MARY PAT THYNGE, Chief Magistrate Judge.
This matter arises from plaintiffs Troy Underwood and Transcend Technologies Group, Inc.'s (collectively, "Plaintiffs") First Amended Complaint against defendants Benefit Express Services, LLC; LLR Equity Partners, IV, L.P., LLR Equity Partners Parallel IV, L.P., Michael Sternklar, and Scott Evans (collectively, "Defendants"). The initial complaint was filed on March 5, 2018 against Benefit Express, Services, LLC. The First Amended Complaint was filed on May 21, 2018 against Benefit Express Services, LLC, LLR Equity Partners, IV, L.P., LLR Equity Partners Parallel IV, L.P. Michael Sternklar and Scott Evans. The First Amended Complaint alleges that certain of Defendants made false representations that were relied upon by Plaintiffs, and alleges breach of contract claims against Defendants. On June 26, 2018, Defendants filed a partial motion to dismiss Counts I, II, and III of the First Amended Complaint, which is pending before the court.
This Report and Recommendation addresses whether Plaintiffs adequately pled their allegations of fraud, aiding and abetting fraud, and negligent misrepresentation. For the reasons stated below, it is recommended that Defendants' partial motion to dismiss be granted as to Count II, and denied as to Counts I and III.
Plaintiff Troy Underwood is a citizen of the State of Nevada, residing in Reno. Plaintiff Transcend Technologies Group, Inc. is a California corporation with its principal place of business in Sacramento County, California.
Defendant Benefit Express Services, LLC, is an Illinois limited liability company with its principal place of business in Schaumberg, Illinois. Defendants LLR Equity Partners IV, L.P. and LLR Equity Partners Parallel IV, L.P. are Delaware limited partnerships with their principal places of business in Philadelphia, Pennsylvania. Defendant Michael Sternklar is Chief Executive Officer and Chairman of Defendant Benefit Express Services, LLC. Defendant Scott Evans is Chief Product Officer of Benefit Express Services, LLC.
Underwood founded Transcend Technologies Group, Inc. in 2002.
In 2016, Plaintiffs and Defendants began negotiating a potential sale of BenefitsCONNECT to Benefit Express Services, LLC ("Benefit Express").
On May 21, 2018, Plaintiffs filed their First Amended Complaint against Defendants for alleged fraud, negligent misrepresentation and breach of contract.
Plaintiffs allege Sternklar misrepresented via an oral promise that he would license the Source Code to Underwood for use in the Aurora venture after the sale of BenefitsCONNECT to Benefit Express.
On June 25, 2018, Defendants filed the instant partial motion to dismiss Counts I, II and III of the First Amended Complaint pursuant to Fed. R. Civ. P. 9 and 12(b)(6).
Fed. R. Civ. P. 12(b)(6) governs a motion to dismiss a complaint for failure to state a claim upon which relief can be granted. The purpose of a motion under Rule 12(b)(6) is to test the sufficiency of the complaint, not to resolve disputed facts or decide the merits of the case.
To survive a motion to dismiss, a plaintiffs factual allegations must be sufficient to "raise a right to relief above the speculative level . . . ."
Federal Rule of Civil Procedure 9(b) requires that "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting [the] fraud or mistake."
The elements of a fraud claim under Delaware law are as follows:
Plaintiffs allege that Sternklar made an intentional false oral promise that Plaintiffs would be able to license back the Source Code after the APA was executed when Defendants had no intention of doing so.
Plaintiffs further allege that Sternklar knowingly made this false promise with the intent of inducing Plaintiffs to cancel the licensing agreement with BenefitsCONNECT and to sell BenefitsCONNECT for a lower price.
Defendants allege that Plaintiffs cannot maintain a fraud claim because as a party represented by counsel, they could not have reasonably relied on any oral promises that were not memorialized in the heavily negotiated APA.
Defendants further assert that (assuming solely for the purpose of this motion that the allegation of the existence of Sternklar's oral statement is true) Plaintiffs do not sufficiently plead that Sternklar, at the time the alleged oral promise was made, knew the statement to be false, since it is alleged that Sternklar simply "changed his mind" about licensing the Source Code to Plaintiffs after the APA was executed.
Assuming for the purposes of this motion that Plaintiffs' allegations are true, Plaintiffs have adequately pled enough facts and specificity with respect to a fraud claim. While Delaware courts generally "disfavor allegations of fraud when the underlying utterances take the form of unfulfilled promises of future performance," a complaint that alleges facts with sufficient particularity may "support a reasonable inference that Defendants made promises they had no intention of keeping when they made them."
Delaware courts have held that integration clauses may not preclude a plaintiff's reasonable reliance on a fraudulent misrepresentation.
Here, Plaintiffs provide enough facts for an inference that Sternklar had motivation to make the statements alleged in order to gain an advantage in negotiation of the APA. Further, since Sternklar alone made the statements about the Source Code both before and after the execution of the APA, the facts lie more within the knowledge of Defendants.
Therefore, this court recommends that the partial motion to dismiss as to Count I be denied.
Under Delaware law, to prove a claim of aiding and abetting, Plaintiffs must demonstrate that "(1) a wrongful act was committed; (2) the defendant had knowledge of the act; and (3) the defendant knowingly and substantially participated in or provided substantial assistance of the wrongful act."
Plaintiffs allege LLR and Evans knew fraud was being committed, and gave substantial assistance and encouragement to Benefit Express and Sternklar in effectuating such fraud.
Defendants allege there is no basis for aiding and abetting fraud claims against either Evans or LLR.
Assuming Plaintiffs' allegations against Evans and LLR are true, it is difficult to find a connection between Evan's conversations with a software technician, LLR's negotiation of and funding of the BenefitsCONNECT purchase, and Sternklar's alleged promise to license back to Aurora the Source Code and later reneging on that promise. Plaintiffs fail to allege sufficient facts for the court to reasonably infer that Evans and LLR knew of the fraudulent statements and provided substantial assistance for Sternklar's statements.
Therefore, this court recommends that the partial motion to dismiss Count II be granted.
In order to sustain a claim for negligent misrepresentation under Delaware law, plaintiffs must prove "(1) a pecuniary duty to provide accurate information, (2) the supplying of false information, (3) failure to exercise reasonable care in obtaining on communicating information, and (4) a pecuniary loss caused by justifiable reliance upon the false information."
Plaintiffs allege Sternklar made a promise regarding Plaintiff's, relationship with Benefit Express (specifically that Plaintiffs would be allowed to license back the Source Code after the APA execution) that was false and misleading.
Similar to the fraud claim, Defendants allege Plaintiffs cannot state a cause of action for negligent misrepresentation because they could not reasonably and justifiably rely upon Defendant's alleged oral promise regarding the licensing of the Source Code when the APA makes no reference to that alleged agreement.
Assuming for the purposes of this motion that Plaintiffs' allegations are true, Plaintiffs sufficiently pled all of the elements of a claim of negligent misrepresentation. Plaintiffs allege that the business relationship between the parties in negotiating the APA created a pecuniary duty sufficient to allege negligent misrepresentation. Delaware common law contemplates a duty of disclosure "will arise when the parties are in the midst of a `business relationship' from which they expect to derive `pecuniary benefits'."
Therefore, this court recommends that the partial motion to dismiss with respect to Count III be denied.
Consistent with the findings herein, it is recommended that:
Defendants' partial motion to dismiss (D.I. 24) be denied with respects to Counts I and III, and granted with respect to Count II.
This Report and Recommendation is filed pursuant to 28 U.S.C. § 636(b)(1)(B), FED. R. Civ. P. 72(b)(1), and D.Del. LR 72.1. The parties may serve and file specific written objections within fourteen (14) days after being served a copy of this Report and Recommendation.
The parties are directed to the Court's standing Order in Non-Pro Se matters for Objections Filed under FED. R. Civ. P. 72, dated October 9, 2013, a copy of which is available on the Court's website, www.ded.uscourts.gov.