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Change Capital Partners Fund I, LLC v. Volt Electrical Systems, LLC

Superior Court of Delaware

April 3, 2018

CHANGE CAPITAL PARTNERS FUND I, LLC, a Delaware limited liability company, Plaintiff/Amended Counterclaim Defendant,
v.
VOLT ELECTRICAL SYSTEMS, LLC, a Texas limited liability company and PAUL J. BOUDREAUX, JR., Defendants/Amended Counterclaim Plaintiffs.

          Submitted: January 10, 2018

         On Plaintiffs Motion to Dismiss Amended Counterclaim. GRANTED.

          Kate Harmon, Esquire, Rafael X. Zahralddin, Esquire, and Shelley A. Kinsella, Esquire, Elliot Greenleaf, P.C., Wilmington, Delaware, Attorneys for Plaintiff/Amended Counterclaim Defendant Change Capital Partners Fund I, LLC.

          Marc S. Casarino, Esquire, White and Williams LLP, Wilmington, Delaware, Attorney for Defendants/Amended Counterclaim Plaintiffs Volt Electrical Systems, LLC and Paul J. Boudreaux, Jr.

          MEMORANDUM OPINION

          Richard R. Cooch, J.

         I. INTRODUCTION

         In this Motion by Change Capital Partners Fund I, LLC ("Plaintiff) to Dismiss Defendants' Amended Counterclaim, Plaintiff argues, pursuant to Superior Court Civil Rule 12(b)(6), that this Court should honor the parties' choice-of-law provision, which designates Delaware law, in their operative "Merchants Receivables Purchase and Security Agreement" contract. Defendant Volt Electrical Systems, LLC ("Volt") and Defendant Paul J. Boudreaux, Jr. ("Boudreaux" and, collectively with Volt, "Defendants") argue in response that Delaware law should not govern this transaction as to Counts I-IV of the Complaint because either New York or Texas would be the "default state(s)" for those counts in the absence of a choice-of-law clause in the contract, enforcement of the loan transaction under Delaware law would be contrary to fundamental principles of New York and Texas law, and New York and Texas have materially greater interests in the determination of this issue than does Delaware. Defendants acknowledge that Count V is governed by Delaware law.[1]

         This Court finds, however, that Delaware law governs this transaction. Delaware courts are generally reluctant to subvert parties' agreed-upon choice-of-law provisions. This Court may in appropriate cases ignore a choice-of-law clause through the exception in Restatement (Second) of Conflicts § 187(2)(b), which allows parties to a contract to disregard the chosen state's governing law and apply the law of a state that would have applied absent the choice-of-law clause (the "default state") if the default state has a materially greater interest than the chosen state in the determination of the issue and application of the law of the chosen state would be contrary to a fundamental policy of the default state. The Court does not find that use of this exception is proper under these facts. Therefore, the Court will not disrupt the Delaware choice-of-law clause. The Court grants Plaintiffs Motion to Dismiss the Amended Counterclaim.

         II. PROCEDURAL HISTORY AND FACTS

         The parties submitted at the Court's request a "Parties' Statement of Agreed Upon: (i) Procedural History; (ii) Facts; and (iii) Restated Contentions" (the "Agreed Statement") on January 9, 2018. The Agreed Statement follows below:

         PROCEDURAL HISTORY

[Plaintiff] filed the Complaint commencing the instant action on May 22, 2017. Defendants filed their Answer and Counterclaim (the "Counterclaim") on July 5, 2017. [Plaintiff] filed a Motion on Behalf of Plaintiff Change Capital Partners Fundi, LLC to Dismiss Defendants' Counterclaim Pursuant to Del. Super. Ct. Civ. R. 12(b)(6) on July 25, 2017 (the "Initial Motion to Dismiss"). Thereafter, Defendants sought leave to amend the original Counterclaim on August 2, 2017, which leave was granted by this Court on August 14, 2017. [Plaintiff] withdrew the Initial Motion to Dismiss on August 9, 2017 and Defendants filed the Amended Counterclaim on August 15, 2017. The Amended Counterclaim lodges five causes of action, four of which are predicated upon New York or Texas statutes: (i) N.Y. Penal Law § 190.40; (ii) N.Y. Gen. Bus. Law § 349; (iii) Tex. Fin. Code § 305.001(a) and § 304.001; (iv) Tex. Bus. & Com. Code § 17.44(a); and (v) negligence/negligent misrepresentation.
On August 29, 2017, [Plaintiff] filed its Motion on Behalf of Plaintiff Change Capital Partners Fund I, LLC to Dismiss Defendants' Amended Counterclaim Pursuant to Del. Super. Ct. Civ. R. 12(b)(6) (the "Motion to Dismiss"). Defendants' Responsive Brief in Opposition to Plaintiff's Motion to Dismiss Amended Counterclaim was filed on September 29, 2017. Thereafter, the Reply in Support of Motion on Behalf of Plaintiff Change Capital Partners Fund I LLC to Dismiss Defendants' Amended Counterclaim Pursuant to Del. Super. Ct. Civ. R. 12(b)(6) (the "Reply") was filed by [Plaintiff] on October 13, 2017. A hearing was held on the Motion to Dismiss before the Court on November 20, 2017 (the "Hearing"). Both prior to and after the Hearing, [Plaintiff] approached the Defendants regarding the potential for resolving the matter via mediation, further settlement discussions or some other form of alternative dispute resolution. The parties could not reach agreement on any form of resolution. Consequently, the Parties are providing this Agreed Statement pursuant to the Court's instructions after the Hearing.
FACTS
On October 4, 2016, Azadian Group, LLC ("Azadian"), Volt and Boudreaux entered into a Merchant Receivables Purchase and Security Agreement (the "Agreement").
The fully executed Agreement contains a choice of law provision designating Delaware law to apply to issues arising from the Agreement.
On April 18, 2017, Azadian assigned the Agreement to [Plaintiff] (the "Assignment"). Azadian and [Plaintiff] are both Delaware limited liability companies headquartered in New York. Volt is a Texas limited liability company located in Texas. Boudreaux is a Texas resident and the Managing Member of Volt. Volt and Boudreaux executed the Agreement in Texas.[2]

         III. THE PARTIES' CONTENTIONS

         [The parties restated their contentions in the Agreed Statement:]

A. Plaintiff's Contentions
[Plaintiff] hereby incorporates its Motion to Dismiss and Reply as if fully set forth herein.
1. Pursuant to the terms of the Agreement, Azadian agreed to purchase Volt's future receivables for a flat fee of $350, 000.00, less fees and expenses, for a total payment of $338, 000.00. Volt agreed to transfer $472, 500.00 of purchased receivables to Azadian. Boudreaux personally guaranteed Volt's obligations under the Agreement. Azadian fully satisfied its obligations under the Agreement and paid Volt $338, 000.00. Thereafter, Volt transferred a total of $248, 590.00 in purchased receivables to Azadian. Volt's last transfer to Azadian was on April 12, 2017. Consequently, Defendants defaulted on their obligations under the Agreement, leaving $223, 910.00 in purchased receivables not transferred to Azadian. The Agreement contains provisions allowing Azadian to recover attorneys' fees and interest in the event that the Defendants default.
2. For purposes of a Motion to Dismiss, the Court must accept only well pled allegations as true; the Court need not accept conclusions of law averred in the Amended Counterclaim as true. Further, with regard to well-pled allegations, the test is whether Defendants may recover under any reasonably conceivable set of circumstances.
3. Delaware law applies to this matter in its entirety. The Agreement contains a provision of law designating Delaware law as the law applicable to any dispute that arising from the Agreement. There is no dispute that Azadian fulfilled its obligations under the Agreement. The Defendants have defaulted under the terms of the Agreement in perhaps the most material and fundamental of their obligations to Azadian and, subsequently, [Plaintiff]. That Delaware law should apply to Defendant' default under the Agreement is squarely within Azadian's and the Defendants' intent as enshrined at Section 19.1 of the Agreement. Delaware law applies because Azadian is a Delaware limited liability company and Azadian and the Defendants agreed to designate Delaware law as the applicable law for any disputes concerning the Agreement, which facts establish a material relationship between the Agreement and Delaware. The facts of this matter provide no exception to Delaware's long held, fundamental public policy in allowing parties freedom to contract.
4. Because Delaware law applies, Counts 1 through IV of the Amended Counterclaim must be dismissed. Count V of the Amended Counterclaim must also be dismissed given the insufficient allegations to establish that [Plaintiff] is liable for Azadian's alleged conduct prior to the Agreement being executed. Defendants have failed to sufficiently allege that [Plaintiff] had knowledge of Defendants' existing claims against Azadian at the time the Agreement was assigned to [Plaintiff].
5. To the extent that the Court determines that Delaware law does not apply, the Court must determine if New York and/or Texas law apply to this matter.
a. Counts I and II must be dismissed because the alleged conduct did not occur in New York and, consequently, the New York statutes upon which Defendants rely are not applicable.
b. Further, Count I must be dismissed because N.Y. Penal Law § 190.40 may not be used as a predicate for a cause of action by an entity, even if the cause of action is that which seeks a declaratory judgment, but only as an affirmative defense.
c. Count II must also be dismissed because the Defendants are not consumers for purposes of N.Y. Gen. Bus. Law § 349 and Defendants have not alleged any basis that would allow a factfinder to determine that Defendants are consumers. Defendants' averment in the Amended Counterclaim that they are consumers is not a well-pled factual allegation but is rather a conclusion of law that need not be accepted by the Court. The Agreement does not fall within the purview of N.Y. Gen. Bus. Law § 349 because it has no impact on New York's consumer public and it is not a consumer transaction; Defendants have not alleged any bases upon which a fact finder could find to the contrary.
d. Counts III and IV must be dismissed because Texas law does not apply to the Agreement.
e. Count IV must also be dismissed because Defendants have failed to allege any bases upon which they could be found to be "consumers" under Tex. Bus. & Com. Code § 17.44. Defendants' baseless averments regarding their status as consumers is a legal conclusion that need not be accepted by the Court. Further, Defendants have failed to allege any basis upon which the fact finder could find that Azadian knew that the loaned funds were going to be used to purchase or lease goods or services as required by Texas law. As noted in the Motion to Dismiss, [Plaintiff] does not concede that the Agreement is a loan transaction but acknowledges that, for purposes of the Motion to Dismiss, the Court must accept all well-pled factual allegations in the Amended Counterclaim as true. Further, [Plaintiff] asserts that Defendants' averments pertaining to the nature of the Agreement are conclusions of law that need not be accepted by the Court, rather than well-pled factual allegations.

         B. Defendants' Contentions

         The Defendants incorporate their briefing on the Motion to Dismiss and their arguments as stated on the record at the Hearing, and this synopsis is not intended to limit, restrict, or waive any of the Defendants' positions.

1. The transaction in dispute is a loan and not a purchase of future accounts receivables.
2. The loan originated and was funded by Azadian (and [Plaintiff] via the Assignment) in New York.
3. The Defendants were at all relevant times located in Texas..
4. Delaware has no relationship to the parties or the subject transaction.
5. The annualized interest rate charged by Azadian (and [Plaintiff] via the Assignment) is at least 102%.
6. The loan transaction is usurious under New York and Texas law.
7. New York and Texas have well-settled public policies against usurious loan transactions.
8. New York and Texas law would apply but for a choice-of-law provision in the loan documentation referencing Delaware.
9. Delaware law recognizes that promiscuous use of Delaware choice-of law provisions to circumvent another state law that would apply but for the choice of-law provision warrants disregard of the Delaware choice-of-law provision and application instead of the law of the other state(s).
10. [Plaintiff] is wrong that the Defendants may not rely upon New York law. The Defendants are permitted under New York law to seek a declaration that the criminally usurious nature of the loan transaction warrants cancellation of the transaction.
11. [Plaintiff] is wrong that the Defendants may not rely upon New York law because they are not a consumer. The Defendants have pleaded that they are a consumer for purposes of New York law, and this is accepted for purposes of the Motion to Dismiss. Nevertheless, as evidenced by the information presented by the Defendants, New York law applies broadly to protect consumers and businesses that have been taken advantage of in usurious loan transactions.
12. The Defendants may also recover under Texas law since they have been subjected to criminally usurious loan practices in both New York and Texas. [Plaintiff] is wrong that Texas law does not permit a claim unless there exists the conjunctive "contracting for and receiving" usurious interest, where the applicable Texas statute plainly allows for a claim in the disjunctive of "contracting for or receiving" usurious interest. In this instance, Azadian (and [Plaintiff] via the Assignment) has both contracted for and received usurious interest in violation of Texas law.
13. The Defendants have pleaded that they are a consumer for purposes of Texas law, and this is accepted for purposes of the Motion to Dismiss. As such, [Plaintiff] is wrong to suggest that the Defendants' claims under Texas law should be dismissed for not being a consumer.

         IV. STANDARD OF REVIEW

         Upon a motion to dismiss under Superior Court Rule 12(b)(6), the Court "(i) accepts all well-pleaded factual allegations as true, (ii) accepts even vague allegations as well-pleaded if they give the opposing party notice of the claim, (iii) draws all reasonable inferences in favor of the non-moving party, and (iv) only dismisses a case where the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances."[3] However, the Court will "ignore conclusory allegations that lack specific supporting factual allegations."[4]

         V. ...


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