with the others” to “exercise all voting rights and powers of
control available to it in relation to the Company so as to give full effect to the terms
and conditions” of the SHA.132 Moreover, § 6.1 states that Mr. Homschek, as
123 Ia'. at Sched. 1.
129 Id. See also id. § 21.4 (providing that the SHA “binds and benefits the parties”).
136 sHA §§ 13.1-13.4.
131 sAC 1111 12_13.
139 sHA § 8.2. The sH
A defines “control” as “the power to direct the management and policies of a person, directly or
indirectly, by or through stock ownership, agency or otherwise . ..” § Id. 1.1.
30
Chairman of the Board, “must act impartially and [to] pay regard to the interests of
the Company.”133 These provisions clearly imposed obligations upon the Homschek
Defendants, 134
Even still, Homschek Defendants respond that Plaintiff’ s claim for breach of
the SHA is barred due to Plaintiff"s failure to comply with § l7. l(a) of the
agreement.133 This section defines “Events of Default” under the SHA and includes
“the failure of a party to do, execute or perform any material deed, matter, act or
thing which that party is obliged to do, execute or perform under this Agreement that
remains unremedied for. . . 10 Business Days after notice has been delivered by the
Company or another Shareholder of that breach.”136 “Notice” given under the SHA
must be, among other things, signed and “in writing.”137 Plaintiff does not dispute
that such notice was never provided.
Delaware Courts “often enforce pre-suit notice provisions.”138 Where a
contract’s terms “clearly evidence an intent that litigation be pursued only after
133 Id. § 6.1. Per PF USA’s Bylaws, among the Chairman’s powers was “determin[ing] the
compensation and duties of all officers, employees and agents of the Corporation.” SAC, Ex. J at
Art. V, § 6.
134 According to Plaintiff, Wynn demanded these contractual protections because it was not
intended that he would be directly involved with the business “beyond attending periodic Board
meetings and receiving certain financial information.” SAC 11 28.
133 Defs.’ Mot. to Dismiss at 38.
136 SHA § 17.1(a).
137 Id. § 19.1(b) - (c).
133See U.S. Bank Nat. Ass’n v. U.S. Tiinberlana’s Klarnath Falls, L.L.C., 2004 WL 1699057, at *3
n.24 (Del. Ch. July 29, 2004) (citing Harper v. Del. Valley Broaa'casters, 743 F. Supp. 1076 (D.
Del. 1990), ajj"a', 932 F.2d 959 (3d Cir.l991); Medspan Shipping Servs., Ltd. v. Prua'ential Lines,
541 F. Supp. 1076, 1079 (E.D.Pa. 1982); Int'l Bus. Machines Corp. v. Coma'isco, Inc., 1991 WL
31notice and an opportunity to cure,” a party must generally comply with prescribed
notice and cure procedures in order to pursue a claim of breach under the
agreement.139 The mere filing of a complaint is insufficient to “afford the receiving
party an opportunity to cure its defaults in a non-litigious manner.”140 Defendants
argue that the only reasonable interpretation of § 17.1(a) is that no party to the SHA
can sue for breach of that contract without first providing notice and an opportunity
to cure.141
Plaintiff counters that the SHA cannot be read as requiring notice as a
condition precedent to its ability to file suit.142 ln support of this position, Plaintiff
correctly points out that, unlike in the cases relied upon by Defendants, the SHA
lacks any language connecting the events of default defined in § 17.1 with its
authority to sue for breach of the agreement.143 ln particular, Defendants cite U.S.
Bank National Ass ’n v. U.S. Timberlands Klainath Falls, LLC and Cornell Glasgow,
LLC v. LaGrange Properties, LLC. ln U.S. Bank National Association, the Court of
Chancery found the parties to have contracted to a pre-suit notice provision where
their agreement clearly defined an “Event of Default” and, “of particular relevance,”
269965, at *9 (Del. Super. Ct. Dec. 4, 1991) (citing Harper and Medspan with approval for
proposition that filing of complaint is inadequate notice because there is no ability to cure in a non-
litigious manner)).
139 See id.
140 See id. (quoting Mealspan Shipping Servs., 541 F. Supp. at 1079).
141 Defs.’ Reply Br. at 15.
142 Pl.’s Answ. Br. in Opp’n to Defs.’ Mot. to Dismiss at 32.
143 Ia'. at 33.
32
included a provision specifically tying the trustee’s power to sue to the occurrence
of an Event of Default. 144 Further, in Cornell Glasgow, the Delaware Superior Court
found, following trial, that the contract at issue “oblig[ated]” the parties “to
provide...notice of default and opportunity to cure before pursuing remedies for
breach in court.”145
The parties have not identified any other provision in the SHA referencing §
17.1 or the term “Event of Default.” Nor has either party pointed to language in the
contract “prescribing the consequences of failing to follow the[]...[notice]
procedure[].”146 At the motion to dismiss stage, the Court cannot conclude the SHA
144 See U.S. Bank Nat. Ass’n, 2004 WL 1699057, at *3. “The Chancery Court, upon “[r]eading
the[] provisions [of the contract] together,” determined it was “clear that if there is no failure to
make a required payment, the lndenture makes the Trustee’s authority to sue dependent upon the
giving of notice of a default and passage of the 60-day cure period.” ld. The Court’S discussion of
these provisions is as follows:
Of particular relevance, section 6.3 of the lndenture grants the trustee the authority to sue the Issuer
but ties that power to the occurrence of an Event of Default, as follows:
If an Event of Default occurs and is continuing, the Trustee may
pursue any available remedy (under this lndenture or otherwise) to
collect the payment of principal or interest on the Notes or to enforce
the performance of any provision of the Notes, or this lndenture.20
Finally, the phrase “Event of Default” is defined by section 6.1 of the lndenture, providing that an
Event of Default occurs if there is a failure to make a required payment of principal_(subsection
(a)) or interest (subsection (b)), or, pertinently among other things, if there is a:
(c) failure to perform or observe any other term, covenant or
agreement contained in the Notes, any Subsidiary Guarantee or the
lndenture and such default continues for a period of 60 days after
written notice of such default requiring the lssuers to remedy the
same shall have been given. . .”
143 See Cornell Glasgow, LLC v. LaGrange Props., LLC, 2012 WL 6840625, at *11 (Del. Super.
Ct. Dec. 7, 2012).
146 See generally Anvil Holding Corp., 2013 WL 2249655, at *10 (noting that where party gave
notice under contract, but neglected to follow remaining procedures that “[t]he parties have not
identified any provision prescribing the consequences of failing to follow one or all of these
33
“clearly evidences” that the parties intended § l7.1(a) to bar the instant claims.147
The Motion to Dismiss Count lll as it relates to the Homschek Defendants’
obligations under §§ 8.2 and 6.1 of the SHA is therefore DENIED. Homschek
Defendants’ Motion to Dismiss Count lll as it relates to the FSA and SSA is
GRANTED.
C. Tortious Interference
To state a claim for tortious interference, a plaintiff “must establish the
existence of: ‘(l) a contract, (2) about which defendant knew and (3) an intentional
act that is a significant factor in causing the breach of such contract (4) without
justification (5) which causes injury.”’148 The parties do not dispute the existence of
the SHA, FSA, and SSA, nor do they dispute the Homschek Defendants’ knowledge
of these agreements. The parties disagree as to whether there was “an intentional act
that is a significant factor in causing the breach of such contract without justification
which causes injury.”149
procedures, e.g., the Agreement does not state that the lndemnified Party would forfeit its claim
by failing to follow these procedures”).
147 See U.S. Bank Nat. Ass ’n v. U.S. Timberlands Klamath Falls, L.L.C., 2004 WL 1699057, at *3
(Del. Ch. July 29, 2004). See also VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 615
(Del. 2003) (“Dismissal. . .is proper only if the defendants’ interpretation is the only reasonable
construction as a matter of law.”).
143 See Fisk Ventures, LLC v. Segal, 2008 WL 1961156, at *12 (Del. Ch. May 7, 2008) (quoting
AeroGlobal Capital Mgmt., LLC v. Cirrus Indus., lnc., 871 A.2d 428, 437 n. 7 (Del. 2005)), a/j"d,
984 A.2d 124 (Del. 2009).
149 Id
34
Plaintiff alleges in its Complaint that the Homschek Defendants knew about
Plaintiff’s agreements with PF USA and improperly caused the Company to breach:
(1) the SHA by using its control over the Company’s accounting functions and
failing to provide accurate, complete, and GAAP-compliant financial statements;130
(2) the FSA and SSA “by diverting the proceeds of the offering to fund Mr.
Homschek’s lavish lifestyle without board approval;”131 and (3) the SSA “by
presenting. . .incomplete, inaccurate, and fraudulent financial statements. . .not
prepared in accordance with [GAAP] or any other. . .recognized standard[].”152
ln regards to the SHA, Homschek Defendants argue Plaintiff cannot pursue a
claim for tortious interference on two grounds. First, Homschek Defendants argue
that the claim must be dismissed as a matter law, because Plaintiff did not comply
with §17.1 (a), the notice and cure provision required under the SHA.133 Homschek
Defendants also argue that Plaintiff’s claim must be dismissed because Mr.
Homschek and Global are signatories to the agreement and “defendant[s] cannot
interfere with [their] own contract.”134 Plaintiff disputes the applicability of the
166 sAC 11 103.
131 ld. 11 104.
139 ld. 11 105.
133 Defs.’ Reply Br. at 19.
134 See id.; See Tenneco Auto., Inc. v. El Paso Corp., 2007 WL 92621, at *5 (Del. Ch. Jan. 8, 2007)
(stating tortious interference would thus require that the defendant be a “‘stranger’ to the insurance
contracts, and not a party to them”).
35
notice and cure provisions of the SHA for the instant tortious interference claim,133
however, the Plaintiff does not dispute the principal that parties cannot interfere with
their contract nor does it present any argument or exception against its application
to the SHA. As a result, to the extent the Complaint alleges Mr. Homschek tortiously
interfered with the SHA, Count lV is DISMISSED.136
The Homschek Defendants also argue the Plaintiff is unable to sufficiently
allege interference with the FSA and SSA. The Court disagrees and will not dismiss
this Count as it relates to the FSA and SSA. At this stage of the litigation and
viewing the evidence in the light most favorable to Plaintiff, there is sufficient
support to find that the Homschek Defendants interfered with PF USA’s ability to
perform under the contracts and did so in a manner causing damages to Plaintiffs.
Having found a sufficient basis to allow this claim to proceed, the Court must
address the issue of privilege raised by Mr. Homschek. 137 Defendants cite the general
principle that “employees or directors of a contracting corporation cannot be held
personally liable for inducing a breach of contract by their corporations when they
133 Plaintiff argues that the Defendants have misinterpreted the SHA. “Section 17.1(a) defines an
“Events of Default,” but does not provide that notice of an Event of Default is a condition precedent
to filing suit [The SHA] is “unlike both U.S. Bank and Cornell Glasgow, [because it] does not
contain any provision that ties the ability or authority to file suit to the failure to cure an Event of
Default. . .” Pl.’s Answ. Br. in Opp’n to Defs.’ Mot. to Dismiss at 33.
136 See id. at *5-6.
137 Homschek Defendants also argue Global, as a parent entity, cannot be liable for tortious
interference with a contract of PF USA, its subsidiary. However, because default judgment was
previously entered against Global, the Court need not discuss this privilege issue Defs.’ Mot. to
Dismiss at 38-40.
36
act within their role.”133 Under Delaware law, a director or officer of a corporation
typically will not be held liable for tortious interference with the contracts of their
company unless the individual’s conduct exceeds the scope of his or her agency.159
Mr. Homschek served as PF USA’s CEO and as Chairman of the Company’s Board
of Directors. As Chairman of the Board, Mr. Homschek was required pursuant to the
SHA to act “impartially” and to “pay regard to the interests of the Company.”160 As
CEO, Mr. Homschek was apparently tasked with the “general supervision, direction
and control of the business and the officers of the Corporation” and was granted “the
general powers and duties of management usually vested in the. . . [CEO] of a
corporation.”161 The Complaint alleges Mr. Homschek tortiously interfered with PF
USA’s obligations to appropriately use the investment funds and to provide fair and
accurate financial information. Mr. Homschek is also alleged to have engaged in
self-interested conduct, namely the diversion of the investment proceeds for his
personal use without regard for PF USA’s obligations or the interests of the
Company’s other shareholders These allegations suffice at this stage to support an
133 Id. at 38-39 (quoting Shearin v. E.F. Hutton Group, Inc., 652 A.2d 578, 590 (Del. Ch. 1994)).
139 see opiimiscorp v. Waize, 2015 wL 5147038, at *76 n. 601 (Del. Ch. 2015) (citing rm ’1Ass 'n
of Heat & Frost Insulators & Asbestos Workers Local Union 42 v. Absolute Envtl. Servs., Inc.,
814 F. Supp. 392, 400 (D. Del. 1993)). The rationale behind this concept is that “employees acting
within the scope of their employment are identified with the defendant [entity] so that they may
ordinarily advise the [entity] to breach [its] own contract without themselves incurring liability in
tort.” See Wallace v. Wood, 752 A.2d 1175, 1182-83 (Del. Ch. 1999).
166 sHA § 6.1.
161 SAC, Ex. J at Art. V, § 7.
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inference that Mr. Homschek acted outside of his agency authority and the Court
will not dismiss Count lV in regards to the FSA and SSA.
D. Negligent Misrepresentation
Finally, Plaintiff alleges a separate count of negligent misrepresentation
While “justifiable reliance is an element of common law fraud, equitable fraud, and
negligent misrepresentation under Delaware law”162 and may permit a collective
approach, “[i]t is [also] well-settled Delaware law that the Court of Chancery has
exclusive jurisdiction over claims of negligen[t] misrepresentation.”163 Therefore,
before the Court can decide if the Plaintiff has adequately pled grounds for negligent
misrepresentation, it must first determine if there is proper jurisdiction for Count V
to remain in Superior Court.
A claim for negligent misrepresentation requires the plaintiff to prove “1) a
particular duty to provide accurate information, based on the plaintiffs pecuniary
interest in that information; 2) the supplying of false information; 3) failure to
exercise reasonable care in obtaining or communicating information; and 4) a
pecuniary loss caused by justifiable reliance on the false information.”164 As stated
above, such a claim is subject to the exclusive jurisdiction of the Court of
161 ld. at 142-43.
163 ran Lake v. Son'n CRM USA, Inc., 2013 wL 1087583, at *11 (Del. super. Ct. Feb. 15, 2013)
(citing State Dep ’t of Transp. v. Figg Bridge Eng'rs, Inc., 2001 WL 5593163, at *4 (Del. Super.
Ct. Nov. 9, 2011)).
164 H-M Wexford LLC, 832 A.2d at 142-43 n.44 (Del. Ch. 2003) (citing Glosser v. Cellcor,
Inc., 1994 wL 593929, at *22 (Del. Ch. 1994).
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Chancery.165 ln fact, in Mark Fox Group, Inc. v. E.I. Dupont de Nemours &
Company, the Court of Chancery refused to allow concurrent jurisdiction over
claims of negligent misrepresentation with the Superior Court166 except in very
limited circumstances.167 As such, the Superior Court has generally found a claim of
negligent misrepresentation lies in the Court of Chancery unless the claim is in the
context of the Consumer Fraud Act.”168
When the Superior Court is presented with cases like the one at hand, where
negligent misrepresentation is alleged without a Consumer Fraud Act violation, the
[C]ourt has generally looked beyond the ‘labeling’ of the claim [as negligent
misrepresentation] and examined its substance to determine the true nature of the
claim.”169 ln these cases, the Court must determine whether the plaintiff has actually
pled negligent misrepresentation or simply negligence.170 lf the Court found that the
claim was truly negligent misrepresentation, it is an equitable claim and must be
163 See ran Lake v. Son'n CRM USA, Inc., 2013 wL 1087583, at *11.
166 Mark Fox Group, Inc. v. E.I. Dupont de Nemours & Company, 2003 WL 21524886, at *6 (Del.
Ch. July 2, 2003).
167 Prior to Mark Fox Group, Inc. v. E.I. Dupont de Nernours & Company, the Superior Court in
Ruger v. Funk and Guardian Construction Co. v. Tetra Tech Richardson, Inc., found proper
jurisdiction over negligent misrepresentation claims that were refuted by the economic loss
doctrine through the Section 552 of the Restatement (Second) of Torts (1977) exception. ln a 2006
case, Atwell v. RHIS, Inc., the Superior Court seemed to abandon such an exception to the
Chancery Court’s jurisdiction. Atwell v. RHIS, Inc., 2006 WL 2686532, at *2 (Del. Super. Ct. Aug.
18, 2006)).
163 See Van Lake v. Sorin CRM USA, Inc., 2013 WL 1087583, at *11 (quoting Iacono v. Barici,
2006 WL 3844208, at *5 (Del. Super Ct. Dec. 29, 2006)); see also FA, Inc. v. Equipment Leasing
As)sociates, 5 2005 WL 3436605, *1 (Del. Super. Ct. 2005).
16 Id.170 Id. at *12.
39
heard in the Court of Chancery.171 However, if it is a negligence claim, the Superior
Court has generally retained jurisdiction
ln the instant case, the Plaintiff has not pled a Consumer Fraud Act violation
As a result, the Homschek Defendants argue that this Court does not have proper
jurisdiction over Count V and must dismiss the claim in its entirety. Plaintiff
contends that this Court has jurisdiction over Count V because the Superior Court
has previously exercised jurisdiction over negligent misrepresentation claims
outside of the Consumer Fraud context.172 Plaintiff also asserts that Count V can be
properly heard in this Court because it is based upon a negligence claim.173
While the Court has no reason to dispute the well-reasoned findings made by
other judges of this Court in the context of negligent misrepresentation claims, it
finds the alleged distinction between negligence and negligent misrepresentation
difficult to continue to justify. The elements of duty of care and the exercise of
reasonable care are common in both and seldom does the Court fail to see an
allegation of justifiable reliance regardless of how the complaint is made. Candidly,
if the Court wanted to, it could almost always find (or not find) negligence in these
breach of contract matters as the distinction is so minimal. This judge believes it is
171 See Mark Fox Group, Inc. v. E.I. Dupont de Nemours & Company, 2003 WL 21524886, at *5
(Del. Ch. 2003).
172 Pl.’s Answ. Br. in Opp’n to Defs.’ Mot. to Dismiss at 38 (citing see Chrysler Corp. v. Chaplake
Holdings, Ltd., 822 A.2d 1024, 1037 (Del. 2003); see Gallagher v. E.I. DuPont de Nemours &
C;)., 2010 WL 1854131, at *1-2 (Del. Super. Ct.Apri130, 2010)).
17 ld.
40
time to cease the parsing of words and simply find that the negligent providing of
false information relied upon by the claiming party is a matter for the Court of
Chancery and not the Superior Court. With such a bright line, counsel would clearly
understand the obligation to raise such issues in our equity court and stop including
them in contract disputes hoping the Superior Court will decide to keep the claim
under the disguise of simple negligence
There is no doubt here, after reviewing the Complaint, that Plaintiff intended
to assert a negligent misrepresentation claim. ln the Complaint, Plaintiff asserts that
Defendants knew or should have known the statements were materially false, that
Plaintiff relied upon them and they would be damaged as a result of the
misrepresentation As a result, the Court finds jurisdiction for Count V lies in the
Court of Chancery and will dismiss it from this litigation
IT IS SO ORDERED.
/2(//(1/
4T/dge William C. Carp
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