Brent L. Mills, Inc. v. Katsamakis

• Court: Superior Court of Delaware
• Decided: January 18, 2024
• Docket: N23C-05-237 MAA CCLD
• Status: Published

Opinion

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE

BRENT L. MILLS, INC., ) ) Plaintiff, ) C.A. No. N23C-05-237 MAA CCLD ) v. ) ) BASIL KATSAMAKIS, QUAD ) PARTNERS III-A-LP, and ) REGINALD MOORE, ) ) Defendants. )

Submitted: October 17, 2023 Decided: January 18, 2024

Upon Defendants’ Motion to Dismiss: GRANTED.

MEMORANDUM OPINION

Jonathan M. Stemerman, Esquire (Argued), of ARMSTRONG TEASDALE LLP, Wilmington, Delaware, Attorney for Plaintiff.

Jason C. Jowers, Esquire, and Sarah T. Andrade, Esquire, of BAYARD, P.A., Wilmington, Delaware, and Jordan D. Weiss, Esquire (Argued), of GOODWIN PROCTER LLP, New York, New York, Attorneys for Defendants.

Adams, J.

1 I. INTRODUCTION

This action arises out of a Stock Purchase Agreement between Plaintiff and

Defendants regarding Plaintiff’s acquisition of all the shares in non-party Education

Management, Inc. (the “Company”). The remaining claim in this action is a fraud

claim relating to alleged material representations and omissions about the costs and

timeline of a construction project in connection with Plaintiff’s acquisition of the

Company. Specifically, Plaintiff alleges it only learned after closing that the

construction project was delayed and more expensive than represented.

Defendants move to dismiss, arguing Plaintiff’s remaining claim lacks

particularity, a showing of known falsity, and reasonable reliance. For the following

reasons, the Court finds that Plaintiff fails to state a claim. The Court, therefore,

grants Defendants’ Motion to Dismiss.

II. FACTS1

A. THE AMENDED AND RESTATED STOCK PURCHASE AGREEMENT

On March 3, 2022, Plaintiff Brent L. Mills, Inc. (“BMI” or “Plaintiff”) entered

into an Amended and Restated Stock Purchase Agreement (“the Agreement”)2 with

1 The facts are drawn from the Complaint and the exhibit attached thereto, the Amended and Restated Stock Purchase Agreement (Ex. A). The facts outlined in this opinion are limited to those related to the Fraud in the Inducement claim. 2 The parties originally executed a Stock Purchase Agreement (the “Original Agreement”) on October 27, 2021. Compl. ¶ 11. The transaction outlined in the Original Agreement, however, faced pushback and complications from regulators and accreditors, thereby causing the parties to re-evaluate the structure of the transaction. Id. ¶ 12. 2 Defendants Basil Katsamakis (“Katsamakis”), Reginald Moore (“Moore”), and

Quad Partners III-A-LP (“Quad”) (collectively “the Sellers” or “Defendants”) to

acquire all of the shares in non-party Education Management, Inc. (the

“Company”).3 The Agreement closed on April 26, 2022 (the “Closing”), with BMI

paying $12,342,884 to the Sellers.4

B. ACTIONS AND EVENTS PRIOR TO THE CLOSING

The Company is engaged in operating Blue Cliff College, an accredited career

college that offers education programs in a variety of fields, including massage

therapy, cosmetology, and clinical medical assisting.5 Blue Cliff College offers both

online and in-person classes at several campus locations, including Metairie,

Louisiana; Alexandria, Louisiana; Lafayette, Louisiana; and Gulfport, Mississippi.6

At the time of the Agreement’s negotiation and execution, all Parties

understood that Blue Cliff College was “in the process of planning for and

performing” a construction project for the building of the Blue Cliff College’s

Metairie, Louisiana campus (the “Campus construction”).7 The Sellers “repeatedly

made representations to BMI regarding the timeline and cost for the Campus

construction.”8 Moore and Katsamakis “represented to BMI that the Campus

3 Id. ¶¶ 7, 10, 13. 4 Id. ¶ 15. 5 Id. ¶ 8. 6 Id. ¶ 9. 7 Id. ¶ 17. 8 Id. ¶ 18. 3 construction would be completed for a total cost of $900,000 and that the landlord

for the Campus property had agreed to provide $900,000 in tenant improvement

credits, resulting in a zero-dollar net spend” for the Campus construction.9

Additionally, Sellers represented that the Campus construction would be complete

and ready for use by July 2022.10

BMI alleges that Sellers’ representations were “known to be false prior to

Closing” and the Sellers “failed to share that information with BMI” so the Campus

construction costs were “far different” than represented.11 As evidence of falsity,

BMI points to an undated verbal estimate of $900,000 from a contractor with whom

Moore and Katsamakis had previously worked.12 This contractor allegedly “insisted

on providing no written estimates or billing records, instead electing to be paid

weekly in cash sums always totaling less than $10,000—a dubious practice to which

Defendants acquiesced.”13

By February 4, 2022, Moore and Katsamakis were aware that “reputable and

professional contractors were estimating—in writing—that the Campus construction

work could cost $1,645,257.”14 By March 15, 2022, the original contractor became

“unresponsive and was having difficulty in securing workers and/or permits needed

9 Id. ¶ 19. 10 Id. ¶ 20. 11 Id. ¶¶ 23–24. 12 Id. ¶ 25. 13 Id. 14 Id. ¶ 26. 4 to perform even basic demolition work at the Campus[.]”15 Moore and Katsamakis

were aware of these issues and began seeking additional contractors to complete the

Campus construction.16 On April 11, 2022, Moore and Katsamakis received another

written estimate for $1,728,146.17 In the weeks leading up to Closing, internal e-

mails “reveal[ed] that the timing for the Campus construction was significantly

behind—and in fact that no meaningful progress on the construction had even

occurred as of the date of Closing.”18 BMI alleges it was not informed of the

unreliability of the original estimate, the newer and higher estimates, nor that there

were construction delays prior to Closing.19

C. ALLEGED DAMAGES

BMI asserts that as a result of “Sellers’ misrepresentations and omissions,”

Buyer has incurred a minimum of the following losses: (1) “$1,900,000 in additional

construction costs;” (2) “$400,000 in tenancy costs due to the construction delay;”

and (3) “$3,000,000 in lost contribution margin at the Campus location due to lower

student count caused by construction delays.”20 BMI alleges that “it would not have

15 Id. ¶ 27. 16 Id. 17 Id. ¶ 28. 18 Id. ¶ 29. 19 Id. ¶ 30. 20 Id. ¶ 33. 5 proceeded to Closing based upon the financial terms set out in the Agreement” had

it “known the truth regarding the Campus construction cost and timeline.”21

III. PROCEDURAL HISTORY

On May 24, 2023, Plaintiff filed a complaint alleging three counts: (1) Fraud

in the Inducement;22 (2) Unjust Enrichment;23 and (3) Breach of Contract (In the

Alternative).24

On July 18, 2023, Defendants filed a Motion to Dismiss all claims. Briefing

concluded on September 8, 2023. The Court held oral argument on October 17,

2023. On the record, the Court granted the Motion to Dismiss as to Plaintiff’s Unjust

Enrichment claim (Count II) and the Breach of Contract claim (Count III), and

reserved decision on the Fraud in the Inducement claim (Count I).25

IV. STANDARD OF REVIEW

On a motion to dismiss pursuant to Superior Court Civil Rule 12(b)(6), the

Court must: “(1) accept all well pleaded factual allegations as true, (2) accept even

vague allegations as ‘well-pleaded’ if they give the opposing party notice of the

claim, [and] (3) draw all reasonable inferences in favor of the non-moving party[.]”26

21 Id. ¶ 34. 22 Id. ¶¶ 35–40. 23 Id. ¶¶ 41–44. 24 Id. ¶¶ 45–49. 25 D.I. 24. 26 Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 535 (Del. 2011) (internal citations omitted). 6 A motion to dismiss for failure to state a claim will not be granted “if the plaintiff

may recover under any reasonably conceivable set of circumstances susceptible of

proof under the complaint.”27

V. ANALYSIS

To survive a motion to dismiss claim for fraud, the plaintiff 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.28

Pursuant to Superior Court Civil Rule 9(b), fraud must be “stated with

particularity.” The complaint must allege sufficient well-pleaded facts “from which

it can reasonably be inferred that this ‘something’ was knowable, and that the

defendant was in a position to know it.”29 The party asserting a claim for fraudulent

inducement bears the burden of proof.30

27 Duffield Assocs., Inc. v. Meridian Architects & Eng’rs, LLC, 2010 WL 2802409, at *3 (Del. Super. July 12, 2010) (internal citations omitted). 28 ITW Glob. Invs. Inc. v. Am. Indus. P’rs Cap. Fund IV, L.P., 2015 WL 3970908, at *5 (Del. Super. June 24, 2015) (internal citations omitted). 29 Iotex Commc’ns, Inc. v. Defries, 1998 WL 914265, at *4 (Del. Ch. Dec. 21, 1998). 30 E.g., Channel Medsystems, Inc. v. Boston Sci. Corp., 2019 WL 6896462, at *40 (Del. Ch. Dec. 18, 2019). 7 A. PLAINTIFF FAILS TO PLEAD FALSE STATEMENTS OR MISREPRESENTATIONS WITH PARTICULARITY.

Plaintiff alleges that Defendants misrepresented that the Campus construction

would cost $900,000, resulting in a zero-dollar net spend, and that it would be

completed by July 2022.31 As proof that Defendants knew these were

misrepresentations, Plaintiff points to Defendants entering into a verbal “dubious”

agreement with a contractor, receiving additional estimates for significantly higher

amounts from other contractors, knowing the original contractor failed to begin work

in a timely manner, and failing to share these facts with Plaintiff.32

i. The Court will not consider any occurrences after March 3, 2022.

A majority of the allegations Plaintiff relies upon to support its claim for fraud

depend on conduct that occurred after the execution of the Agreement. Delaware

law makes clear, however, that conduct occurring after the execution of an

agreement may be relevant for breach of contract, but not for fraudulent inducement.

ITW Global Investments Inc. v. American Industrial Partners Capital Fund IV,

L.P.,33 a decision from this court regarding fraud, is instructive. In its complaint, the

plaintiff alleged that defendant “manipulated the Financial Statements by engaging

in the alleged sham sales” and did so before entering into, and with intent to induce

31 Compl. ¶¶ 19–20. 32 Id. ¶¶ 24–30. 33 2015 WL 3970908 (Del. Super. June 24, 2015). 8 plaintiff to enter into, the Stock Purchase Agreement.34 The court reviewed the

timing of the alleged misrepresentations and held that the conduct before the parties

entered into the purchase agreement sufficiently pled fraud.35 Conduct occurring

after the execution of the agreement, by contrast, may be relevant for breach of

contract, but not for fraudulent inducement.36

The Parties executed the Agreement on March 3, 202237 and closed on April

26, 2022.38 As such, the following allegations will not be considered for Plaintiff’s

claim for fraud in the inducement:

• The $1,728,146 estimate Defendants allegedly received on April 11,

2022;39

• Defendants’ internal e-mails in the “weeks leading up to Closing[,]”

indicating that the Campus construction was significantly behind;40 and

34 Id. at *7. 35 Id. (distinguishing fraud in the inducement from breach of contract, finding the conduct that occurred before the purchase agreement sufficiently avoided impermissible bootstrapping). 36 Id. See also Air Data Sys., LLC v. L-3 Commc’ns Corp., 2019 WL 328429, at *6 (Del. Super. Jan. 23, 2019) (“A plaintiff cannot rely on a misrepresentation made after the parties executed an agreement for a fraudulent inducement claim. Fraudulent statements made after the execution of an agreement relate to the performance of the contract, not the inducement of the contractual relationship.”) (internal quotations omitted). 37 Compl. ¶ 13. 38 Id. ¶ 15. 39 Id. ¶ 28. 40 Id. ¶ 29. 9 • The assertion that Defendants were aware “by March 15, 2022” of the

issues with the original contractor and the resulting delays.41

ii. The remaining alleged misrepresentations are not pled with sufficient particularity.

To meet the particularity requirements for fraud, a complaint must allege: “(1)

the time, place, and contents of the false representation; (2) the identity of the person

making the representation; and (3) what the person intended to gain by making the

representations.”42 Although the particularity requirement does not sound the death

knell for a plaintiff, a certain heightened threshold must be met in order to survive a

motion to dismiss.

The particularity requirement is exemplified by this court’s decision in

Flowshare, LLC v. GeoResults, Inc.43 In Flowshare, the court held the plaintiff

stated a claim for fraud when it alleged who made the statements, that the statements

were made via email, the dates the emails were sent, and that the emails were sent

prior to the execution of the agreement.44 By contrast, in Fortis Advisors LLC v.

Dialog Semiconductor PLC45 the Court of Chancery held that the particularity

requirement was not met because the complaint was not particular enough when the

41 Id. ¶ 27. 42 Abry P’rs V, L.P. v. F & W Acq. LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006). 43 Flowshare, LLC v. GeoResults, Inc., 2018 WL 3599810 (Del. Super. July 25, 2018). 44 Id. at *6. 45 Fortis Advisors LLC v. Dialog Semiconductor PLC, 2015 WL 401371 (Del. Ch. Jan. 30, 2015). 10 plaintiff failed to identify who made the statements, nor where or when any of the

statements were made.46 The court further noted that the failure to provide a specific

time period forced the defendant to “guess,” which cannot satisfy the pleading

standard.47

Here, the Complaint fails to provide the time of the alleged false

representations other than through a heading: “Pre-Closing Events and Conduct by

Defendants[.]”48 Unlike the conduct taking place after the Agreement’s execution,

the Complaint includes no dates for when the remaining misrepresentations

allegedly occurred. For example, Plaintiff alleges that it learned in a post-closing

investigation that Defendants knew their representations regarding the campus

construction and timeline were false prior to Closing,49 but the Complaint does not

indicate if the alleged representations were before or after the Agreement was

executed. Nor did the Complaint identify when Defendants disclosed the $900,000

estimate and tenant improvement credit, or that the Campus construction would be

completed by July of 2022.50 Such bald allegations cannot support a claim for fraud.

46 Id. at *6–8. The court in Fortis Advisors did differentiate between misrepresentations and omissions, noting that for omissions, a broader time period is reasonable given “it is logical to tie a misrepresentation to a period of time” when the information was concealed. Id. at 8. Where Plaintiff here also asserts misrepresentations, in part, through omissions of information, the affirmative misrepresentations are still not particularized as to time, rendering this case different from distinguished cases in Fortis Advisors. 47 Id. at *7. 48 Compl. Section III. D. 49 Id. ¶ 24. 50 See, e.g., id. ¶¶ 20, 25. 11 Here, Plaintiff attributed the statements to Moore and Katsamakis, but

otherwise provided no detail about how or when the representations were made.

Like defendants in Fortis Advisors, Defendants are left to guess about the details of

the alleged misrepresentations, and the Complaint here suffers the same fate.

Plaintiff has failed to plead the alleged misrepresentations with the required

particularity and the Court will grant Defendants’ Motion to Dismiss Plaintiff’s

fraud claim.

B. PLAINTIFF’S RELIANCE ON THE ALLEGED FALSE STATEMENTS WAS NOT REASONABLE. Even if the particularity requirements were met, Plaintiff also fails to plead

that reliance on the alleged misrepresentations was justifiable.51 Reliance is

determined on an objective standard52 viewed in the context of the parties’

relationship, knowledge, and experience.53 The victim of fraud “cannot close his

eyes to a known risk . . . he cannot close his eyes to a risk that is obvious[.]”54

Delaware courts also distinguish between fraudulent statements and

approximations.55 Fraudulent statements tend to be conceived “from the get-go,”

51 See, e.g., ITW Glob. Invs., 2015 WL 3970908, at *8 (“To establish a claim for fraud, a plaintiff must have acted in justifiable reliance on the representation.”). 52 Great Hill Equity P’rs IV, LP v. SIG Growth Equity Fund I, LLLP, 2018 WL 6311829, at *33 (Del. Ch. Dec. 3, 2018). 53 Arwood v. AW Site Servs., LLC, 2022 WL 705841, at *23 (Del. Ch. Mar. 9, 2022) (internal citations omitted). 54 Id. at *24 (quoting AMPAT/Midwest, Inc. v. Illinois Tool Works Inc., 896 F.2d 1035, 1042 (7th Cir. 1990)). 55 Trenwick Am. Litig. Tr. v. Ernst & Young, L.L.P., 906 A.2d 168, 208–09 (Del. Ch. 2006). 12 where a plaintiff demonstrates “circumstances suggesting they were unsound from

the inception.”56 In Trenwick America Litigation Trust v. Ernst & Young, L.L.P, the

court found that a company’s public disclosure statements were not fraudulent when

they “expressly indicate[d] that estimates regarding potential claims and the reserves

necessary to address them [were] imprecise and [could not] be guaranteed.”57 The

court rejected the plaintiff’s argument that the estimates were fraudulent just because

they turned out to be wrong and the company became insolvent.58

Delaware law is “reluctant to permit a plaintiff to premise a fraud claim on

the failure of future predictions to come true, because such predictions are, by

definition, not statements of past fact, but necessarily imprecise attempts to foresee

the future.”59 Here, Plaintiff asserts it relied on Defendants’ representations that the

Campus construction would only cost $900,000 and would be completed by a

particular date. The Court finds this reliance unreasonable.

First, as Plaintiff concedes, the $900,000 was an estimate from the

contractor.60 Even if this Court agreed with Plaintiff’s characterization of the

56 Id. at 209. 57 Id. at 208–09. 58 Id. at 209 (“There are no pled facts, aside from an indication that those estimates turned out to be too low, that suggest that the estimates were irresponsibly prepared, much less that they were intentionally understated[.]”). Aff’d sub nom Trenwick Am. Litig. Tr. v. Billett, 931 A.2d 438 (Del. 2007) (TABLE). 59 Homan v. Turoczy, 2005 WL 2000756, at *15 (Del. Ch. Aug. 12, 2005) (“It is the law in Delaware that statements of opinion concerning probable future events cannot be deemed fraud or misrepresentation when, as here, they were clearly made as such.”). 60 Compl. ¶ 25. 13 “dubious” contractor, the fact that the cost was an estimate, indicates that it could

change. The assertion that Plaintiff relied on an estimate, which in its plain meaning

suggests the amount could vary, allows the Court to find that reliance was not

reasonably justified.

Second, the parties agreed to the fact that the Campus construction project

was “in the process of determining the required capex and tenant improvement” in

the Company Disclosure Schedule to the Stock Purchase Agreement (“the

Disclosures”).61 The representations about the Campus construction’s completion

date and its cost were not included in either the Agreement or the Disclosures.

Instead, the parties agreed that the design process was ongoing, and the capex was

not yet determined.62 For Plaintiff to now allege that it entered into the Agreement

relying on the cost and timeliness promises is unreasonable given Plaintiff’s explicit

agreement to the unknowns in the Agreement. Therefore, the Court finds that there

was no justifiable reliance on the alleged misrepresentations.

61 Defs.’ Mot. to Dismiss, Ex. 1. Company Disclosure Schedule to Stock Purchase Agreement, § 5.05(g)(2). The Court notes that when deciding a motion to dismiss the Court considers only the allegations in the complaint, and “documents referred to in a complaint.” In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 169 (Del. 2006). Here, Plaintiff provided the Amended and Restated Stock Purchase Agreement as Exhibit A to the Complaint, which references the Disclosures. Therefore, this Court considers Exhibit 1 incorporated by reference and within the scope of review for the motion to dismiss. The Court additionally notes that Plaintiff did not object to the use of the Disclosures in its brief, nor in oral argument so the Court considers use of the Disclosures unopposed. 62 Defs.’ Mot. to Dismiss, Ex. A. § 5.05(g)(2). 14 VI. CONCLUSION

In conclusion, Defendants’ Motion to Dismiss is GRANTED pursuant to

Superior Court Civil Rule 12(b)(6) because Plaintiff has failed to state a claim for

Fraud in the Inducement.

IT IS SO ORDERED.