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Kostyszyn v. Martuscelli

Court of Chancery of Delaware

July 14, 2014

Agnieszka Kostyszyn and Marek Kostyszyn
Gianmarco Martuscelli, Giida Martuscelli, The Estate of Brett J. Harris, Frozen Endeavors, Inc., a Delaware Corporation, AJT, Inc., a Delaware Corporation, and Chesapeake Inn, Inc., a Maryland Corporation

Dear Counsel:

This action involves a dispute between the purchasers and seller of an ongoing business known as Paciugo Gelato and Cafe, (hereinafter "the Business"), which is located in the Christiana Mall in Newark, Delaware. The purchasers seek indemnification, monetary damages, and cancellation of the documents underlying the agreement they made with the seller in December 2011 to purchase the assets of the Business for a purchase price of $272, 500.00. The purchasers contend that the seller misrepresented the financial condition of the Business and breached seller's agreement to continue purchasing gelato from the Business for sale in its other three retail businesses.

Nearly two years after purchasing the Business, purchasers filed a Verified Amended Complaint (the "Complaint") on September 5, 2013, against the seller and several other defendants.[1] The Complaint alleges: (i) breach of contract; (ii) breach of warranty; (iii) indemnification; (iv) equitable fraud; (v) fraud; (vi) negligent misrepresentation; (vii) intentional misrepresentation; and (viii) breach of the covenant of good faith and fair dealing. The Complaint contains nine prayers for relief, seeking declaratory relief, money damages, cancellation of the documents underlying the sale of the Business, an accounting, and "[s]uch other and further relief as this Court deems just and equitable under the circumstances."[2] On October 22, 2013, seller and the other defendants moved to dismiss the Complaint under Court of Chancery Rules 9(b), 12(b)(1), and 12(b)(6).[3] Following briefing on the motion, oral argument took place on March 20, 2014, at the conclusion of which I reserved decision.

Defendants have moved to dismiss the Complaint in its entirety on the grounds that this Court lacks subject matter jurisdiction over plaintiffs' claims and, in any event, that plaintiffs have failed to plead their fraud claims with sufficient particularity, and have failed to state a claim upon which relief may be granted in all counts as well. See Rules 9(b), 12(b)(1), and (b)(6). In this draft report, I recommend that the Court dismiss plaintiffs' equitable claim (Count IV) with prejudice under Rule 12(b)(6), but allow plaintiffs to transfer their remaining legal claims to a court of law.

Factual Background[4]

The plaintiffs are Agnieszka and Marek Kostyszyn, who purchased the Business in December 2011 from Defendant Frozen Endeavors, Inc. The other defendants are the Estate of Brett J. Harris, [5] Gianmarco and Gilda Martuscelli, AJT, Inc., and Chesapeake Inn, Inc. The Martuscellis are principals in Frozen Endeavors, Inc., AJT, Inc., and Chesapeake Inn, Inc. AJT, Inc. owns and operates La Casa Pasta Restaurant in Newark, Delaware, while Chesapeake Inn, Inc. owns and operates the Chesapeake Inn, in Chesapeake City, Maryland, and formerly owned and operated the Canal Creamery and Sweet Shoppes (the "Creamery") also in Chesapeake City, Maryland.

On December 1, 2011, plaintiffs entered into an agreement of sale with Frozen Endeavors to purchase the Business for $272, 500.00. The decision to purchase the Business and the purchase price was based upon sales information reported to Marek by Gianmarco and Harris at their first meeting, and subsequent statements provided to Marek regarding business earnings, on-site sales, catering sales, and profit analysis.[6] Plaintiffs timely paid the purchase price in three installments, with the final installment being paid on December 31, 2011. The assets of the Business already had been transferred to plaintiffs on December 1, 2011. As part of the transaction, the Business's ten-year lease with Christiana Mall was assumed by plaintiffs.

At the first meeting between the parties, Gianmarco and Harris produced an earnings statement that reflected a profit of $7, 186.21 on retail sales of $282, 473.03 and catering sales of $74, 882.00 (gross sales equaling $357, 355.04) from the opening in July 2010 through August 2011.[7] The agreement was drawn to reflect the importance of catering sales as consideration for the purchase. Section 5.d of the Agreement states that: "Seller shall continue to purchase gelato for Chesapeake Inn, Canal Creamery & Sweet Shoppe ("Creamery") and La Casa Pasta for a period often years so long as Buyer does not breach its obligations under this agreement of Buyer's lease with Christiana Mall, LLC."[8]

Following the sale of the Business to plaintiffs, catering sales dropped in 2012 to $18, 475.00. In August 2011, defendants Gianmarco, Harris, Gilda, and Chesapeake Inn had begun offering ice cream at the Creamery without notifying plaintiffs. Furthermore, by agreeing to purchase gelato for a period often years, defendants had represented that they would continue to operate the Creamery for a period often years when, in fact, they only held a three-year lease on the property where that business was located. In an email to Marek dated July 2, 2013, Gianmarco admitted that he sold his interest in the Creamery prior to the end of the three-year lease because he had been losing money at that location for the past two years (2011 and 2012). The Business's catering sales for the period of January 1, 2013 to August 13, 2013, to the Chesapeake Inn and La Casa Pasta totaled only $3, 300.00. In another email to Marek dated July 3, 2013, Gianmarco stated that:

I lost money at [the Business] and the Creamery but I tried my best and it wasn't good enough. [Harris] and I sold [the Business] because we were both losing too much money ([Harris] lost all his savings and had nothing left). We sold you the business while still owing the bank over $70k in a loan that I just finished paying off this year. We didn't make any money from you or anything associated with [the Business]. We were absentee owners who couldn't afford to pay the bills any longer.[9]

Plaintiffs now allege that the overstatement of the continuing agreement to purchase gelato, along with defendants' improper representations, assurances, business practices and financial statements, which were false and misleading, directly resulted in plaintiffs calculating a purchase price that was more than they would otherwise have been willing to pay for the Business. Furthermore, defendants' failure to disclose that the Business was "losing too much money" caused the plaintiffs to enter into a long term lease with Christiana Mall, exposing the assets of the Business to potential claims and the plaintiffs to personal liability under the terms of the lease if the Business were to fail.


Defendants have moved to dismiss the Complaint on three grounds. First, they contend that under Rule 12(b)(1), this Complaint should be dismissed for lack of subject matter jurisdiction because plaintiffs' only claims sounding in equity -equitable fraud/negligent misrepresentation - fail as a matter of law under Rule 12(b)(6). Defendants argue that the only other potential basis for equitable jurisdiction, i.e., plaintiffs' prayers for relief requesting cancellation/rescission and an accounting, also fail because plaintiffs waited too long to seek rescission and have failed to plead a predicate basis for which they would be entitled to the remedy of an accounting. According to defendants, plaintiffs have failed to state a claim under Rule 12(b)(6) and failed to meet the pleading requirements set forth in Rule 9(b) for fraud, misrepresentation, equitable fraud, and negligent misrepresentation, and have failed to state a claim under Rule 12(b)(6) for breach of contract, breach of express warranty, indemnification, and breach of the implied covenant of good faith and fair dealing.

Plaintiffs oppose the motion, arguing that as to the Court's subject matter jurisdiction, their pleadings contain prayers for equitable relief, specifically for cancellation of the agreement and an accounting, and in general as justice requires. Furthermore, they argue that all of defendants' arguments regarding the substantive law of Delaware are nonresponsive, irrelevant and moot because the sales agreement executed by the parties contains an express choice of law provision stating that the agreement shall be governed by Maryland law.[10] Plaintiffs contend that they have sufficiently pled their tort claims against the defendants based on defendants' failure to disclose information regarding catering sales, the intended closing of the Creamery, the material change to the operation of the Creamery, and the misstatements and misrepresentations of the financial condition of Frozen Endeavors and the Creamery. ...

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