RGIS International Transition Holdco, LLC v. Retail Services WIS Corporation

• Court: Superior Court of Delaware
• Decided: February 13, 2024
• Docket: N21C-12-077 PRW CCLD
• Status: Published

Opinion

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE

RGIS INTERNATIONAL ) TRANSITION HOLDCO, LLC, ) RGIS INTERNATIONAL ) TRANSITION HOLDCO MEXICO, ) LLC, and RGIS MEXICO, LLC, ) ) Plaintiffs, ) ) v. ) C.A. No. N21C-12-077 ) PRW CCLD RETAIL SERVICES WIS ) CORPORATION, RETAIL SERVICES ) WIS HOLDINGS CORPORATION, ) JAMES ROSE, and ) RICHARD BAXTER, ) ) Defendants. )

Submitted: January 12, 2024 Decided: February 13, 2024

Upon Defendants’ Motion to Dismiss, GRANTED.

MEMORANDUM OPINION AND ORDER

Christopher P. Simon, Esquire, David G. Holmes, Esquire, CROSS & SIMON, LLC, Wilmington, Delaware, Jed M. Schwartz, Esquire, Christopher Almon, Esquire, Michael T. Frieda, Esquire, MILBANK LLP, New York, New York, Attorneys for Plaintiffs RGIS International Transition Holdco, LLC, RGIS International Holdco, LLC, and RGIS Mexico, LLC.

Steven T. Margolin, Esquire, Bryan T. Reed, Esquire, GREENBERG TRAURIG, LLP, Wilmington, Delaware, Attorneys for Defendants James Rose and Richard Baxter.

WALLACE, J. Plaintiffs here purchased shares of certain companies from sellers. Turns out,

those certain companies had certain troublesome undisclosed liabilities, including

millions owed to Mexican taxation authorities. Plaintiffs have responded with a

fraud claim against the Delaware-incorporated seller entities. To boot, Plaintiffs

have brought civil conspiracy and aiding and abetting fraud claims against the

sellers’ CEO and CFO, both of whom reside in Texas.

Those officer-defendants now move to dismiss the claims brought against

them as individuals. They say they aren’t subject to personal jurisdiction in

Delaware and—even were they—that Plaintiffs failed to adequately state claims

against them as individual defendants.

Plaintiffs have pled themselves into a pickle. The non-resident officer-

defendants could be subject to personal jurisdiction in Delaware under a minimum-

contacts analysis only if they were acting within their corporate role. But those same

officer-defendants cannot be liable for the civil conspiracy or aiding and abetting

claims unless they were acting outside their corporate role. All that said, the Court

need not make the call on whether the tag was applied or missed on either end. The

Plaintiffs’ claims against the individual officer-defendants don’t survive Rule

12(b)(6) scrutiny and are, therefore, dismissed for that failure.

-1- I. FACTUAL AND PROCEDURAL BACKGROUND1

A. THE PARTIES

Plaintiffs RGIS International Transition Holdco, LLC, RGIS International

Transition Holdco Mexico, LLC, and RGIS Mexico, LLC (collectively, “RGIS”) are

Delaware limited liability corporations.2

Defendants Retail Services WIS Corporation and Retail Services WIS

Holdings Corporation (the “Selling Entity Defendants”) are Delaware corporations

headquartered in Dallas, Texas.3 Individual Defendants James Rose and Richard

Baxter both reside in Texas.4 Mr. Rose is the Chief Executive Officer and Mr.

Baxter the Chief Financial Officer of the Selling Entity Defendants.5

B. FACTUAL BACKGROUND

In September 2021, RGIS purchased from the Selling Entity Defendants the

entire issued share capital of three entities—WIS UK, WIS Mexico, and PSI

(collectively, the “Transferred Companies”)6—for an aggregate purchase price of

1 This background is drawn from the pleadings, which include the Complaint, Answer, Counterclaims, and the documents incorporated therein. 2 Amended Complaint (“Am. Compl.”) ¶ 9 (D.I. 22). 3 Id. ¶¶ 10-12. 4 Id. ¶¶ 13-14. 5 Id. 6 WIS Mexico and PSI are the entities located in Mexico and, as later discussed, subject to Mexican tax liability. Mr. Rose and Mr. Baxter both served on the board of managers for WIS Mexico and PSI. Id.

-2- $7.5 million.7

The governing Share Purchase Agreement contains the Selling Entity

Defendants’ representations and warranties.8 Those now mentioned are pertinent to

this motion.9

SPA Section 5.1.4 addresses the Transferred Companies’ liabilities. Under

Section 5.1.4.1, Selling Entity Defendants represent and warrant that RGIS “has

been provided with true and accurate copies of” the Transferred Companies’ balance

sheets and income statements for the fiscal year ended March 31, 2021, and the four

months ended July 31, 2021.10 And those financial statements “present fairly, in all

material respects, the financial position and the results of operations of the

Transferred Companies as of the respective dates thereof and for the respective

periods covered . . . .”11 That section also provides that “the Transferred Companies

have no indebtedness other than (i) as reflected on the Financial Statements, or

(ii) as incurred in the Ordinary Course of Business.”12 SPA Section 5.1.4.2 states,

[t]here are no material liabilities or obligations of the Transferred Companies of any nature, whether or not accrued, contingent or otherwise, other than those that (i) are reflected or reserved against 7 Am. Compl. ¶ 1. 8 Id., Ex. 1 (“SPA”). 9 Other representations and warranties are also included in the Amended Complaint, but only those included here are relevant to the claims brought against Mr. Rose and Mr. Baxter. 10 SPA § 5.1.4.1. 11 Id. 12 Id.

-3- on the Financial Statements or otherwise set forth in this Agreement, (ii) have been incurred in the Ordinary Course of Business of the Transferred Companies since March 31, 2021, (iii) are permitted or contemplated by this Agreement, or (iv) have been discharged or paid off since March 31, 2021.13

Section 5.1.9 of the SPA contains the Selling Entity Defendants’ representations and

warranties with respect to taxes. Section 5.1.9.1 states, in pertinent part:

To the knowledge of the Seller, (i) all material Tax Returns required to be filed by or with respect to any Transferred Company have been filed and all such Tax Returns were correct and complete in all material aspects; (ii) all material Taxes due and payable have been paid or will be paid by the due date thereof; (iii) there is no action, suit, proceeding, investigation, audit, deficiency, adjustment or claim pending or, to the knowledge of the Seller, threatened in writing with respect to any Taxes of the Transferred Companies; (iv) each of the Transferred Companies has complied with all applicable Laws relating to the payment and withholding of Taxes and has duly and timely withheld and paid over to the appropriate taxing authorities all amounts required to be so withheld and paid over . . . .14

Under SPA Section 5.1.9.3, Selling Entity Defendants represent and warrant that,

[t]o the knowledge of the Seller, the Transferred Companies have properly collected and remitted all material amounts of sales and similar Taxes with respect to sales or leases made or services provided to their customers and have properly received and retained any appropriate Tax exemption certificates or other documentation for all such sales, leases or other services made without charging or remitting any material amounts of sales or similar Taxes that qualify as exempt from sales and similar Taxes.15

13 Id. § 5.1.4.2. 14 Id. § 5.1.9.1. 15 Id. § 5.1.9.3.

-4- The “knowledge of the Seller” is defined in the Agreement as “the actual knowledge

after reasonable inquiry of James Rose and Richard Baxter.”16 Indeed, Mr. Rose and

Mr. Baxter represented to RGIS that they were fully knowledgeable regarding all

relevant issues and that they would be RGIS’s sole contact during negotiations.17

After the closing, RGIS learned of WIS Mexico and PSI’s outstanding tax

liabilities in Mexico.18 Those companies owed the Mexican taxation authorities

upwards of 40 million Mexican pesos (approximately $2.5 million U.S. dollars) for

various unpaid taxes stemming back to 2007.19 In addition, an open audit into

WIS Mexico from 2010 has a potential tax liability of 71 million Mexican pesos

(approximately $4.2 million U.S. dollars).20

RGIS was unaware of these outstanding tax liabilities when they entered into

the Agreement. At closing, the Selling Entity Defendants presented only a

consolidated report to RGIS with no separate financial statement of the Transferred

Companies.21

In contrast, the Selling Entity Defendants were searching for solutions to the

16 Id. § 1 (Definitions and interpretation). 17 Am. Compl. ¶ 19. 18 Id. ¶¶ 4, 27. 19 Id. ¶¶ 28-33. 20 Id. ¶ 32. 21 Id. ¶ 36.

-5- tax liabilities well before the sale occurred. According to PSI and WIS Mexico’s

books and records, Selling Entity Defendants attempted to move PSI’s operations

and employees entirely to WIS Mexico, leaving PSI with no operations or assets—

only liabilities.22

The named Individual Defendants were also involved in efforts to resolve

those liabilities. In 2015, Mr. Rose heard a presentation about PSI’s liabilities, as

well as the plan to move PSI’s assets, and was then-on privy to the effort.23 And in

2021, Mr. Baxter authorized a payment of 7.761 million Mexican Pesos purportedly

to settle a tax liability of approximately 71 million Mexican Pesos.24 But that

payment was never provided to the Mexican tax authorities; instead, it was

distributed to employees of WIS Mexico.25 In connection with that payment, a

document was created purporting to be a settlement with Mexican tax authorities.26

That settlement document was later discovered to be fabricated.27 Mr. Baxter had

some knowledge of the fabricated settlement document, as he asked those same

employees for an update on the “tax liability settlement” just prior to the sale

22 Id. ¶¶ 40-41. 23 Id. ¶ 42. 24 Id. ¶¶ 43-44. 25 Id. ¶ 44. 26 Id. ¶¶ 43-44. 27 Id. ¶ 44.

-6- transaction.28

In November 2021, RGIS demanded compensation for the liabilities it has

now incurred and currently faces.29 Defendants refused, and RGIS filed suit.30

C. PROCEDURAL BACKGROUND

RGIS initiated this action on December 10, 2021.31 After a long delay,32 RGIS

served summonses in June 2023.33 The Individual Defendants answered with their

initial motion to dismiss.34

In response, RGIS filed an Amended Complaint, bringing three causes of

action: (1) fraud against the Selling Entity Defendants;35 (2) civil conspiracy against

the Individual Defendants,36 and; (3) aiding and abetting fraud against the Individual

Defendants.37 The Individual Defendants have answered with another motion to

28 Id. ¶ 45. 29 Id. ¶ 8. 30 Id. 31 D.I. 1. 32 Instead of moving this case forward, RGIS waited to act upon its initial Complaint for months—providing intermittent status updates only at the Court’s behest. See D.I. 2 (status update dated July 25, 2022); D.I. 4 (status update dated Feb. 9, 2023); D.I. 6 (status update dated May 24, 2023). Without question, RGIS’s months-long delay extended well past this Court’s 120-day time limit for service of summonses and complaints. See Super. Ct. Civ. R. 4(j). 33 D.I. 10-15. 34 D.I. 16. 35 Am. Compl. ¶¶ 60-72. 36 Id. ¶¶ 73-76. 37 Id. ¶¶ 77-80.

-7- dismiss.38 That motion is now ripe for decision.

II. PARTIES’ CONTENTIONS

Mr. Rose and Mr. Baxter seek to dismiss Counts II and III of the Amended

Complaint.39 In support, they make two main arguments.40 First, they contend that

they are not subject to personal jurisdiction in the State of Delaware.41 Specifically,

Mr. Rose and Mr. Baxter say that they are not necessary and proper parties under

10 Del. C. § 3114, and that constitutional due process concerns warrant dismissal of

the claims against them.42

Second, Mr. Rose and Mr. Baxter contend that neither the civil conspiracy nor

the aiding and abetting fraud claim is pled such that they withstand the reasonable

conceivability examination that must be engaged.43 They argue that the Amended

Complaint pleads insufficient facts of the elements necessary to state either claim.44

38 Individual Defendants’ Renewed Motion to Dismiss Counts II and III of Plaintiffs’ Amended Complaint (“Defs.’ Mot.”) (D.I. 25). 39 See generally id. 40 In addition to that described here, Individual Defendants also urge the Court to consider two documents outside of the pleadings. See id. at 23-24; id., Ex. A (Tax Settlement Document); id., Ex. B (Deloitte Letter). Because the motion can be and is disposed of on the 12(b)(6) failure-to- state-a-claim merits alone, the Court didn’t consider these documents. See Super. Ct. Civ. R. 12(b)(6) (instructing how the Court must proceed under Rule 56 when matters outside the pleadings are presented to and not excluded by the Court). 41 Id. at 12-18. 42 Id. 43 Id. at 19-26. 44 Id. at 19-23, 25-26.

-8- Additionally, as basis for dismissal, they point to Delaware law that explains that a

corporation cannot conspire with its own officers, directors, or agents.45

RGIS opposes the Individual Defendants’ motion.46 In its opposition, RGIS

contends that Messrs. Rose and Baxter are subject to personal jurisdiction in

Delaware under Section 3114.47 And it insists that both the civil conspiracy claim

as well as the aiding and abetting fraud claim are sufficiently pled here.48

With reference to the latter, RGIS contends that both claims fall under the

personal motivation exception to the Delaware rule that a corporation cannot

conspire with its own officers, directors, or agents.49 In support, RGIS says that

Messrs. Rose and Baxter acted “to cause the sale of the Transferred Companies and

thereby eliminate their personal liability to Mexican authorities for non-compliance

with [tax] requirements.”50 According to RGIS, “[u]nder Mexican law, directors

such as Rose and Baxter are subject to liability for non-compliance with [tax]

requirements, but that exposure is potentially reduced once they no longer serve as

directors, and the sale had the effect of Rose and Baxter no longer serving as

45 Id. at 22-23; Individual Defendants’ Reply Brief in Support of Motion to Dismiss (“Defs.’ Reply Br.”) at 6-13 (D.I. 30). 46 See generally Plaintiffs’ Answering Brief in Opposition to Individual Defendants’ Renewed Motion to Dismiss (“Pls.’ Answering Br.”) (D.I. 28). 47 Id. at 24-34. 48 Id. at 8-17. 49 Pls.’ Answering Br. at 13-18. 50 Id. at 14 (quoting Am. Compl. ¶ 74).

-9- directors of the Mexican Entities, leaving the Transferred Companies with the

liability.”51

Because this motion can be disposed of on Rule 12(b)(6) grounds alone, the

Court need not resolve the personal jurisdiction challenge posed.

III. STANDARD OF REVIEW

“Under Superior Court Civil Rule 12(b)(6), ‘[t]he legal issue to be decided is,

whether a plaintiff may recover under any reasonably conceivable set of

circumstances susceptible of proof under the complaint.’”52 Under that Rule, the

Court will

(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 the claims] unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances.53

“If any reasonable conception can be formulated to allow Plaintiffs’ recovery, the

motion must be denied.”54 This is because “[d]ismissal is warranted [only] where

the plaintiff has failed to plead facts supporting an element of the claim, or that under

51 Am. Compl. ¶ 46; id. at 13-14. 52 Vinton v. Grayson, 189 A.3d 695, 700 (Del. Super. Ct. 2018) (alteration in original) (quoting Super. Ct. Civ. R. 12(b)(6)). 53 Id. (alteration in original) (quoting Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 535 (Del. 2011)). 54 Id. (citing Cent. Mortg. Co., 27 A.3d at 535).

-10- no reasonable interpretation of the facts alleged could the complaint state a claim for

which relief might be granted.”55

Civil Rule 9(b) requires one to plead a fraud claim with particularity.56

IV. DISCUSSION

A. RGIS’S CLAIMS OF CIVIL CONSPIRACY AND AIDING AND ABETTING FAIL.

In Counts II and III, RGIS alleges that Mr. Rose and Mr. Baxter engaged in

acts of civil conspiracy as well as aiding and abetting fraud.57 A civil conspiracy

claim requires a plaintiff establish that “two or more persons combined or agreed

with the intent to do an unlawful act or to do an otherwise lawful act by unlawful

means.”58 An aiding and abetting claim requires a plaintiff allege “(i) underlying

tortious conduct, (ii) knowledge, and (iii) substantial assistance.” 59 Both claims

must be pled with a certain degree of particularity.60

55 Hedenberg v. Raber, 2004 WL 2191164, at *1 (Del. Super. Ct. Aug. 20, 2004) (citation omitted). 56 Super. Ct. Civ. R. 9(b). 57 Am. Compl. ¶¶ 73-80. 58 In re Transamerica Airlines, Inc., 2006 WL 587846, at *6 (Del. Ch. Feb. 28, 2006). 59 Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 2014 WL 6703980, at *23 (Del. Ch. Nov. 26, 2014). 60 Id. at *20-23 (applying the Rule 9(b) particularity standard to civil conspiracy and aiding and abetting claims); Albert v. Alex. Brown Mgmt. Servs., Inc., 2005 WL 2130607, at *11 (Del. Ch. Aug. 26, 2005) (“Where a complaint alleges fraud or conspiracy to commit fraud, the Rules of this court call for a higher pleading standard, requiring the circumstances constituting the fraud or conspiracy to ‘be pled with particularity.’” (quoting Atlantis Plastics Corp. v. Sammons, 558 A.2d 1062, 1066 (Del. Ch. 1989), and citing Ch. Ct. R. 9(b), which is identical to Super. Ct. Civ. R. 9(b) and states: “In all averments of fraud, the circumstances constituting fraud shall be stated with particularity.” (cleaned up and emphasis added))).

-11- Generally, a corporation cannot be deemed to have conspired with its wholly

owned subsidiary, or its officers and agents.61 And “like civil conspiracy, officers

and agents cannot aid and abet their principal or each other in the commission of a

tort.”62 But these general rules may not apply when the officer or agent of the

corporation steps out of his corporate role and acts on personal motives.63 A

corporate officer does not step out of his corporate role unless he “seeks to gain a

benefit independent of [his] financial interest resulting from [his] employment by or

investment in [his employer].”64

While RGIS tries mightily to convince otherwise, the personal motivation

exception just doesn’t save the claims challenged here. The Amended Complaint

describes Messrs. Rose and Baxter acting within their capacities as CEO and CFO

of the Selling Entity Defendants while purportedly perpetuating a fraud against

RGIS.

To argue the personal motivation exception, RGIS mostly relies on its

61 In re Transamerica Airlines, Inc., 2006 WL 587846, at *6 (citing Amaysing Techs. Corp. v. Cyberair Commc’ns, Inc., 2005 WL 578972, at *7 (Del. Ch. Mar. 3, 2005)); see also Anschutz Corp. v. Brown Robin Cap., LLC, 2020 WL 3096744, at *17-18 (Del. Ch. June 11, 2020) (characterizing the general rule as a “basic law of conspiracy”). 62 Largo Legacy Grp., LLC v. Charles, 2021 WL 2692426, at *18 (Del. Ch. June 30, 2021) (quoting Cornell Glasgow, LLC v. La Grange Props., LLC, 2012 WL 2106945, at *11 (Del. Super. Ct. June 6, 2012)). 63 In re Transamerica Airlines, Inc., 2006 WL 587846, at *6 (citing Amaysing Techs. Corp., 2005 WL 578972, at *7); Largo Legacy Grp., LLC, 2021 WL 2692426, at *18 (citing same). 64 Anschutz Corp., 2020 WL 3096744, at *18 (alteration in original) (quoting Amaysing Techs. Corp., 2005 WL 578972, at *8).

-12- allegation that Messrs. Rose and Baxter are “reducing [their] personal exposure to

liability in Mexico” by selling the companies with outstanding tax liabilities.65 But

RGIS nowhere reveals or alleges facts demonstrating that the sale (or any act related

thereto) was done outside of the Individual Defendants’ corporate roles, or pursuant

to some particularized personal motives. RGIS also broadly asserts that Mr. Rose

and Mr. Baxter could be liable for outstanding tax liabilities as directors of the

Transferred Companies, and that liability “is potentially reduced” once they no

longer serve as directors.66 Yet, RGIS points to no law substantiating that claim, and

identifies no facts showing they acted for that reason.

Messrs. Rose and Baxter may in fact personally benefit from selling those

companies with outstanding tax liabilities. But that alone doesn’t show that they

stepped outside of their corporate role and acted out of personal motivation to do so.

Indeed, as it must, RGIS admits that its allegation is that the Individual Defendants

it’s after “us[ed] their capacities as officers and the benefits of Delaware law[] to

negotiate a transaction intended to carry out a fraud against Plaintiffs.”67 So, even

when drawing all reasonable inferences in its favor, RGIS has pled insufficient facts

65 Am. Compl. ¶¶ 46, 74; Pls.’ Answering Br. at 13-14. 66 Am. Compl. ¶ 46; Pls.’ Answering Br. at 13. 67 Pls.’ Answering Br. at 32 (emphasis added). Indeed, the suggested benefits Messrs. Rose and Baxter may have supposedly gained from selling the Transferred Companies to RGIS are more aptly categorized as “resulting from their employment,” because the facts and occurrences of the claims against the individuals and the fraud claim against the Selling Entity Defendants are so intertwined. See Anschutz Corp., 2020 WL 3096744, at *18.

-13- to save its otherwise impermissible conspiracy and aiding and abetting claims via

the personal motivation exception.

V. CONCLUSION

RGIS cannot bring the civil conspiracy or aiding and abetting fraud claims it

has penned against Mr. Rose and Mr. Baxter; corporations can’t do either with their

own officers. RGIS’s attempt to save those claims by resorting to the personal

motivation exception fails in its pleading.

The Individual Defendants’ Motion to Dismiss Counts II and III of the

Amended Complaint is GRANTED.

IT IS SO ORDERED.

_______________________ Paul R. Wallace, Judge

-14-