Submitted: May 18, 2017
R. Wood, Jr., Esquire Adam V. Orlacchio, Esquire Blank Rome
P. DiTomo, Esquire Alexandra M. Cumings, Esquire Morris,
Nichols, Arsht & Tunnell LLP.
Michael Busenkell, Esquire Margaret F. England, Esquire
Gellert Scali Busenkell & Brown, LLC.
Rohrbacher, Esquire Susan M. Hannigan, Esquire Richards,
Layton & Finger, P.A.
letter opinion resolves Defendants' motion to dismiss.
Defendants move to dismiss for lack of subject matter
jurisdiction because, in their view, the complaint merely
seeks to collect a debt, and damages provide an adequate
remedy at law. They also move to dismiss for failure to state
a claim, and Defendant Ahmed Khattak moves to dismiss for
lack of personal jurisdiction. Because, when viewed
holistically, the complaint does not assert any equitable
claims and an adequate remedy exists at law, the motion to
dismiss for lack of subject matter jurisdiction is granted.
facts outlined in this letter opinion derive from
Plaintiff's Verified Amended Complaint (the
GSM Nation, LLC ("GSM") is a Delaware limited
liability company in the mobile phone retail and wholesale
business. Defendant Ahmed Khattak is the chief executive
officer, co-founder, and manager of GSM and owns 85% of the
GSM units. Junaid Shams is the other co-founder of GSM. Shams
was acquainted with Plaintiff David Warren Yu through medical
studies at the George Washington University before Yu loaned
money to GSM in the series of transactions that gave rise to
U.S. Mobile Inc. was a Delaware corporation that was merged
with and into Defendant U.S. Mobile LLC, a Delaware limited
liability company, on July 1, 2015. Khattak also allegedly
controls U.S. Mobile LLC.
and Shams founded GSM in 2010, and since then, the company
has allegedly experienced "tremendous
growth." In 2011, GSM was featured in Forbes
magazine and listed among Businessweek's 25 most
mid-2012, GSM sought to expand further by developing a mobile
virtual network operator ("MVNO"), which would
allow GSM to provide cellular service plans to its customers.
But GSM was cash strapped at the time. Shams, at
Khattak's request, approached Yu for the purpose of
soliciting loans to GSM, and Khattak allegedly represented to
Yu that GSM needed capital to launch an MVNO. In October
2012, GSM provided Yu with a prospectus that included the
plan to form an MVNO as a division of GSM.
February 2013 through September 2014, Yu loaned $3, 500, 000
to GSM under a series of 16 separate loan agreements (the
"Loan Agreements") bearing 12% simple interest,
payable monthly. Yu was entitled to call the loans at any
time with 60 days' notice.
paid Yu the required monthly interest payments and employed
personnel to develop MVNO capabilities. The Complaint also
alleges that Khattak paid himself "a draw" of $10,
000 to $15, 000 per month from GSM while Yu was making loans
to the company. Additionally, Khattak used $5, 000 from GSM
each month to cover his personal living expenses. And the
Complaint asserts that Khattak "tried to buy a luxury
car using a cashier's check from GSM,
" but it does not allege that Khattak was
successful in buying the car or when he made the attempt.
April 2013, GSM released an MVNO business plan, which stated
in part that the MVNO GSM was developing would be a part of
GSM. But Yu alleges that instead of completing the MVNO
development process within GSM, Khattak applied to the
Federal Communications Commission (the "FCC") on
behalf of U.S. Mobile LLC for permissions related to becoming
an MVNO. U.S. Mobile LLC sought the right from the FCC to
provide global resale services between the United States and
points abroad. Yu alleges that, as a result, U.S. Mobile LLC,
not GSM, became an MVNO. Yu also asserts on information and
belief that Khattak caused GSM to purchase cellular phones
and transfer them to U.S. Mobile LLC for no consideration,
but the Complaint does not allege when this transfer
paid Yu the required interest payments under the Loan
Agreements until January 2016 when GSM's interest check
was returned for insufficient funds. GSM's February 2016
interest check also was returned for insufficient funds. On
February 17, 2016, Yu made a demand for full payment of the
debt pursuant to the Loan Agreements. But GSM allegedly
responded that "given the current state of the business,
GSM is not able to repay or service the
loan." GSM provided Yu with a GSM income
statement dated December 4, 2015, which showed a net loss of
$812, 257, and a GSM balance sheet dated January 31, 2016,
which showed total assets of $112, 730.27 and total
liabilities of $4, 403, 083.35.
3, 2016, Yu filed the original complaint in this action, and
on July 26, 2016, he filed the Complaint at issue in this
motion. Count I of the Complaint alleges a breach of contract
claim against GSM for failure to repay the loans. Count II is
a claim for fraudulent inducement against GSM and Khattak in
connection with the Loan Agreements because GSM and Khattak
allegedly represented that an MVNO would be developed within
GSM. Count III alleges equitable fraud against GSM and
Khattak for the same conduct. Count IV is a fraudulent
transfer claim against GSM, Khattak, U.S. Mobile LLC, and
U.S. Mobile Inc. Count V alleges unjust enrichment against
GSM, Khattak, U.S. Mobile LLC, and U.S. Mobile Inc., and
count VI seeks to pierce the corporate veils of GSM, U.S.
Mobile LLC, and U.S. Mobile Inc. under an alter ego theory of
liability against Khattak. Further, Yu's prayer for
relief requests "equitable rescission" of the loan
agreements, "reformation, " a "constructive
trust" voiding the transfers from GSM to U.S. Mobile
LLC, and an "equitable accounting."
August 9, 2016, Defendants GSM, U.S. Mobile Inc., and U.S.
Mobile LLC moved to dismiss the Complaint for lack of subject
matter jurisdiction. Defendant Khattak moved to dismiss for
lack of personal jurisdiction, and all Defendants moved to
dismiss for failure to state a claim. Yu asserts that his
claims for equitable fraud and unjust enrichment are
equitable claims. And he argues that his claims for
fraudulent transfer and fraudulent inducement seek equitable
remedies such that the Court of Chancery has subject matter
jurisdiction. Yu contends that the Court has jurisdiction
over his breach of contract claim ...