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Patel v. Sunvest Realty Corp.

Superior Court of Delaware

October 15, 2018


          Submitted: July 2, 2018

         Upon Defendants' Motion to Dismiss: Granted in part, denied in part Upon Defendants' Motions to Strike: Granted in part, denied in part

          MEMORANDUM OPINION Julia B. Klein, Esquire of KLEIN, LLC, Wilmington, Delaware, Attorney for Plaintiffs.

          Eric J. Monzo, Esquire, and Brenna A. Dolphin, Esquire of MORRIS JAMES, LLP, Wilmington, Delaware, Attorneys for Sunvest Realty Corporation, Raymond W. Cobb, Esquire of O'HAGAN MEYER, LLC, Wilmington, Delaware, Attorney for RE/MAX, LLC and RE/MAX Holdings.

          LEGROW, J.

         This case arose from alleged fraud committed by a real estate broker formerly employed by a franchise branch of a nationally-recognized real estate firm. Plaintiffs allege the broker embezzled funds Plaintiffs entrusted to him for the purpose of investing in real property. Beginning in summer 2017, the broker defaulted on Plaintiffs' promissory notes, and he filed for bankruptcy a few months later. Plaintiffs now bring claims of vicarious liability, common law negligence, negligent hiring, retention, and supervision, breach of contract, and fraud against the franchisee and franchisor.

         Plaintiffs' claims present questions of franchisor and vicarious liability for conduct of a franchisee's agent. Although the complaint adequately pleads vicarious liability claims against both defendants, the adequacy of its direct liability claims is more limited. As to those direct claims, Plaintiffs fail to plead claims that depend on allegations that the franchisor employed the broker. Some of Plaintiffs' other direct claims survive under the low pleading standard applicable to this motion, although Plaintiffs' ultimate likelihood of success on those claims seems marginal at best. In sum, notwithstanding the exhausting length and rhetoric of Plaintiffs' complaint, Plaintiffs barely make out fraud, negligence, and contract-based claims under agency principles, but those claims may not withstand a closer look after discovery.


         The following facts are drawn from the amended complaint.[1] Carl Chen worked as a real estate broker from 1986 until 2017 when his real estate license was terminated. According to the complaint, Chen worked for more than two decades at RE/MAX Sunvest Realty ("Sunvest"), a franchisee of RE/MAX, LLC ("RE/MAX") (collectively with Sunvest, the "Defendants"). Beginning in 1991, Chen convinced several friends and acquaintances to invest in real property in return for monthly interest payments. Chen continued to enter into these promissory notes up to October 2016. In May 2017, Chen failed to make the monthly interest payment to one of his noteholders, Norman Nelson. Nelson later was informed that Chen no longer worked at Sunvest. On October 24, 2017, Chen filed for bankruptcy. Around this time, the noteholders learned most of their funds never were invested in real property.

         On January 17, 2018, several noteholders ("Plaintiffs") brought this action against Sunvest and RE/MAX to recover the funds they invested with Chen.[2] Sunvest and RE/MAX filed separate motions to dismiss the original complaint, and Plaintiffs then filed an amended complaint containing counts against each defendant for vicarious liability, common law negligence, negligent hiring, retention, and supervision, breach of contract, and fraud. Defendants filed motions to dismiss the first amended complaint ("the Complaint") and the parties briefed and argued those motions.

         The Parties' Contentions

         In its motion to dismiss, Sunvest first argues the Court should dismiss Plaintiffs' claims under Rule 19 because the parties cannot join Chen who, Sunvest maintains, is an indispensable party. Sunvest contends complete relief cannot be granted to the parties without Chen's joinder because Chen's conduct is the basis of Plaintiffs' action. Sunvest acknowledges the automatic stay prevents Chen's joinder in this case while the bankruptcy case is litigated, but Sunvest asserts all Plaintiffs' claims can be litigated in the bankruptcy action. Apart from this procedural argument, Sunvest also maintains the Complaint should be dismissed for failure to state a claim. Sunvest contends Plaintiffs only made conclusory statements in support of their vicarious liability, negligent hiring, retention and supervision, breach of contract, and fraud claims.

         In a separate motion, RE/MAX argues the Complaint fails to allege the existence of any legally-cognizable relationship between Chen and RE/MAX. RE/MAX notes the Complaint alleges claims against "RE/MAX," but fails to specify which claims are asserted against which defendants. RE/MAX contends the Complaint fails to make any connection between Sunvest and RE/MAX and does not allege an employment or agency relationship with RE/MAX. Finally, like Sunvest, RE/MAX argues the Complaint fails to plead fraud with sufficient particularity.

         In response to Sunvest's motion, Plaintiffs argue Chen is not an indispensable party because the parties may obtain discovery from him without joining him to this action. Additionally, Plaintiffs assert they have pleaded fraud and the other claims with sufficient particularity and have pleaded sufficient facts to put RE/MAX on notice that they intend to show RE/MAX exerted control over Chen.


         On a motion to dismiss, the Court must determine whether the "plaintiff 'may recover under any reasonably conceivable set of circumstances susceptible of proof.'"[3] "If [the plaintiff] may recover, the motion must be denied."[4] A court may grant the motion if "it appears to a reasonable certainty that under no state of facts which could be proved to support the claim asserted would plaintiff be entitled to relief."[5] When applying this standard, the Court will accept as true all non-conclusory, well-pleaded allegations.[6] In addition, "a trial court must draw all reasonable factual inferences in favor of the party opposing the motion."[7]

         A. Chen is not an indispensable party under Rule 19(a).

         Sunvest first argues the amended complaint should be dismissed because Chen allegedly is an indispensable party who cannot be joined in this action. Sunvest argues Chen's conduct forms the basis for Plaintiffs' claims and therefore he is an indispensable party under Rule 19. Because the automatic stay imposed by the bankruptcy action prevents the parties from joining Chen, Sunvest argues the Complaint should be dismissed.

         Under Rule 19(a), joinder is mandatory when: (1) complete relief cannot be afforded without the absent party's participation, or (2) the absent party claims an interest in the subject of the action. Specifically, the rule provides, in relevant part:

A person who is subject to service of process and whose joinder will not deprive the Court of jurisdiction over the subject matter of the action shall be joined as a party in the action if (1) in the person's absence complete relief cannot be accorded among those already parties, or (2) the person claims an interest relating to the subject of the action and is so situated that the disposition of the action in the person's absence may (i) as a practical matter impair or impede the person's ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of the claimed interest. If the person has not been so joined, the Court shall order that the person be made a party.[8]

         Rule 19(a)(2) is not implicated here because none of the parties argues Chen has an interest in the subject of the action or that litigation without Chen would impair his ability to protect his interests. As to Rule 19(a)(1), on which Sunvest relies, complete relief can be accorded to all named parties without Chen's joinder. Sunvest argues Chen is indispensable because his conduct forms the basis for Plaintiffs' claims. Chen's likely role as an essential factual witness, however, does not compel the conclusion that joinder is necessary to accord relief to all the named parties. The parties may subpoena Chen, take discovery from him, and compel him to testify. Thus, Plaintiffs' claims do not require Chen's joinder for evidentiary purposes. Additionally, Chen's joinder is not required to determine liability because Plaintiffs do not claim Chen or either defendant was comparatively or contributorily negligent. Accordingly, Chen is not an indispensable party under Rule 19(a).

         B. Count I of the Complaint adequately pleads Chen committed fraud and that he was Sunvest's employee.

         Count I of the Complaint alleges Sunvest vicariously is liable for Chen's fraud. Sunvest argues the Complaint fails to plead fraud with particularity and fails adequately to allege Chen was Sunvest's employee or agent.

         1. The Complaint adequately alleges Chen committed fraud.

         According to Superior Court Civil Rule 9(b), "[i]n all averments of fraud, . . . the circumstances constituting fraud . . . shall be stated with particularity."[9] The rule requires a plaintiff to "allege circumstances sufficient to fairly apprise the defendant of the basis for the claim."[10] The elements of fraud are:

(1) defendant's false representation, usually of fact, (2) made either with knowledge or belief or with reckless indifference to its falsity, (3) with an intent to induce the plaintiff to act or refrain from acting, (4) the plaintiff's action or inaction resulted from a reasonable reliance on the representation, and (5) reliance damaged the plaintiff.[11]

         Plaintiffs' Complaint alleges Chen falsely claimed to invest significant funds in real estate on Plaintiffs' behalf.[12] The Complaint describes how Chen developed a reputation as a seasoned real estate broker and alleges that several plaintiffs were friends with Chen for many years before they entrusted their money to him. The Complaint includes the following exchange that occurred at a creditors' meeting for the bankruptcy action between Chen, the debtors' trustee, Alfred Giuliano, and Plaintiffs' attorney, Julia Klein:

CHEN: Yeah, we - we borrowed the money - the intention was to invest in real estate, but then I ended up using that to take care of my negative cash flow.
GIULIANO: Is that what you told them? You told them it was to invest in real estate?
CHEN: In the very beginning, yes. Later on when they -
GIULIANO: Like the million seven, when you borrowed the million seven, what did you tell those folks?
CHEN: Yeah, to invest in real estate.
GIULIANO: To invest in real estate. But you did not invest it in real estate, you used it to cover the cash flow?
CHEN: Yeah.
KLEIN: What did you - so, just so I understand the money that you received from Mr. B[h]at, the $200, 000, those went to pay interest payments of other noteholders or what did you use the money for?
CHEN: I - I used the money for - to take care of negative cash flow for Chen-MAX, both of the Chen-MAX Properties, Inc.
KLEIN: Okay. Did you use the money you received from him to invest in any property, any real ...

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