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Richie v. Hillstone Environmental Partners, LLC

United States District Court, D. Delaware

July 9, 2019





         Presently before the court in this diversity action is the motion to dismiss for failure to state a claim filed by defendant Hillstone Environmental Partners, LLC ("Hillstone"). (D.I. 25) For the following reasons, I recommend that the court grant the motion to dismiss, and dismiss the complaint with prejudice.


         On November 19, 2015, James Chance Richie, Shalewater Solutions, LLC, and ShaleApps, LLC (collectively, "plaintiffs") entered into an Asset Purchase Agreement ("APA") with Hillstone for the sale of a business that provided environmental management services to the oil and gas industry (the "Business"). (D.I. 1 at ¶ 8) Pursuant to the APA, Mr. Richie sold Shalewater Solutions, LLC and ShaleApps, LLC to Hillstone for a fixed purchase price to be paid on the closing date in 2015. (Id. at ¶¶ 8-9) The APA further requires Hillstone to pay plaintiffs Earnout Payments for the calendar years ending 2016, 2017, and 2018, to be calculated based on Hillstone's earnings during those years. (Id. at ¶¶ 9-10)

         In accordance with the terms of the APA, Hillstone delivered the 2016 and 2017 Earnout Statements to plaintiffs by March 31, 2017 and March 31, 2018, respectively. (Id. at ¶¶ 11-12; D.I. 26, Ex. 1 at § 2.7(a)[1]) The 2016 and 2017 Earnout Statements represented that Hillstone generated a loss and, consequently, no Earnout Payment was due in those years. (D.I. 1 at ¶ 12) Plaintiffs did not review the materials used in preparing the 2016 and 2017 Earnout Statements, nor did they challenge the accuracy of the 2016 and 2017 Earnout Statements within the thirty-day window for delivering an Earnout Dispute Notice, in accordance with § 2.7(b) of the APA. (D.I. 26, Ex. 1 at § 2.7(b)) After receiving more data related to the 2018 Earnout Statement, plaintiffs began to suspect that there were material misrepresentations or miscalculations in the 2016 and 2017 Earnout Statements. (D.I. 1 at ¶ 13) On or about November 2, 2018, plaintiffs made a formal written request for the underlying documentation forming the basis of the 2016 and 2017 Earnout Statements, but Hillstone declined to provide the documentation. (Id. at ¶ 14)

         Plaintiffs filed the instant litigation on January 22, 2019 in the Western District of Texas, asserting a cause of action for fraud. (D.I. 1 at ¶¶ 18-19) On February 20, 2019, Hillstone filed a motion to transfer the case to the District of Delaware, which was granted on April 8, 2019. (D.I. 10; D.I. 16) The case was subsequently transferred to this court on April 9, 2019. (D.I. 17)


         Rule 12(b)(6) permits a party to move to dismiss a complaint for failure to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). When considering a Rule 12(b)(6) motion to dismiss, the court must accept as true all factual allegations in the complaint and view them in the light most favorable to the plaintiff. Connelly v. Lane Constr. Corp., 809 F.3d 780, 790-91 (3dCir. 2016).

         To state a claim upon which relief can be granted pursuant to Rule 12(b)(6), a complaint must contain a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). Although detailed factual allegations are not required, the complaint must set forth sufficient factual matter, accepted as true, to "state a claim to relief that is plausible on its face." Bell Ail. Corp. v. Twombly, 550 U.S. 544, 570 (2007); see also Ashcroft v. Iqbal, 556 U.S. 662, 663 (2009). A claim is facially plausible when the factual allegations allow the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Iqbal, 556 U.S. at 663; Twombly, 550 U.S. at 555-56.

         Allegations of fraud are subject to the heightened pleading requirements of Federal Rule of Civil Procedure 9(b). U.S. ex ret Whatley v. Eastwick Coll., 657 Fed.Appx. 89, 93 (3d Cir. 2016). Under Rule 9(b), a plaintiff must "state with particularity the circumstances constituting fraud or mistake." This heightened pleading standard was meant to "place the defendants on notice of the precise misconduct with which they are charged, and to safeguard defendants against spurious charges of... fraudulent behavior." Seville Indus. Mack Corp. v. Southmost Mack Corp., 742 F.2d 786, 791 (3d Cir. 1984). Accordingly, the complaint must provide "all of the essential factual background that would accompany 'the first paragraph of any newspaper story'-that is, the 'who, what, when where and how' of the events at issue." Whatley, 657 Fed.Appx. at 93 (quoting In re Rockefeller Ctr. Prop., Inc. Sec. Litig., 311 F.3d 198, 215 (3d Cir. 2002)). "The use of boiler plate and conclusory allegations will not suffice." Kuhn Constr. Co. v. Ocean & Coastal Consultants, Inc., 844 F.Supp.2d 519, 530 (D. Del. 2012) (internal quotation marks and citations omitted).


         A. Nature of the Claim

         In support of its motion to dismiss, Hillstone contends that plaintiffs' fraud claim is barred by the express terms of the APA, which provides a binding procedure for addressing plaintiffs' allegations of material misrepresentations in the 2016 and 2017 Earnout Statements. (D.I. 25 at 5) According to Hillstone, plaintiffs' fraud claim is based on a violation of Hillstone's contractual duty to provide Earnout Statements, and Hillstone had no independent legal duty to deliver the Earnout Statements or to allocate expenses among affiliates in a particular way. (Id. at 7-8; D.I. 29 at 4) Hillstone further alleges that ...

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