Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

In re Bracket Holding Corp. Litigation

Superior Court of Delaware

July 31, 2017

IN RE BRACKET HOLDING CORP. LITIGATION

          Submitted: January 31, 2017

         Express Scripts, Inc. and United BioSource LLC's Motion to Dismiss Bracket Holding Corp.'s Amended Complaint - DENIED

         Jim Stewart's Motion to Dismiss Bracket Holding Corp.'s Amended Complaint - GRANTED

         Bracket Holding Corp. and PCP Managers LLC's Motion to Dismiss Counts I, II, IV and V of United BioSource LLC's Amended Complaint - GRANTED in Part and DENIED in Part

          David E. Ross, Esquire, Nicholas D. Mozal, Esquire, Ross Aronstam & Moritz LLP, of Counsel: Reed S. Oslan, P.C., Scott A. McMillin, P.C., Leslie S. Garthwaite, Esquire, Brett A. Nerad, Esquire, Kirkland & Ellis LLP, Attorneys for Bracket Holding Corp. and PCP Managers LLC.

          Edward B. Micheletti, Esquire, Cliff C. Gardner, Esquire, Matthew P. Majarian, Esquire, Skadden, Arps, Slate, Meagher & Flom LLP, One Rodney Square, . Attorneys for Express Scripts, Inc. and United BioSource LLC.

          Stephen E. Jenkins, Esquire, Catherine A. Gaul, Esquire, Marie M. Degnan, Esquire, Ashby & Geddes, P.A.Attorneys for Jim Stewart.

          MEMORANDUM OPINION

          JUDGE WILLIAM C. CARPENTER JR.

         Three motions to dismiss have been filed in this consolidated matter: (1) Express Scripts, Inc. and United BioSource LLC's Motion to Dismiss Bracket Holding Corp.'s Amended Complaint; (2) Jim Stewart's Motion to Dismiss Bracket Holding Corp.'s Amended Complaint; and (3) Bracket Holding Corp. and PCP Managers LLC's Motion to Dismiss Counts I, II, IV, and V of United BioSource LLC's Amended Complaint. For the foregoing reasons, the Motion of Express Scripts, Inc. and United BioSource LLC is DENIED, Jim Stewart's Motion is GRANTED, and Bracket Holding Corp. and PCP Managers LLC's Motion is GRANTED in Part and DENIED in Part.

         I. BACKGROUND

         A. The Parties

         Express Scripts, Inc. ("ESI"), a Delaware corporation engaged in pharmaceutical support services and benefits management, purchased United BioSource LLC ("UBC") in April of 2012.[1] Among other subsidiary entities, UBC owned Bracket Global Holdings LLC, Bracket Global K.K., and Bracket Global Limited (collectively, "the Company").[2] In June of 2013, Parthenon Capital Partners ("Parthenon"), a private equity fund, formed Bracket Holding Corp. ("Bracket") for purposes of purchasing the Company from UBC ("Transaction").[3]

         Jim Stewart ("Stewart") was the Company's Vice President of Finance and Controller for its Scientific Services division at all relevant times prior to closing.[4]On August 15, 2013, after the Transaction closed, Stewart was appointed as Bracket's Vice President of Finance and Secretary.[5]

         B. Marketing & Sale of the Company

         ESI and UBC began marketing the Company for sale in the fall of 2012.[6]ESI, through its agents and employees, apparently "exercised significant control over the process of selling the Company."[7] ESI hired Credit Suisse Securities (USA) LLC ("Credit Suisse") as a financial advisor and KPMG LLC ("KPMG") to perform seller-side due diligence.[8] Credit Suisse prepared a Confidential Information Memorandum ("CIM"), [9] and KPMG conducted a Quality of Earnings ("QoE") investigation and issued its findings in a February 2013 QoE Report.[10]

         Both the CIM and QoE Report would be provided to potential purchasers in connection with the sale of the Company.[11] The materials reflected, among other things, the Company's historical earnings before interest, tax, depreciation, and amortization ("EBITDA"), along with current and projected estimates of working capital.[12] The CIM touted the Company as a leading pharmaceutical services provider with a 16.4% increase in revenue from 2009 to 2012.[13] These financial figures were apparently based on historical "unaudited internal management financial statements" and projections supplied by Company management.[14] The QoE Report cited the CIM, information provided by management, and "Q&A sessions" with Stewart and others as the "key sources" KPMG relied upon in arriving at its QoE findings.[15]

         ESI and UBC collected and prepared the financial information KPMG and Credit Suisse used to complete the CIM and QoE Report.[16] In this regard, ESI and UBC worked closely with Stewart, as the Company's then-Vice President of Finance and Controller of the Scientific Services division.[17] Throughout the sales process, Stewart was "substantially involved and worked closely with ESI and UBC in responding to due diligence requests with respect to the Company's revenue recognition policies and financial statements."[18]

         At ESI's direction, UBC sent a copy of the CIM to Parthenon in October of 2012. Based on the representations contained in the CIM and conversations with Credit Suisse personnel, Parthenon viewed the Company as a potential acquisition target. On January 3, 2013, Parthenon sent Credit Suisse an indication of interest.[19]

         Several meetings among Parthenon, Company management, and representatives of both ESI and UBC took place in January and February of 2013.[20] On February 22, 2013, Parthenon sent a letter of intent to purchase the Company.[21] Thereafter, Parthenon continued to perform due diligence, which included review and consideration of the QoE Report, the Company's financials, and customer agreements. Parthenon also engaged auditors from Ernst & Young to further assist with the diligence process.

         On April 13, 2013, Parthenon submitted a revised letter of intent based collectively on the CIM, QoE Report, and the represented historical financial information of the Company through March 31, 2013. These financials reflected that the Company continued to generate over $30 million in EBITDA over the prior twelve-month period. Parthenon's intent to purchase the Company would nevertheless remain contingent upon the Company's financial performance through May 2013.

         UBC and Credit Suisse provided the May 31, 2013 financial statements to Parthenon in early June 2013. The updated financials were based on and incorporated the March 31, 2013 statements, and reflected similar trailing twelve months ("TTM") revenue and EBITDA.[22] UBC and ESI allegedly represented that the financial information was true and accurate.[23]

         Satisfied with the information it received about the Company, Parthenon formed Bracket to complete the Transaction.[24] Bracket agreed to purchase the Company from UBC for over $180 million. This final purchase price was apparently based in large part "on ESI's and UBC's represented TTM EBITDA generated by the Company as of May 31, 2013..., "[25]

         C. The Securities Purchase Agreement

         UBC and Bracket entered a Securities Purchase Agreement ("SPA") on July 12, 2013.[26] The SPA included express representations and warranties by UBC as to the accuracy of certain financial information. Specifically, in § 3.4, UBC represented and warranted that the "Financial Statements" were derived from and consistent with the Company's books and records, had been "prepared in accordance with" U.S. Generally Accepted Accounting Principles ("GAAP"), and "present[ed] fairly in all material respects the financial position and results of operation" of the Company.[27] As defined, "Financial Statements" included the Company's unaudited combined balance sheets as of (1) March 31, 2013 and "related statements of income for the three-month period then ended;" (2) December 31, 2012 and "related statements of income for the twelve-month period then ended;" and (3) December 31, 2011 and "related statements of income for the twelve-month period then ended."[28]

         For purposes of the SPA, "Working Capital" was defined as "the sum of the current assets of [the Company]... less the sum of the current liabilities of [the Company], all as determined in accordance with GAAP applied on a basis consistent with the preparation of the Benchmark Statement."[29] The SPA incorporated the Company's statement of Working Capital as of May 31, 2013, which the agreement refers to as the "Benchmark Statement."[30] Section 2.4(a) provides that the Benchmark Statement had been "calculated in accordance with GAAP" and identifies a "Benchmark Working Capital" of nearly $11.9 million.[31]Prior to Closing, UBC would provide a statement setting forth its "good faith" estimation of Working Capital. This "Estimated Working Capital" figure was "final and binding for purposes of calculating the Closing Payment, " which would be adjusted according to a comparison between the Estimated and Benchmark Working Capital figures.[32] Finally, "Closing Working Capital" would be reflected in a Closing Statement, "prepared consistently with the Benchmark Statement" within 120-days of Closing.[33]

         Section 2.5 of the SPA governed post-Closing adjustments to Closing Working Capital. If UBC and Bracket could not promptly resolve disputes concerning the Closing Working Capital, [34] § 2.5 required that they "jointly refer the dispute to KPMG LLP, " as "Arbiter, " "to finally resolve.. .all points of disagreement set forth in the Notice of Dispute that remain unresolved with respect to the Closing Working Capital reflected on the Closing Statement."[35] The SPA provides that the Arbiter's determinations would be "final, conclusive and binding with respect to.. .Closing Working Capital.. .in the absence of manifest error."

         Closing took place on August 14, 2013. In accordance with SPA Disclosure Schedule 2.3, Bracket wired the funds to close the deal to ESI's account.[36] UBC, at ESFs direction, executed a closing certificate affirming to Bracket that UBC's representations and warranties remained true and correct as of the Closing Date and that all covenants and agreements had been performed.[37] Individuals comprising the "Knowledge Group, " including Stewart, likewise signed certificates at closing attesting to the truth and accuracy of representations and warranties contained in the SPA.[38]

         D. The Transaction Services Agreement

         On August 15, 2013, UBC and Bracket entered a Transition Services Agreement ("TSA").[39] The terms of the TSA pertained to "the provision of certain transitional services in connection with the divestiture and sale of the Compan[y] from UBC to [Bracket]."[40] UBC agreed to provide support and human resources services to Bracket for six months post-closing ("Transition Period") and Bracket agreed to promptly compensate UBC for its services.[41] The terms of the TSA required Bracket to pay UBC within 30 days of receiving each invoice. Under § 2(d), Bracket was prohibited from withholding payment to UBC "on account of any obligation owed by [UBC] to [Bracket] that has not been finally adjudicated, settled, or otherwise agreed upon by the parties in writing."[42] Beginning in October 2013, UBC sent Bracket monthly invoices for its services. To date, none of the invoices have been paid.[43]

         E. Bracket's Discovery of the Alleged Fraud

         The day after the Transaction Closed, August 15, 2013, Stewart was named Bracket's Vice President of Finance and Secretary. However, by December 2013, Stewart's financial reporting and accounting practices were called into question. Bracket's new Chief Financial Officer and consultants apparently "discovered that many of the unbilled receivables" Stewart recorded "were invalid and could never be billed." Further investigation allegedly revealed that Stewart had tracked revenue in a "secret second set of books" and recognized revenue for contracts prior to work being performed, from non-existent and/or terminated contracts, and/or in amounts above contracted totals for active contracts.

         As a result of these improper accounting practices, it is alleged that UBC overstated revenue in connection with the sale of the Company by approximately: $8 million in the financial statements provided for the twelve months ended December 31, 2011; $8 million in the financial statements for the twelve months ended December 31, 2012; and $2.8 million in the financial statements for the three months ended March 31, 2013. Additionally, the Closing Working Capital figure was allegedly inflated by $30 million "on a net basis.. .as a result of the overstatement of revenue's impact on the Company's unbilled receivables and deferred revenue accounts."[44] Overall, Bracket claims it overpaid to acquire the Company by $50 million dollars as a result of the purportedly fraudulent financials Defendants supplied in connection with the Transaction.

         F. The Working Capital Arbitration

         Bracket filed this litigation on February 27, 2015, alleging, among other things, that UBC, ESI, and Stewart fraudulently induced Bracket to purchase the Company with falsely inflated financial information. On March 26, 2015, UBC filed an action in the Delaware Court of Chancery seeking to compel Bracket to commence arbitration in compliance with the § 2.5(b) of the SPA. The Chancery Court granted UBC's request on November 12, 2015 and ordered the parties to promptly commence the working capital arbitration process in accordance with the SPA (the "Chancery Order").[45] The Chancery Order further provided that "the arbiter will not decide defendant Bracket Holding Corp.'s fraud claims pending in Delaware Superior Court... ."[46]

         Per § 2.5(b) of the SPA, each party submitted its proposed calculation of Closed Working Capital and related briefing to the Arbiter ("Working Capital Arbitration").[47] Consistent with the Chancery Order, the Arbiter did not consider "[t]he impact of Stewart's fraudulent activities on the estimated Closing Working Capital.., ."[48] On March 9, 2016, the Arbiter issued its report, ruling in favor of UBC and determining a "Final Working Capital" of $9, 687, 383 thus entitling Bracket to a price adjustment of $504, 591.

         G. The Instant Litigation

         The proceedings in this Court were stayed pending the outcome of Arbitration and the Chancery Court action. After certain of UBC's claims against Bracket were transferred to this Court from the Court of Chancery, this Court entered an order consolidating UBC's case with the litigation Bracket filed in February of 2015. Both Bracket and UBC filed Amended Complaints on April 13, 2016. Bracket's Amended Complaint asserts a number of claims, including fraud, aiding and abetting, conspiracy, and breach of fiduciary duty against ESI, UBC, and Stewart. UBC's Amended Complaint asserts three counts of breach of contract against Bracket (two based on the SPA and one based on the TSA) and two counts of tortious interference against Parthenon.[49]

         UBC and ESI have moved to dismiss Bracket's Amended Complaint pursuant to Delaware Superior Court Civil Rule 12(b)(6) and 9(b) for failure to state a claim upon which relief can be granted and for failure to plead fraud with particularity. Stewart's motion requests dismissal of Bracket's claims against him pursuant to Superior Court Civil Rules 12(b)(1), 12(b)(2), 12(b)(6), and 9(b). Finally, Bracket and Parthenon move to dismiss Counts I, II, IV, and V of UBC's Amended Complaint pursuant to Rule 12(b)(6) for failure to state a claim.

         After two hearings on the motions were held before this Court, the Court reserved decision with respect to UBC and ESI's Motion to Dismiss Bracket's Amended Complaint and Stewart's Motion to Dismiss Bracket's Amended Complaint. The Court denied Bracket's Motion to Dismiss UBC's Complaint as to Count II and reserved decision with regard to Counts I, IV, and V. This Opinion disposes of all outstanding motions.

         II. STANDARD OF REVIEW

         Under Delaware Superior Court Civil Rule 12(b)(6), the Court may dismiss a complaint for "failure to state a claim upon which relief can be granted."[50] On a motion to dismiss, the Court accepts as true the well-pleaded allegations of the complaint and gives the plaintiff "the benefit of every reasonable inference to be drawn from those allegations."[51] "In evaluating the complaint, the [C]ourt may also consider the unambiguous terms of those documents incorporated by reference in the complaint, especially when evaluating a claim that those documents make material misstatements of fact."[52] Only if the Court finds with reasonable certainty that a plaintiff "could prevail on no state of facts inferable from the pleadings" will the Court dismiss the Amended Complaint at this preliminary stage.[53]

         III. ESI AND UBC'S MOTION TO DISMISS BRACKET'S AMENDED COMPLAINT

         Bracket's Amended Complaint asserts two counts of fraud each against UBC (Counts I and III) and ESI (Counts II and IV). Counts I and II allege fraud based on the overstated EBITDA. Counts III and IV claim UBC and ESI fraudulently manipulated the Company's working capital. In addition, Bracket asserts claims for aiding and abetting fraud against ESI (Count VII) and conspiracy to commit fraud against ESI, UBC, and Stewart (Count IX). ESI and UBC move to dismiss Bracket's claims against them pursuant to Rule 12(b)(6), on the grounds that: (1) collateral estoppel prevents Bracket from challenging facts decided in the binding Working Capital Arbitration; (2) the fraud claims are merely bootstrapped breach of contract claims; (3) Bracket fails to state a claim for fraud with the requisite particularity; and (4) Bracket fails to state claims for aiding and abetting and/or conspiracy.

         A. Collateral Estoppel

         ESI and UBC primarily contend that Bracket must be collaterally estopped from challenging facts decided in the Working Capital Arbitration. In response, Bracket argues that application of collateral estoppel would be inappropriate because the Arbitration adjudicated a much narrower dispute than that presented in the instant litigation.

         The doctrine of collateral estoppel "precludes a redetermination of facts actually litigated and determined in a prior proceeding."[54] Arbitration is included among the "prior actions" to which the doctrine applies.[55] Importantly, it is the burden of the party raising collateral estoppel to show "that the issue whose relitigation [it] seeks to foreclose was actually decided in the first proceeding."[56]Ultimately, in order for collateral estoppel to bar Bracket's claims, UBC and ESI must demonstrate that: "(1) a question of fact essential to the judgment (2) [was] litigated and (3) determined (4) by a valid and final judgment."[57] In assessing whether these elements are satisfied, the Court must necessarily "consider the prior adjudication in order to determine whether issue preclusion bars [the] plaintiffs claims."[58]

         Bracket's Amended Complaint alleges that the Company's unbilled receivables and deferred revenue were fraudulently inflated, resulting in an overstatement of net working capital by approximately $30 million.[59] While, in hindsight, it would perhaps have been more productive for all issues relating to working capital to have been presented to the Arbiter, that simply did not occur here. While the Court will not comment on the truncated presentation to the Arbiter, what was provided, and why the Working Capital Arbitration proceeded in the manner it did, it is clear to the Court that Bracket's fraud allegations were not factored into the Arbiter's working capital determination and thus, were not "actually litigated" at that time. The directions from the Chancellor did not require such determination and, in fact, the Chancery Order removed it from the arbitration decision unless pursued by Bracket. Bracket's arbitration submissions clearly reflect its intention to remove the fraud issues from the scope of the Working Capital Arbitration. Bracket's January 29, 2016 submission reads:

In accordance with the terms of the SPA and the Chancery Court's Order, for purposes of this arbitration, Bracket has removed all adjustments from its Working Capital calculation that pertain to and overlap with its fraud claims and the underlying fraudulent accounting issues. Accordingly, Bracket has dropped all issues relating to fraud from the arbitration.
As Bracket has explained in its Complaint filed in the Superior Court Suit, the Benchmark Statement was prepared using fraudulent financial records. However, solely for the purposes of this arbitration, Bracket will arbitrate the dispute over working Capital, as described under the SPA, without regard to the fraud embedded in the Benchmark Statement and other financial records. For the arbitration only, Bracket removed adjustments to account balances that are based upon or overlap with Bracket's Superior Court fraud claims.

         Bracket cites CompuCom Sys., Inc. v. Getronics Fin. Holdings B. V.[60] as setting forth the proper scope of arbitration determinations like the one at issue here. In CompuCom, the U.S. District Court for the District of Delaware refused to dismiss a plaintiffs fraud claim based on the doctrine of collateral estoppel despite prior arbitration concerning post-closing adjustments to purchase price.[61] The Court recognized that such proceedings generally "encompass[] narrow paradigms"[62] and exist ""not to determine whether the .. .purchase price agreed to.. .was 'the fair sale price for the company[, ]"'since "the process assumes the accuracy of the baseline purchase price[, ]" but rather "to account for post-agreement changes in the value of the acquired company over the brief period between the signing and closing.., ."[63] The Court also emphasized that there, as here, the contract "differentiate[d] between the purchase price adjustment mechanism and the entirely separate representations and warranties made by the Sellers, " and therefore "clearly anticipate[d]" that the plaintiff could pursue an action for fraud to enforce the representations and warranties.[64]

         UBC and ESI argue that CompuCom is distinguishable from the instant matter because, there, the Arbiter's determination expressly "differentiated between [the Arbiter's] limited role under the purchase price adjustment mechanism and whether the allegations of fraud have any merit."[65] Similarly, in Mehiel v. Solo Cup Co., [66] the Court permitted the plaintiffs claim that the defendant "failed to prepare its working capital statement in good faith in its treatment of the Earthshell Reserve" to proceed, even though the plaintiff made this argument in its earlier arbitration submissions because the Arbiter's report stated that it did "not address" the proposed adjustments related to plaintiffs Earthshell Reserve claim.[67]

         Unlike the arbitration reports discussed in CompuCom and Mehiel, the arbitration determination involved here does not expressly exclude certain claims or issues from the scope of its determination.[68] In fact, this Arbitration Report relays largely numerical findings without further explanation or detail. The Report does, however, clearly state that the scope of the Arbiter's review and determination was limited by § 2.5(b) of the SPA and "subject to the terms of the Chancery Order."[69] Given the narrow scope of § 2.5 and the Chancery Order's instruction that the Arbiter "not decide" Bracket's "fraud claims pending in the Delaware Superior Court, "[70] the lack of an express indication by the Arbiter that it excluded from its consideration the fraud claims appears meaningless. The Court cannot find, at this juncture, that the facts and issues essential to Bracket's claims were "actually decided" in the Working Capital Arbitration.[71] UBC and ESFs Motion to Dismiss Bracket's Amended Complaint based on the doctrine of collateral estoppel is therefore denied. As a final note on this issue, the parties will be bound, absent fraud, by the Arbiter's decision as to working capital. In other words, if Bracket fails to prove its fraud claims with respect to working capital here, the decision of the Arbiter will remain final and binding.

         B. Bootstrapping Doctrine

         Next, ESI and UBC contend Bracket is essentially claiming breach of § 3.4(a) of the SPA, in which UBC represented and warranted that the financial statements were GAAP-compliant and presented fairly the Company's financial position and results of operation.[72]

         Under Delaware law, a plaintiff may claim fraud "based on representations found in a contract, " but "where an action is based entirely on a breach of the terms of a contract between the parties, and not on a violation of an independent duty imposed by law, a plaintiff must sue in contract and not in tort."[73] The bootstrapping doctrine thus prevents a plaintiff from stating a claim for fraud "simply by adding the term 'fraudulently induced' to a complaint that states a claim for breach of contract, or by alleging that the defendant never intended to abide by the agreement at issue.. .."[74] However, the doctrine does not foreclose fraud claims "based on conduct that is separate and distinct from.. .conduct constituting breach" of contract.[75]

         Bracket maintains the Amended Complaint alleges fraudulent conduct that occurred before the parties entered the SPA and "that is separate and distinct from" any breach of the SPA.[76] Generally, allegations focused on inducement to contract qualify as "separate and distinct" conduct for purposes of avoiding the bootstrapping doctrine.[77] Indeed, Delaware courts have refused to apply the doctrine where the defendant's alleged fraud takes place prior to contracting and thus with the goal of inducing the plaintiffs signature and willingness to close on the transaction.[78]

         At this juncture of the litigation, the Amended Complaint sufficiently alleges fraudulent conduct prior to the SPA's execution and Closing which was intended to induce Bracket to purchase the Company.[79] Simply put, throughout negotiations and in the lead up to Closing, UBC and ESI allegedly produced and assured the accuracy of certain financial information, knowing that information was false and misleading, with the intent of inducing Bracket to purchase the Company at an inflated price.[80] These allegations suffice to avoid dismissal.

         C. Fraud

To survive a motion to dismiss, a plaintiff claiming fraud must allege that:
(1) defendant falsely represented a material fact or omitted facts that the defendant had a duty to disclose; (2) defendant knew that the representation
was false or made with a reckless indifference to the truth; (3) defendant intended to induce plaintiff to act or refrain from action; (4) plaintiff acted in justifiable reliance on the representation; and (5) plaintiff was injured by its reliance on defendant's representation.[81]

Per Superior Court Civil Rule 9(b), "[i]n all averments of fraud, .. .the circumstances constituting fraud... shall be stated with particularity."[82] Accordingly, a plaintiff must "plead 'the time, place and contents of the false representations, '"[83] in addition to "the identity of the person making those representations."[84] Rule 9(b)'s particularity requirement is satisfied where the plaintiff "allege[s] circumstances sufficient to fairly apprise the defendant of the basis for the claim."[85]

         First, any rational reading of Bracket's Amended Complaint would lead to a reasonable conclusion that if the allegations are established, elements 3, 4 and 5 above would clearly be met. There would be no other reason for the material misrepresentations other than to induce Bracket to purchase the Company, and the alleged false representations could be shown to have been reasonably relied upon in a context such as this. In addition, since Bracket asserts that the fraud caused an overpayment for the Company in excess of $50 million, it seems almost silly to dispute the damages element on a motion to dismiss. Rather, the real issue here is whether Bracket has alleged its fraud claims against UBC and ESI with sufficient particularity to avoid dismissal.

         UBC and ESI argue Bracket failed to identify with particularity any misstatement made to Bracket on either ESI or UBC's behalf. Rather, they characterize the allegations as pertaining only to fraudulent conduct of Stewart that "in no way implicate[s] either ESI or UBC"[86] and of which neither ESI nor UBC could conceivably have been aware. Because of the contractual relationship of the parties, to establish the fraud claims (as opposed to breach of contract claims), material misstatements or omissions made outside of the written contract must be pled and established by Bracket. "In addition to overt representations, fraud may.. .occur through deliberate concealment of material facts, or by silence in the face of a duty to speak."[87] At the motion to dismiss stage, a plaintiff "need only point to factual allegations making it reasonably conceivable that the defendants charged with fraud knew the statement was false."[88]

         The Court finds the Amended Complaint specifically identifies the financial information that allegedly reflected the overstatements as well as the specific accounts and contracts implicated in the alleged fraud.[89] Bracket also provides the names of the specific ESI and UBC employees and agents, in addition to Stewart, allegedly involved throughout the marketing and sale of the Company.[90] These allegations clearly relate to and surround the marketing and sale of the Company and are sufficient to apprise ESI and UBC of the basis of Bracket's fraud claims for Rule 9(b) purposes.[91]

         The Court also finds it reasonable that Bracket may prove UBC and ESI were in a position to know of the allegedly false financial information, or were at least reckless in not knowing, at the time representations concerning the accuracy of the financials were made.[92] The Amended Complaint alleges UBC knew its representations and warranties were false when made "through the direct knowledge of [its] agents, including, but not limited to Stewart, who was a member of the Knowledge Group in the SPA and whose knowledge is attributable to UBC."[93] ESI is likewise alleged to have known of the misrepresentations "through the contact between its agents and the Knowledge Group in the SPA, including Stewart, " as well as by virtue of "its position as parent of UBC and the Company, and through its control and direction of the sale process."[94] General allegations of knowledge are sufficient at the motion to dismiss stage, and the Court is obliged to consider those allegations in the light most favorable to Bracket.[95] As a result, the Court will not, at this stage, dismiss Bracket's fraud claims for failure to plead the element of knowing misrepresentation.[96]

         Finally, the Court recognizes that the Amended Complaint cites a number of exchanges between ESI and UBC personnel and Parthenon before Bracket's formation in June 2013. Citing TrenwickAm. Litig. Trust v. Ernst & Young, L.L.P., in which the Court of Chancery disallowed a litigation trust plaintiff from claiming reliance on statements made before the trust existed, UBC and ESI argue representations made to Parthenon cannot serve as the basis for Bracket's fraud claims.[97] Bracket responds that any representations made to Parthenon may, in fact, be imputed to Bracket, because Parthenon served as Bracket's "promoter" [98] by "actively assist[ing] in.. .creating, protecting, and organizing" Bracket.[99] This relationship, Bracket maintains, distinguishes this case from Trenwick, which involved a trust created solely for litigation purposes with no connection to the earlier entity. The Court agrees with Bracket. There is no dispute Parthenon created the Bracket entity simply for purposes of completing the Transaction just prior to the SPA's execution. Any misstatements and omissions directed at Parthenon with the intent to influence the decision to purchase the Company can be considered transferred to Bracket at this stage. UBC and ESI's Motion to Dismiss Bracket's fraud claims is therefore DENIED.

         D. Aiding and Abetting / Conspiracy

         Finally, UBC and ESI argue for dismissal of Counts VII and VIII. Count VII asserts a claim for aiding and abetting against ESI, alleging ESI, through its and its agents' participation and direction of UBC during the sales process, knowingly and substantially participated in UBC and Stewart's fraud. [100] In Count VIII, Bracket claims UBC and ESI knowingly participated in a conspiracy to defraud Bracket with the shared objective of "sell[ing] the Company for the largest amount possible."[101] The entities allegedly acted in furtherance of the conspiracy by engaging and directing their financial advisors, consultants, agents, and employees, including Stewart, throughout the marketing and sales process to present and supply the artificially inflated financial information to Bracket. [102]

         The torts of civil conspiracy and aiding and abetting, while similar, address different claims.[103] Conspiracy involves "concerted action by agreement, " whereas aiding and abetting concerns "concerted action by substantial assistance."[104] Both causes of action require predicate tortious conduct.[105] To state an aiding and abetting claim, a plaintiff must show: (1) underlying tortious conduct, (2) knowledge, and (3) substantial assistance.[106] For civil conspiracy, a plaintiff must allege: "(1) two or more persons; (2) an object to be accomplished; (3) a meeting of the minds.. .relating to the object or.. .course of action; (4) one or more unlawful acts; and (5) damages as a proximate result thereof."[107]

         ESI and UBC argue Counts VII and VIII should be dismissed because the Amended Complaint fails to plead the required elements of a valid predicate and knowing participation. Because the Court has allowed Bracket's fraud claims to move forward, it will not dismiss Counts VII and VIII for lack of predicate tortious conduct at this time. Further, the Courts finds the Amended Complaint satisfies the less stringent standards for pleading knowledge on a motion to dismiss. Bracket sufficiently alleges facts from which one may infer UBC and ESI knowingly participated in the underlying fraud or that ESI knowingly assisted the fraudulent acts of UBC and/or Stewart.[108] While the Court believes there are significant questions as to the merit of Bracket's vicarious liability claims, it will allow the claims to survive for now. The Court does suggest that Bracket review whether these counts are necessary or merit pursuing further. Candidly they appear to be mere "add on" counts that may actually undermine the fraud claims. However, that is a decision for Bracket to make, not the Court.

         IV. JIM STEWART'S MOTION TO DISMISS BRACKET'S AMENDED COMPLAINT

         Defendant Jim Stewart has also moved to dismiss Bracket's claims against him. The Amended Complaint asserts three Counts against Stewart. Bracket claims Stewart: (1) breached his fiduciary duty (Count VI); (2) committed fraud by artificially inflating Bracket's value (Count V); and (3) conspired with ESI and UBC to defraud Bracket by inducing them to purchase the Company at an inflated price (Count IX).

         In moving to dismiss, Stewart contends: (1) this Court lacks subject matter jurisdiction over Bracket's breach of fiduciary duty claim; (2) the Court lacks personal jurisdiction over him as a non-resident; and (3) even if this Court has jurisdiction, Bracket's claims fail as a matter of law pursuant to Superior Court Civil Rules 9(b) and 12(b)(6). Because this Court finds it lacks personal jurisdiction over Stewart, it need not address Stewart's remaining grounds for dismissal.

         In response to the contention that this Court lacks personal jurisdiction over Stewart, Bracket asserts three distinct theories in an attempt to show jurisdiction exists.[109] Bracket relies on: (1) Delaware's long-arm statute, 10 Del. C. § 3104(c); (2) Delaware's director consent statute, 10 Del. C. § 3114; and (3) the SPA's forum selection clause. The Court will address each theory in turn.

         Delaware's Long-Arm Statute

         Delaware courts apply a two-pronged analysis to determine whether a plaintiff has met its burden of establishing personal jurisdiction over a nonresident under the long-arm statute.[110] The Court must first consider whether the long-arm statute is satisfied and then determine "whether subjecting the nonresident to jurisdiction in Delaware violates the Due Process Clause of the Fourteenth Amendment."[111]

         Delaware's long-arm statute, 10 Del. C. § 3104(c), confers personal jurisdiction over any nonresident who, inter alia, causes tortious injury in the State by an act or omission in this State.[112] Bracket contends that Stewart is subject to jurisdiction in Delaware because he was a key participant in the conspiracy to defraud Bracket. This "conspiracy theory" of personal jurisdiction does not, however, "constitute an independent basis for subjecting an out-of-state resident to personal jurisdiction."[113] Instead, the theory rests on "the notion that, in appropriate circumstances, a defendant's conduct that either occurred or had a substantial effect in Delaware, " thus subjecting him to personal jurisdiction in Delaware, "may be attributed to another defendant who would not otherwise be amenable to jurisdiction in this State, if that defendant is a coconspirator."[114]

         In Istituto Bancario Italiano SpA v. Hunter Engineering Co., [115] the Delaware Supreme Court set forth a five-part test for establishing conspiracy jurisdiction. According to the Istituto test, Bracket must make a factual showing that:

(1) a conspiracy to defraud existed; (2) the defendant was a member of that conspiracy; (3) a substantial act or substantial effect in furtherance of the conspiracy occurred in [Delaware]; (4) the defendant knew or had reason to know of the act in the forum state or that acts outside the forum state would have an effect in the forum state; and (5) the act in, or effect on, the forum state was a direct and foreseeable result of the conduct in furtherance of the conspiracy.[116]

Delaware courts have consistently construed this test narrowly, requiring "a plaintiff to assert specific facts, not conclusory allegations."[117] However, a defendant who has voluntarily participated in a conspiracy "with knowledge of its . . . effects in the forum state can be said to have purposefully availed himself of conducting activities in the forum state, thereby fairly invoking the benefits and burdens of its laws."[118]

         Bracket argues that Stewart's out-of-state activities directly harmed Bracket, a Delaware corporation, causing Bracket to pay substantially more than it otherwise would have paid. However, Bracket has not alleged that any of Stewart's actions occurred in Delaware. Rather, Bracket merely argues that because a Delaware corporation suffered harm, Delaware's public policy favors broadly construing 10 Del. C. § 3104.[119] In essence, Bracket asserts that simply by virtue of its incorporation in Delaware and Stewart's alleged fraudulent acts affecting it, Istituto is satisfied. However, \nlotex Communications v. Defries, [120]the Court of Chancery made clear that "in the case of Delaware corporations having no substantial physical presence in this State, an allegation that a civil conspiracy caused injury to the corporation by actions wholly outside this State will not satisfy the requirement found in the Supreme Court's opinion in Istituto Bancario of a 'substantial effect... in the forum state.'"[121]

         None of the corporations involved in this case have presences in Delaware, and none of Stewart's conduct is alleged to have occurred in Delaware.[122]Additionally, unlike the entities involved in Bracket's cited cases, Bracket is neither headquartered in Delaware, nor is Delaware its principal place of business. Its sole connection to Delaware is its incorporation status. That, by itself, will not support Istituto.[123] The Court finds the long-arm statute will not support a finding of personal jurisdiction over Stewart.

         Director Consent Statute

         Bracket also contends Delaware has jurisdiction over Stewart under Delaware's Director Consent statute, 10 Del. C. § 3114.[124] Section 3114(b) allows for personal jurisdiction over non-resident officers "in all civil actions..., by or on behalf of, or against such corporation, .. .in any action or proceeding against such officer for violation of a duty in such capacity.''''[125] An "officer" is defined as a person who:

(1)Is or was the president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer or chief accounting officer of the corporation at any time during the course of conduct alleged in the action or proceeding to be wrongful;
(2)Is or was identified in the corporation's public filings with the United States Securities and Exchange Commission (SEC) because such person is or was 1 of the most highly compensated executive officers of the corporation at any time during the course of conduct alleged in the action or proceeding to be wrongful; or
(3)Has, by written agreement with the corporation, consented to be identified as an officer for purposes of this section.[126]

         Bracket contends that, post-closing, Stewart was appointed by the Board as its "Vice President, Finance and Secretary."[127] Even assuming this designation satisfies the statute's definition of "officer, " appointment as an officer of a Delaware corporation is not alone enough to confer jurisdiction over Stewart. Section 3114 requires a "close nexus between the claims against the corporation and those against the officer..., and that the claims against the officer.. .involve conduct taken in his official corporate capacity."[128] As such, the implied consent mechanism of § 3114 only applies against an officer or director involved conduct taken in his official corporate capacity.[129] The core of the offending conduct alleged here occurred prior to closing, and thus prior to Stewart's designation as an officer. Stewart did not owe any official duty to Bracket prior to his appointment as an officer, and therefore, he cannot be said to have violated any duty in his capacity as an officer with regard to his conduct in anticipation of the Transaction. Once the Transaction had been completed, the sting had occurred and any assertion of continued fraudulent conduct would be in the context of a contract action. In addition, to the extent Stewart assumed a corporate position, it appears to have been held only for a very short period of time after closing and before he left the Company. Based on these facts, the Court finds the § 3114 does not confer personal jurisdiction over Stewart.

         SPA's forum ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.