Kostyszyn v. Martuscelli

• Court: Superior Court of Delaware
• Decided: February 18, 2015
• Docket: 14C-08-010
• Status: Published

Opinion

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE IN AND FOR NEW CASTLE COUNTY

AGNIESZKA KOSTYSZYN, ) and MAREK KOSTYSZYN ) Plaintiffs, ) ) v. ) C.A. N14C-08-010 PRW ) GIANMARCO MARTUSCELLI, ) GILDA MARTUSCELLI, ) the ESTATE OF BRETT J. HARRIS ) FROZEN ENDEAVORS, INC., ) a Delaware Corporation, ) AJT, INC., a Delaware Corporation, ) CHESAPEAKE INN, INC., ) a Maryland Corporation. ) Defendants. )

Submitted: December 8, 2014 Decided: February 18, 2015

MEMORANDUM OPINION AND ORDER

Upon Defendants’ Motion to Dismiss Plaintiffs’ Complaint, GRANTED.

Gregory D. Stewart, Esquire, Law Office of Gregory D. Stewart, P.A., Wilmington, Delaware, Attorney for Plaintiff.

Brian M. Gottesman, Esquire (argued), Michael W. McDermott, Esquire, Suzanne H. Holly, Esquire, Berger Harris LLP, Wilmington, Delaware, Attorneys for Defendants.

WALLACE, J. I. INTRODUCTION

Before the Court is Defendants Gianmarco Martuscelli, Gilda Martuscelli,

the Estate of Brett J. Harris, Frozen Endeavors, Inc., AJT, Inc., and Chesapeake

Inn, Inc.’s (collectively the “Defendants”) motion to dismiss. Plaintiffs Agnieszka

Kostyszyn and Marek Kostyszyn (together the “Plaintiffs”) currently own and

operate Paciugo Gelato and Café (“Paciugo”). They purchased the business from

Defendants and now allege that Defendants committed fraud during its sale and

have breached their duties under the sale’s agreement. Because the Plaintiffs have

failed to meet the required pleading standards for all claims, the Court GRANTS

the Defendants’ motion to dismiss.1

II. FACTS AND PROCEDURAL BACKGROUND

In late 2011, Plaintiffs approached the owners of Paciugo about the

possibility of opening up a franchise. 2 Plaintiffs met with Gianmarco Martuscelli

(“Mr. Martuscelli”), principal of Frozen Endeavors, Inc. (“Endeavors”), and B.J.

Harris (now deceased). 3 Messrs. Martuscelli and Harris presented Plaintiffs with a

1 At oral argument, Defendants argued that only Frozen Endeavors was properly named and all claims were improperly brought against the other defendants. Because Plaintiffs have failed in substance to file an adequate complaint, the Court need not determine who are the proper defendants to the action. 2 See Plf.’s Answering Br. at 1. 3 See Compl. at ¶ 14.

-2- profit statement for Paciugo ranging from July 2010 to August 2011. 4 The profit

statement reflects a profit (“net with payroll”) of $7,186.21 and details Paciugo’s

retail sales, catering sales, rent cost, insurance cost, ingredient costs, royalties paid,

and payroll for those months.5

On December 1, 2011, Plaintiffs purchased Paciugo from Endeavors for

$272,500, which they paid in three installments. 6 The Martuscellis were not a

party to the Agreement of Sale (“Agreement”); only Plaintiffs and Endeavors

signed the contract.7 The contract provided, in part, that Mr. Martuscelli’s other

businesses, Chesapeake Inn (“Chesapeake”) and Canal Creamery & Sweet Shoppe

(“Creamery”), and Mr. Martuscelli’s parents’ business, La Casa Pasta, would

continue purchasing gelato from Paciugo. Section 5(d) of the agreement states:

Seller shall continue to purchase gelato for Chesapeake Inn, Canal Creamery & Sweet Shoppe and La Casa Pasta for a period of ten years so long as Buyer does not breach its obligations under this Agreement or the companion note and security agreement or Buyer’s lease with Christiana Mall, LLC. 8

4 See Profit Statement, Ex. 1 to Compl. 5 See id. 6 See Agreement of Sale (“Agreement”), Ex. 2 to Compl., at 1. 7 See id. at 11. 8 See id. at 3.

-3- The present dispute arose when Paciugo’s sales declined after Plaintiffs

purchased the business. Plaintiffs claim that gelato sales to Chesapeake, La Casa

Pasta, and the Creamery immediately dropped in 2012 to $18,4759 and further

declined in 2013 to $3,300. 10 The Creamery reportedly stopped purchasing

altogether from Paciugo in April 2013 when Mr. Martuscelli, who held a three-

year lease for the Creamery, sold his interest in the business prior to the

termination of the lease. 11 In an email exchange with the Plaintiffs, Mr.

Martuscelli explained he never owned but only had a lease on the Creamery, and

that he sold his interest because the Creamery had been losing money for the

preceding two years. 12 In that email, Mr. Martuscelli wrote:

I lost money at Paciugo and the Creamery but I tried to [sic] my best and it wasn’t good enough. BJ and I sold Paciugo because we were both losing too much money (BJ lost all his savings and had nothing left). We sold you the business while still owing the bank over $70k in a loan that I just finished paying off this year. We didn’t make any money from you or anything associated with Paciugo. We were absentee owners who couldn’t afford to pay the bills any longer. 13

9 See Compl. at ¶ 17. 10 See id. at ¶ 22. 11 See Def’s. Mot. to Dismiss at 7. 12 Compl. at ¶¶ 21, 23. 13 Id. at ¶ 24.

-4- After receiving that email, Plaintiffs commenced this suit in the Court of Chancery,

alleging both equitable and legal claims. The Court of Chancery dismissed the

Plaintiffs’ equitable fraud claim with prejudice and dismissed the remaining legal

claims without prejudice for lack of subject matter jurisdiction. 14 Plaintiffs now

bring legal claims they enumerate as follows: (1) Breach of Contract; (2) Breach

of Warranty; (3) Indemnification; (4) Fraud; (5) Negligent Misrepresentation;

(6) Intentional Misrepresentation; and (7) Breach of Implied Covenant of Good

Faith and Fair Dealing. 15

III. STANDARD OF REVIEW

Generally, a plaintiff must plead the facts with “reasonable conceivability”

to survive a motion to dismiss.16 When considering a motion to dismiss under

Rule 12(b)(6), the Court will:

14 See Kostyszyn v. Martuscelli, 2014 WL 3510676, at *7 (Del. Ch. July 14, 2014) (declining to engage clean up doctrine to address Plaintiffs’ legal claims, but allowing Plaintiffs to transfer them to Superior Court). 15 See Compl. Plaintiffs also contend that Frozen Endeavors is a void entity and therefore lacks standing to move to dismiss. They cite no authority for that argument. Nonetheless, Frozen Endeavors filed a Certificate of Revival in 2014. That certificate retroactively validated all of Frozen Endeavors’ actions taken during the time period the corporation was void. See DEL. CODE ANN. tit. 8, § 312(e) (2013) (reinstatement by Certificate of Revival “shall validate all contracts, acts, matters and things made, done and performed” by a corporation while its certificate of incorporation was forfeited or void). 16 WP Devon Assocs. v. Hartstrings, LLC, 2012 WL 3060513, at *3 (Del. Super. Ct. July 26, 2012) (citing Cambium Ltd. v. Trilantic Capital Partners III L.P., 2012 WL 172844, at *1 (Del. Jan. 20, 2012)).

-5- (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; (3) draw all reasonable inferences in favor of the non-moving party; and (4) [not dismiss a claim] unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances.17

The Court may dismiss a claim if a plaintiff fails to plead an element of that

claim. 18

Under Rule 9(b), a plaintiff bringing a fraud or misrepresentation claim must

plead it with particularity—a heightened pleading standard.19 The plaintiff must

plead:

(1) a false representation, usually of fact, made by the defendant; (2) the defendant’s knowledge or belief that the representation was false, or was made with reckless indifference to the truth; (3) an intent to induce the plaintiff to act or to refrain from acting; (4) [that] the plaintiff’s action or inaction was taken in justifiable reliance upon the representation; and (5) damage to the plaintiff as a result of such reliance. 20

17 See Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d 531, 535 (Del. 2011) (stating standard for motions to dismiss). 18 See Harris v. Dependable Used Cars, Inc., 1997 WL 358302, at *2-3 (Del. Super. Ct. March 20, 1997); Wolstenholme v. Hygenic Exterminating Co., Inc., 1988 WL 77655, at *1-2 (Del. Super. Ct. July 5, 1988); see also Zebroski v. Progressive Direct Ins. Co., 2014 WL 2156984, at *6 (Del. Ch. Apr. 30, 2014). 19 Super Ct. Civ. R. 9(b); Universal Capital Mgmt. Inc. v. Micco World, Inc., 2012 WL 1413598, at *2 (Del. Super. Ct. Feb. 1, 2012). 20 Id. (citing Crowhorn v. Nationwide Mut. Ins. Co., 2001 WL 695542, at *4 (Del. Super. Ct. Apr. 26, 2001)).

-6- The plaintiff must also state the “time, place, and contents of the fraud,” as well as

identify the person accused of committing the fraud. 21

IV. PARTIES’ CONTENTIONS

After the Court of Chancery dismissed Plaintiffs’ legal claims they filed suit

in this Court alleging that Defendants falsely represented the catering revenue and

financial condition of Paciugo, causing them to pay more for the business.22 They

further claim Defendants breached their obligations under the sales agreement by

failing to have their businesses purchase gelato at the same rate they did prior to

the Paciugo sale. 23

Defendants move to dismiss Plaintiffs’ Complaint in its entirety.

Defendants argue that they have not breached their obligations under the

Agreement. 24 Further, Defendants say, Plaintiffs have not specifically alleged

which of Defendants’ representations, made during the sale’s negotiations, were

false so as to provide the support required for the fraud, negligent

misrepresentation, and intentional misrepresentation claims. 25

21 See id. (listing elements of a fraud claim). 22 See Compl. at ¶ 25. 23 See id. at ¶ 36. 24 See Def’s. Mot. to Dismiss at 13. 25 See id. at 9.

-7- V. DISCUSSION

A. The Agreement is governed by Maryland law.

The parties disagree as to whether Delaware or Maryland substantive law

governs Plaintiffs’ claims. The Agreement contains varied (and seemingly

conflicting) choice of law provisions: Section 9(a) states that the agreement shall

be enforced “to the fullest extent permissible under Maryland or Delaware law”;

while the governing law provision in Section 9(i) says that the contract “will be

governed by, and construed and enforced in accordance with, the laws of the state

of Maryland.”26 The Court finds the latter to be the clearer expression of the

parties’ intended choice of “governing” law and to control here.

Delaware courts “are bound to respect the chosen law of contracting parties,

so long as that law has a material relationship to the transaction.” 27 Maryland law

has a material relationship to this contract because thereunder Plaintiffs sell (or

sold) gelato to two Maryland businesses and the Agreement’s negotiations, during

which the alleged fraud or misrepresentation occurred, took place at the

Chesapeake Inn in Maryland.28 Because the Agreement explicitly designates the

26 See Agreement, at 6. 27 Abry Partners V, L.P. v. F&W Acquisition LLC, 891 A.2d 1032, 1046 (Del. Ch. 2006). 28 See Compl. at ¶ 27 (stating Chesapeake Inn, a Maryland corporation with its principal place of business in Maryland, purchases gelato from Paciugo).

-8- laws of Maryland as the governing law of the contract, this Court will apply

Maryland substantive law.

B. Maryland law does not recognize an independent cause of action for breach of the implied covenant of good faith and fair dealing.

Maryland contract law recognizes an implied covenant of good faith and fair

dealing. 29 It does not, however, recognize an independent cause of action for a

breach of that implied covenant. 30 Because no cause of action exists for the

Plaintiffs’ claim under the governing law of the contract, it must be dismissed.

Defendants’ motion is therefore GRANTED as to the breach of implied covenant

of good faith and fair dealing claim.

C. Plaintiffs fail to adequately allege breach of contract.

Plaintiffs brought three breach of contract claims: breach of contract, breach

of warranty, and indemnification.

29 See Greenfield v. Heckenbach, 797 A.2d 63, 81 (Md. Ct. Spec. App. 2002) (citing Keller v. A .O. Smith Harvestore Products, Inc., 819 P.2d 69, 73 (Colo. 1991)) (recognizing implied covenant of good faith and fair dealing). 30 See Baker v. Sun Co., 985 F. Supp. 609, 610 (D. Md. 1997) (stating Maryland does not explicitly recognize an independent cause of action for the implied contractual duty of good faith and fair dealing); Mt. Vernon Props., LLC. v. Branch Banking & Trust Co., 907 A.2d 373, 381 (Md. Ct. Spec. App. 2006) (“[T]here is no independent cause of action at law in Maryland for breach of the implied covenant of good faith and fair dealing.”).

-9- Even recognizing the low burden imposed to survive dismissal, 31 Plaintiffs’

pleadings do not demonstrate how Defendants have breached the Agreement and

how, on these breach claims, they, Plaintiffs, may recover under any reasonably

conceivable set of circumstances susceptible of proof. The contract requires

Defendants to purchase gelato for the Chesapeake Inn, Creamery, and La Casa

Pasta for ten years.32 Plaintiffs attempt to engraft to the Agreement a requirement

that Defendants purchase gelato in the amounts reflected in the Profit Statement

and refrain from purchasing competing products, such as ice cream. 33 But the

Profit Statement is just that—an accounting of the business’s profits for a certain

period. There is neither an allegation nor evidence it was to be part of the

Agreement.

The contract does not specify any amount of gelato that must be purchased.

Nor does the contract state that Defendants must continue to purchase gelato for a

non-operating business or refrain from purchasing ice cream. Plaintiffs admit that

the Chesapeake Inn and La Casa Pasta still purchase gelato from Paciugo, although

in smaller amounts.34 Plaintiffs also admit that Defendants bought gelato for the

31 Doe v. Cahill, 884 A.2d 451, 458 (Del. 2005). 32 See Profit Statement. 33 See Compl. at ¶¶ 35-36. 34 See id. at ¶¶ 27, 35-36.

-10- Creamery following the Paciugo sale. 35 Even drawing reasonable inferences in

favor of the Plaintiffs, they could not recover for breach of contract under any

reasonably conceivable set of circumstances because Plaintiffs admit that

Defendants still purchase gelato according to the terms of the contract for the

businesses that Defendants still operate. The Court need not “accept every strained

interpretation of the allegations proposed by the [P]laintiff[s].” 36 Plaintiffs here

have failed to plead facts supporting a finding of a breach of an obligation under

the Agreement, which is, of course, an essential element of their breach of contract

claim. 37 The claim must be dismissed.

In addition, the breach of warranty and indemnification claims must be

dismissed. Plaintiffs complain that Defendants’ alleged “improper accounting and

other business practices resulting in an overstatement of profits and revenues

substantially inflated revenue projections” constituted breaches of warranties in the

contract.38 Although the Court must accept all well-pleaded factual allegations as

true, “allegations that are merely conclusory and lacking factual basis, [ ] will not

35 See id. at ¶ 17. 36 Malpiede v. Townson, 780 A.2d 1075, 1083 (Del. 2001). 37 See VLIW Technology, LLC v. Hewlett-Packard Co., 840 A.2d 606, 612 (Del. 2006) (listing essential elements for a breach of contract claim as (1) the existence of a contract, (2) the breach of an obligation imposed by the contract, and (3) damage to the plaintiff). 38 See Compl. at ¶ 44.

-11- survive a motion to dismiss.”39 Plaintiffs have pled no facts showing that

Defendants utilized improper accounting practices. Nor have they pled facts

showing how the profits or revenues were inflated. They simply allege that the

sales in years following the sale of the franchise did not meet the same level as the

sales in previous years. Absent the necessary specific allegations of fact for

Plaintiffs’ claims that Defendants breached an express warranty in the contract, the

breach of warranty and indemnification claims must also be dismissed. 40

Defendants’ motion is GRANTED as to the breach of contract, breach of

warranty, and indemnification claims.

D. Plaintiffs’ fraud and intentional misrepresentation claims lack reference to a false statement made by Defendants.

A plaintiff must state the “time, place, and contents” of the fraud or

misrepresentation alleged and allege that the defendant’s representation was false

to plead a claim with particularity as required by Rule 9(b). 41 In this case,

Plaintiffs have merely stated that Defendants presented them with false financial

39 See Brevet Capital Special Opportunities Fund, LP v. Fourth Third, LLC, 2011 WL 3452821, at *6 (Del. Super. Ct. Aug. 5, 2011) (quoting Criden v. Steinberg, 2000 WL 354390, at *2 (Del. Ch. Mar. 23, 2000)). 40 Lord v. Souder, 748 A.2d 393, 398 (Del. 2000) (“Where allegations are merely conclusory . . . (i.e., without specific allegations of fact to support them) they may be deemed insufficient to withstand a motion to dismiss.”). 41 See Universal Capital Mgmt. Inc. v. Micco World, Inc., 2012 WL 1413598, at *2 (Del. Super. Ct. Feb. 1, 2012).

-12- information using improper accounting methods 42 without pleading adequate facts

informing how the records were false. Plaintiffs do not specify the time, place, and

contents of the alleged fraud as required. They instead generalize that

“information regarding the financial condition, operating results, revenue, income

and expenses” of the business was false.43 Plaintiffs indicate neither how

Defendants’ accounting methods were improper nor how the one financial

statement Plaintiffs relied on in purchasing the franchise was inaccurate. They

have not specified any false statements made by Defendants nor that Defendants

knew or believed their statements to be false. In short, Plaintiffs have failed to

plead multiple elements of their fraud claims. Accordingly, the fraud and

intentional misrepresentation claims must be dismissed.

Defendants’ motion is GRANTED as to fraud and intentional

misrepresentation claims.

E. Without an “intimate nexus,” there can be no claim of negligent misrepresentation.

Maryland law requires a plaintiff alleging negligent misrepresentation to

plead all the elements of fraud plus the existence of an “intimate nexus.” 44 To

42 See Compl. at ¶¶ 53-56. 43 See id. at ¶ 55. 44 See Weisman v. Connors, 540 A.2d 783, 792 (Md. 1988) (defining “intimate nexus” as “contractual privity or its equivalent”).

-13- show an intimate nexus, the plaintiff must demonstrate that the defendant owed the

plaintiff a duty of care by showing contractual privity or its equivalent. 45 Plaintiffs

have failed to plead the existence of an intimate nexus; there are no facts pled

demonstrating that Defendants owed Plaintiffs a specific duty of care in this

instance. As the Court of Chancery determined, the parties engaged in an arm’s

length transaction. Neither in Chancery, nor here, have Plaintiffs pled “the

existence of a fiduciary, special, or confidential relationship between the parties.”46

In turn, they have failed to plead the existence of an “intimate nexus” as required

under Maryland law. 47 Therefore, the negligent misrepresentation claim must be

dismissed 48 and the Defendants’ motion as to that claim is GRANTED.

45 Dwoskin v. Bank of Am., N.A., 850 F. Supp. 2d 557, 571 (D. Md. 2012) (“When dealing with claims of economic loss due to negligent misrepresentation, a plaintiff must prove the defendant owed a duty of care by demonstrating an intimate nexus . . . demonstrated by showing contractual privity or its equivalent.”). 46 Kostyszyn v. Martuscelli, 2014 WL 3510676, at *5 (Del. Ch. July 14, 2014). 47 Gresi v. Atl. Gen. Hosp. Corp., 756 A.2d 548, 553-56 (Md. 2000). 48 See, e.g., In re Asbestos Litigation (Fluitt), 2014 WL 600638 (Del. Super. Ct. Jan. 29, 2014) (complaint in asbestos matter, to which Florida substantive law applied, insufficient when it failed to state the essential elements of plaintiffs’ claims, which Delaware’s pleading standard requires, under Florida’s applicable statute).

-14- VI. CONCLUSION

While the missing required elements for each of the several claims may

differ, Plaintiffs cannot, under the Complaint and its allegations as pled, recover

under any reasonably conceivable set of circumstances susceptible to proof. The

Defendant’s Motion to Dismiss Plaintiffs’ Complaint is GRANTED, and all of the

Plaintiffs’ claims are DISMISSED.

IT IS SO ORDERED.

/s/ Paul R. Wallace PAUL R. WALLACE, JUDGE

Original to Prothonotary cc: All counsel via File & Serve

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