Cross et al v. Batterson
Filing
19
MEMORANDUM OPINION AND ORDER Signed by the Honorable Harry D. Leinenweber on 6/28/2017:Mailed notice(wp, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
ROBERT CROSS and JONATHAN
ZAKIN,
Plaintiffs,
Case No. 17 C 198
v.
Judge Harry D. Leinenweber
LEONARD BATTERSON,
Defendant.
MEMORANDUM OPINION AND ORDER
For the reasons stated herein, Defendant’s Partial Motion to
Dismiss
[ECF
No.
9]
is
granted.
Counts
II
through
V
of
the
Complaint are dismissed without prejudice.
I.
This
case
Plaintiffs
arises
Robert
“Plaintiffs”)
and
Cross
from
and
BACKGROUND
a
contract
Jonathan
Defendant
Leonard
dispute.
Zakin
In
2005,
(collectively,
Batterson
the
(“Batterson”)
executed a contract called the Operating Agreement (the “Operating
Agreement”).
liability
(“BCZ”),
The Operating Agreement created a Delaware limited
company,
whose
aptly
purpose
named
was
to
Batterson
Cross
and
Zakin,
“acquire,
hold
and
dispose
Investments” for the benefit of its members.
LLC
of
ECF No. 12 (Def.’s
Mot. Dismiss), Ex. A (Operating Agreement) ¶ 2.3.
The Operating Agreement laid out the terms for the management
and operation of BCZ.
It stipulated that a three-member Board of
Managers, consisting of Batterson, Cross, and Zakin, was to run
the
company.
See,
Operating
Agreement
¶ 6.1.
Any
decision
requiring the approval of the Board needed the votes of at least
two board members. Id. Certain decisions, however, required the
unanimous consent of all the managers – that is, the approval of
Batterson as well as Plaintiffs.
Id. ¶ 6.1.
Decisions calling
for such unanimity included “the acquisition or disposition of any
Investment of the Company”; “the purchase or sale of interests in
Investment Vehicles”; “the offer of any Units and/or the admission
of any additional Members”; and “any amendment or modification of
this Agreement.”
Id. ¶ 6.1(b)(i)-(x).
With respect to the admission of new members, the Operating
Agreement specified that these members may not contribute more
than
$500,000.00
Agreement
¶ 3.1.
in
As
total
to
pleaded
the
in
the
company.
See,
Complaint,
Operating
this
contract
provision ensured that the founding members’ ownership in the LLC
– and the amount of profits to which they were entitled – never
dipped
below
a
certain
percentage.
See,
Compl.
¶ 3.
In
particular, Plaintiffs allege that they were “each entitled to not
less
than
21.5
percent
of
the
Company’s
net
revenues.”
Id.
Plaintiffs further allege that this payout was one of the few ways
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in which members of the LLC could be remunerated since “[u]nder
the
terms
permitted
of
the
BCZ
to
receive
Agreement,
any
salary
no
member
or
of
the
compensation
express approval of the Board of Managers.”
Company
without
Id. ¶ 14.
is
the
Moreover,
the Board did not “at any time” approve “any form of salary,
compensation,
or
other
distribution
Members, including Batterson.”
Other
provisions
of
to
be
paid
to
any
of
its
Id. ¶ 15.
the
Operating
Agreement
affirmative obligations on the Board of Managers.
imposed
In particular,
Article X of the Operating Agreement required the Board to keep
and make available to its members certain “books, records, [and]
accounting.” The provision read,
(a) The Board of Managers shall keep or cause to be
kept complete and accurate books and records of the
Company and supporting documentation of the transactions
with respect to the conduct of the Company’s business.
The records shall include, but not be limited to,
complete and accurate information regarding the state of
the business and financial condition of the Company, a
copy of the certificate of formation and operating
agreement and all amendments to the certificate of
formation and operating agreement. . . .
(b) The books and records shall be maintained in
accordance with sound accounting practices and shall be
available
at
the
Company’s
principal
office
for
examination
by
any
Member
or
the
Member’s
duly
authorized representative at any and all reasonable
times during normal business hours.
Operating Agreement ¶ 10.2.
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The facts recounted thus far are largely undisputed.
That is,
the parties agree that the Operating Agreement was a valid and
enforceable contract when it was executed and that, as long as it
was in effect, the Operating Agreement regulated the relationship
of Plaintiffs and Batterson.
Plaintiffs further acknowledge that
their claims arose out of this contract, and Batterson admits that
the contract created BCZ and governed its operation for a period of
time.
of
the
See, Compl. ¶ 2 (alleging that “Plaintiffs’ claims arise out
relationship
between
Defendant
Batterson
and
Plaintiffs
Cross and Zakin that was formed by an Agreement between the parties
relating to the formation and operation of an entity known as
Batterson
Cross
Zakin,
LLC”);
ECF
No.
8
(Def.’s
Answer)
¶ 2
(admitting that “there was an agreement, dated as of September 23,
2005, between Batterson and Plaintiffs that, among other things,
‘related to the . . . operation of an entity known as Batterson
Cross Zakin, LLC’”); id. ¶ 9 (admitting that “BCZ was at a time
governed by . . . [the] Operating Agreement”).
At some point, however, the two sides’ stories diverge.
As is
crucial to their lawsuit, Plaintiffs allege that they “[n]ever
resigned their respective position as Managing Principals of BCZ.”
Compl. ¶ 17.
Plaintiffs thus maintain that they “remain Managing
Principals of BCZ” and that they “[n]ever signed or consented to
any amendments to the BCZ Agreement.”
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Compl. ¶¶ 17-18.
Batterson
denies these allegations.
Def.’s Answer ¶¶ 17-18. Nonetheless,
because the allegations are accepted as true at this stage of the
litigation, Batterson stands accused of breaching the Operating
Agreement for taking actions that were never approved by his fellow
managers.
Specifically,
Batterson
is
alleged
to
have
violated
Operating Agreement by engaging in the following conduct.
he
“unilaterally
caused
the
BCZ
Agreement
to
be
the
First,
‘amended’
in
January 2010,” something he did “without permission and without
notice to Cross or Zakin, and without authority or consent of the
BCZ Board of Managers.”
name
to
Batterson
Compl. ¶ 23.
Venture,
LLC.
Id.
Second, he changed BCZ’s
¶
22.
Third,
he
sold
“interests in BCZ to third parties in such a manner” that “Cross
and Zakin’s respective ownership interests in [the putative new
company] were [reduced to] only approximately 1 percent each.” Id.
Finally, Batterson used the money raised from the third parties “to
pay himself compensation, salary, or other distributions that were
not authorized by BCZ’s Board of Managers.”
Id. ¶ 24.
Plaintiffs further allege that they did not discover these
breaches to the Operating Agreement until late 2015, or about a
decade after the contract was executed and five years after the
purported amendment to it took place.
See, Compl. ¶ 21.
The
impetus for Plaintiffs’ discovery was the sale of one of BCZ’s
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investments to IBM for a handsome sum.
As Plaintiffs state, “BCZ
was and is the manager for another entity, BVC-Cleversafe, LLC,”
which “made direct investment in a company named Cleversafe.”
¶ 19.
Id.
On “information and belief,” Plaintiffs further state that
“Cleversafe was acquired by IBM at the end of 2015 or during 2016.”
Id.
Upon the same information and belief, Plaintiffs allege that
the transaction generated substantial revenues that should have
accrued to them.
Id. ¶¶ 19-20 (“Upon information and belief, at
least $6 million of the money paid by IBM to BVC-Cleversafe . . .
BCZ is entitled [to].
less
than
21.25
Cross and Zakin are each entitled to not
percent
of
any
management
fees
paid
by
BVC-
Cleversafe, LLC.”).
After learning of the acquisition of Cleversafe by IBM, Cross
and Zakin “contacted Batterson to confirm how much money each would
be receiving.”
Compl. ¶ 21.
This was when Batterson told them the
unwelcome news that due to what he had done, Plaintiffs were not
entitled to any money (or not as much as they thought).
The
information, dismaying as it may have been, came “belatedly” and
only after “repeated efforts to obtain additional information from
Batterson.”
Id. ¶ 24.
On the strength of these allegations, Plaintiffs bring a fivecount Complaint.
In addition to the breach of contract claim
(Count I), Plaintiffs bring four other causes of action that are
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the subject of this motion to dismiss.
They are:
breach of the
implied covenant of good faith and fair dealing (Count II), “fraud
by/fraudulent concealment” (Count III), unjust enrichment (Count
IV), and accounting (Count V).
For the reasons explained herein, the Court grants Batterson’s
Motion to Dismiss these four counts.
II.
As
an
initial
matter,
ANALYSIS
the
parties
contract law applies to the present action.
that
choice
of
law
without
further
agree
that
Delaware
The Court thus adopts
comment.
The
Court
also
acknowledges that, due to the state residences of the parties and
the amount in controversy, it has diversity jurisdiction in this
case.
See, 28 U.S.C. § 1332; Compl. ¶¶ 3-6.
Batterson moves under Rule 12(b)(6) to dismiss all but the
breach of contract claim.
In ruling on his Motion, the Court
freely consults the Operating Agreement, even though that document
was only referenced in but not attached to Plaintiffs’ Complaint.
See,
Grabianski
v.
Bally
Total
Fitness
Holding
Corp.,
891
F.Supp.2d 1036, 1042-43 (N.D. Ill. 2012) (citing authorities to
support
the
proposition
that
a
court
may
consider
a
contract
attached to a motion to dismiss in such circumstances as found in
this case).
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Because
Batterson
devotes
the
majority
of
his
briefs
to
seeking dismissal of Count III, the fraudulent concealment claim,
the Court begins its discussion with that claim.
It then proceeds
in chronological order through the remaining counts.
A. Count III: Fradulent Concealment
Batterson
asserts
multiple
Plaintiffs’ fraud claim.
reasons
for
dismissal
of
These include the contention that the
claim merely duplicates the breach of contract claim, as well as
the more common argument that Plaintiffs have failed to plead with
particularity the elements of fraud.
The Court turns to each of
these issues below.
1. Whether Plaintiffs’ Fraud Claim is
an Impermissible Duplicate of the Contract Claim
“It seems more and more,” said a Delaware court, “that breach
of contract claims will not suffice to ameliorate the sense of
betrayal parties feel when they come out on the losing end of a
contractual business relationship.”
Cornell Glasgow, LLC v. LA
Grange Props., LLC, No. N11C-05-016 JRS CCLD, 2012 Del. Super.
LEXIS 266, at *2-3 (Super. Ct. June 6, 2012). Balefully aggrieved,
these parties “feel compelled to punctuate their breach claims
with claims that the breaching party committed fraud.” Id.
punctuation,
however,
is
allowed
only
when
the
“facts
Such
and
circumstances reveal that something more than failed performance”
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underpins the alleged fraud.
Id. at *3.
Otherwise, the cry of
fraud is simply an unwarranted “escalation” of what should be a
“straightforward breach of contract dispute,” akin to the bringing
of “big sticks to a fist fight.” Id.
As
a
complaint
less
colorful
“alleges
fraud
statement
of
Delaware
contemporaneously
with
law,
when
breach
a
of
contract, the fraud claim will survive only if premised on conduct
that
is
separate
breach.”
and
distinct
from
the
conduct
constituting
Hiller & Arban, LLC v. Reserves Mgmt., LLC, No. N15C-02-
161 WCC, 2016 Del. Super. LEXIS 328, at *11-13 (Super. Ct. July 1,
2016); see also, Air Prods. & Chems. v. Wiesemann, No. 14-1425SLR, 2017 U.S. Dist. LEXIS 26819, at *58 (D. Del. Feb. 27, 2017)
(“As a general rule under Delaware law, where an action is based
entirely
on
a
breach
of
the
terms
of
a
contract
between
the
parties, and not on a violation of an independent duty imposed by
law, a plaintiff must sue in contract and not in tort.”) (quoting
ITW Global Invs. Inc. v. Am. Indus. Partners Capital Fund IV,
L.P., 2015 Del. Super. LEXIS 320, at *6 (Del. Super. June 24,
2015)) (internal quotation marks omitted).
Moreover, a plaintiff
cannot “‘bootstrap’ a breach of contract claim into a tort claim
merely by intoning the prima facie elements of the tort while
telling the story of the defendant’s failure to perform under the
contract.”
Cornell Glasgow, 2012 Del. Super. LEXIS 266, at *24.
- 9 -
The Court thus looks to see whether Plaintiffs have carried
their burden to plead more than just the story of Batterson’s
failure to perform under the Operating Agreement.
The answer is a
plain
allegation
no.
Consider,
Batterson
“secretly
for
and
example,
without
Plaintiffs’
authorization
Agreement to be ostensibly amended in 2010.”
caused
that
the
BCZ
Compl. ¶ 43.
This
statement is deficient on its face as an allegation of fraud since
Batterson’s duty to obtain authorization from Cross and Zakin is
imposed solely by contract.
In other words, the allegation that
Batterson wrongfully “caused the BCZ Agreement to be ostensibly
amended” is merely a restatement of the allegation that Batterson
breached
Section
6.1(b)(x)
of
the
Operating
Agreement,
which
required that “any amendment or modification” to the agreement be
approved
by
included.
the
As
entire
such,
Board
the
of
Managers,
allegation
does
Cross
and
nothing
Zakin
to
move
Plaintiffs’ claim from the domain of contract to that of fraud.
The
Court
reaches
the
Plaintiffs’ other allegations.
same
Plaintiffs’
allegation
that
conclusion
with
respect
to
As with their previous statement,
Batterson
unilaterally
and
wrongly
removed them as managers is equivalent to their complaint that
Batterson
breached
the
Operating
Agreement,
specifically
the
provision that a “Managing Principal may be removed by a vote of
all
other
Managing
Principals”.
- 10 -
See,
Compl.
¶
43
(emphasis
added);
Operating
improperly
Agreement
reduced
¶ 6.2(b).
Plaintiffs’
Similarly,
ownership
that
shares
Batterson
to
“only
approximately 1 percent” is a breach of Section 3.1; and that
Batterson “paid himself unwarranted, unauthorized, and undisclosed
funds, in the form of salaries, compensation, and/or distribution”
is a violation of the terms of the agreement under which “no
Member
of
the
Company
compensation.”
In
permitted
to
receive
any
salary
or
See, Compl. ¶¶ 14-15, 45.
short,
perpetrated
is
Plaintiffs’
fraud
are
allegations
coextensive
Batterson breached the contract.
with
as
to
their
how
Batterson
allegations
that
Such selfsame breach-of-contract
pleading cannot support a fraud claim sounding in tort. See Nemec
v.
Shrader,
991
A.2d
1120,
1129
(Del.
2010)
(stating
in
the
context of a tort brought alongside a breach of contract claim
that “[i]t is a well-settled principle that where a dispute arises
from obligations that are expressly addressed by contract, that
dispute will be treated as a breach of contract claim”); Data
Mgmt. Internationale, Inc. v. Saraga, No. 05C-05-108, 2007 Del.
Super.
LEXIS
412,
at
*9
(Super.
Ct.
July
25,
2007)
(“Under
Delaware law, a plaintiff bringing a claim based entirely upon a
breach of the terms of a contract generally must sue in contract,
and not in tort.”).
- 11 -
It
is
true
that
Plaintiffs
also
alleged
committed his offending conduct covertly.
he
acted
them.
“secretly,”
while
Plaintiffs
to
plead
Batterson
That is, they say that
“conceal[ing]
See, Compl. ¶¶ 43-44.
that
material
facts”
from
But such allegations do not help
fraud.
Simply
put,
since
even
“an
intentional, knowing, wanton, or malicious” breach of contract is
still a breach of contract, such a breach done surreptitiously is
not fraud.
See, Data Mgmt., 2007 Del. Super. LEXIS 412 at *9
(“Even an intentional, knowing, wanton, or malicious action by the
defendant will not support a tort claim if the plaintiff cannot
assert wrongful conduct beyond the breach of contract itself.”).
Plaintiffs’
fraud
action
also
fails
for
the
independent
reason that they not have pleaded “damages separate and apart from
the alleged damages for breach of contract.”
AFH Holding Advisory
v. Emmaus Life Scis., No. N12C-09-045 MMJ CCLD, 2013 Del. Super.
LEXIS
180,
at
*35-36
(Super.
Ct.
May
15,
2013)
(“The
party
asserting fraud must plead damages separate and apart from the
alleged damages for breach of contract.
The fraud damages must be
more than a ‘rehash’ of the contract damages.”); Cornell Glasgow,
2012
Del.
Super.
LEXIS
266,
at
*29
(same).
This
is
despite
Plaintiffs requesting a slew of damages, including that for their
lost “share of the management fees received by or to be received
by BCZ as a result of IBM’s acquisition of Cleversafe . . . or as
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a
result
of
BCZ’s
direct
investment
in
Cleversafe”;
“other
incidental, consequential, special, and general damages, plus prejudgment interest on all such monies”; and, last but not least,
punitive damages.
None
of
Compl. ¶¶ 49-50.
these
prayers
for
relief
constitutes
“separate and apart” from those for breach of contract.
the
damages
relating
to
the
payoff
from
BCZ’s
damages
First,
Cleversafe
investment reflect the money allegedly owing to Plaintiffs under
the terms of the Operating Agreement.
Far from being something
“separate and apart” from contractual damages, these lost payments
are
the
classic
compensatory
damages
that
would
be
awarded
Plaintiffs if they prevail in their contract action. Second, the
requested
damages,
“incidental,
plus
consequential,
pre-judgment
interest
on
special,
all
such
and
general
monies”
are
exactly a “rehash” of the damages that Plaintiffs plead in their
contract claim.
There, Plaintiffs allege that “[a]s a direct,
foreseeable, and proximate result of Batterson’s breach of the BCZ
Agreement, Plaintiffs suffered damages, including legal costs and
fees, plus other incidental, consequential, special and general
damages, as well as lost prejudgment interest on all such monies.”
See, Compl. ¶ 36.
This is almost verbatim what they plead as
damages in this count.
- 13 -
Finally, while Plaintiffs reserve the request for punitive
damages to only Count III, the mere request for such relief does
not
elevate
Plaintiffs’
claim
into
fraud.
Otherwise,
a
party
could always state fraud simply by asking for those damages which
are not available in a contract action.
See, Data Mgmt., 2007
Del. Super. LEXIS 412, at *18 (“Punitive damages are not available
in a breach of contract case. . . .”).
Moreover, the Delaware
Supreme Court has instructed that “[t]he award of punitive damages
can not be made unless the plaintiff also receives compensatory
damages.”
Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1077
(Del. 1983).
the
breach
Here, Plaintiffs’ compensatory damages all “rehash”
of
contract
damages.
As
such,
their
prayer
for
punitive damages standing alone is insupportable and cannot bring
about a claim of fraud.
In sum, because Plaintiffs’ fraud claim (Count III) is an
impermissible bootstrap of the contract claim, the Court dismisses
it.
2. Whether Plaintiffs Have Pleaded
the Elements of a Fraudulent Concealment Claim
Any concerns about a duplicate claim aside, Batterson argues
– and the Court agrees – that Plaintiffs have failed to plead
fraudulent concealment.
Plaintiffs must allege:
To state such a claim under Delaware law,
“1) a false representation, usually one
- 14 -
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) the plaintiff’s
action
or
inaction
taken
in
justifiable
reliance
upon
the
representation; and 5) damage to the plaintiff as a result of such
reliance.”
Stephenson, 462 A.2d at 1074; accord, Matthews Office
Designs, Inc. v. Taub Invs., 647 A.2d 382 ¶ 6 (Del. 1994) (calling
these elements “well established”).
In this case, Plaintiffs do not accuse Batterson of having
made any overt false representations.
Rather, they argue that
Batterson
deliberately
committed
fraud
either
by
concealing
material facts or by remaining silent in the face of a duty to
speak.
A.2d
See, Compl. ¶¶ 42, 44, 46-48; see also, Stephenson, 462
at
1074
(“[F]raud
misrepresentations.
It
does
may
not
also
consist
occur
merely
through
of
overt
deliberate
concealment of material facts, or by silence in the face of a duty
to speak.”).
Batterson counters that Plaintiffs have made only
conclusory allegations of any active concealment or duty to speak
and so failed the “heightened pleading standards” required under
FED. R. CIV. P. 9(b).
See, United States v. Acacia Mental Health
Clinic, LLC, 836 F.3d 770, 776-77 (7th Cir. 2016) (explaining that
Rule
9
“requires
heightened
pleading
- 15 -
standards
because
of
the
stigmatic
injury
fraud”).
The
that
Court
potentially
results
examines
Plaintiffs’
searches
for
from
allegations
pleading
to
of
see
if
in
the
Batterson is correct.
The
Court
Complaint
first
that
reasonably
give
factual
rise
to
allegations
the
inference
Batterson actively concealed information from Plaintiffs.
looks
for
facts
suggesting
that
Batterson
took
“some
that
It thus
action
affirmative in nature designed or intended to prevent, and which
does prevent, the discovery of facts giving rise to the fraud
claim.”
See,
Metro
Commun.
Corp.
BVI
v.
Advanced
Mobilecomm
Techs. Inc., 854 A.2d 121, 150 (Del. Ch. 2004) (“In order to state
a claim of fraud by active concealment, [the plaintiff] must show
that a defendant took some action affirmative in nature designed
or intended to prevent, and which does prevent, the discovery of
facts giving rise to the fraud claim, some artifice to prevent
knowledge of the facts or some representation intended to exclude
suspicion
and
prevent
inquiry.”)
(internal
quotation
marks
omitted); Lecates v. Hertrich Pontiac Buick Co., 515 A.2d 163, 176
(Del.
Super.
Ct.
1986)
(“[A]
claim
of
fraudulent
concealment
requires the twin showing of (a) the defendant’s knowledge of the
alleged wrong, and (b) an affirmative act of concealment by the
defendant.
An
affirmative
act
of
concealment
suggests
.
.
.
scienter and some affirmative action on [the defendant’s] part in
- 16 -
concealing the wrong.”) (internal citations and quotation marks
omitted).
The Court finds no such allegations.
The closest Plaintiffs
come to identifying an affirmative act of concealment is with the
allegation that Batterson disclosed the true state of affairs to
Plaintiffs “belatedly” and only after they made “repeated efforts
to obtain additional information from [him].” Compl. ¶ 24.
their
brief,
Plaintiffs
elaborated
on
this
allegation,
In
stating
that Batterson “failed, despite repeated requests, to turn over
financial documents, records, receipts, and other documents” to
Plaintiffs.
ECF No. 16 at 4.
Such supplemental pleading is
improper, since a “complaint may not be amended by the briefs in
opposition to a motion to dismiss,” Thomason v. Nachtrieb, 888
F.2d 1202, 1205 (7th Cir. 1989) (“It is a basic principle that the
complaint may not be amended by the briefs in opposition to a
motion to dismiss[.]”), but even if credited, the allegation does
not help Plaintiffs.
This is because Plaintiffs have alleged no details as to how
Batterson “failed” to honor their requests.
Did Batterson simply
not respond to Plaintiffs’ communications?
Did he respond but
only “belatedly”?
Did he pick up the phone, reply to the email,
or greet Plaintiffs at the door only then to put them off with
delaying tactics?
How is it that Plaintiffs needed Batterson to
- 17 -
“turn
over
financial
documents,
records,
receipts,
and
other
documents” when, under their own version of the facts, they were
members of the Board of Managers and so were charged with keeping
such records as well as making them available “at any and all
reasonable
times
during
normal
business
hours”?
Operating
Agreement ¶ 10.2(b).
Plaintiffs provide no hint of an answer.
to
rely
the
barebones
allegation
produce the information sought.
that
They choose instead
Batterson
“failed”
to
They thus leave the Court with no
basis to infer that Batterson did anything other than keeping mum.
Plaintiffs therefore have not made out an allegation of active
concealment.
See, Air Prods., 2017 U.S. Dist. LEXIS 26819, at *58
(D. Del. Feb. 27, 2017) (“Active concealment requires more than
mere silence.”) (citing Wiggs v. Summit Midstream Partners, LLC,
2013 Del. Ch. LEXIS 84, at *11 (Del. Ch. Mar. 28, 2013)).
Next, the Court examines whether Plaintiffs have adequately
alleged that Batterson had a duty to speak and breached that duty
by
remaining
silent.
It
is
true
that
Plaintiffs
stated
that
Batterson owed them a fiduciary duty since he was “a Member and
one of the three Managing Principals in BCZ.”
Compl. ¶ 42. It is
also true that as a manager of a LLC, Batterson owes a fiduciary
duty
to
his
encompasses
fellow
an
managers
affirmative
and
members,
obligation
- 18 -
to
and
that
speak
in
the
duty
certain
circumstances.
See, Feeley v. NHAOCG, LLC, 62 A.3d 649, 660 n.1
(Del. Ch. 2012) (quoting with approval the holding that “in the
absence of a contrary provision in the LLC agreement, LLC managers
and members owe traditional fiduciary duties of loyalty and care
to
each
other
and
to
the
company”)
(internal
quotation
marks
omitted); Prairie Capital III, L.P. v. Double E Holding Corp., 132
A.3d 35, 52 (Del. Ch. 2015) (“An affirmative obligation to speak
[] arises where there is a fiduciary or other similar relation of
trust and confidence between the parties.”) (internal quotation
marks omitted).
However,
even
accepting
that
Batterson
had
some
duty
to
speak, the Court cannot find that he had the duty to say what
Plaintiffs contend he should have said.
Plaintiffs charge that
Batterson should have told them a number of things.
the
fact
company’s
that
he
name,
amended
reduced
These include
the
Operating
Agreement,
their
ownership
shares,
considered them managers of BCZ.
changed
and
no
the
longer
But as discussed, these are
exactly the things that Plaintiffs say Batterson did in breach of
the Operating Agreement.
Plaintiffs’
Batterson
“duty
should
to
have
See, supra, Section II.A.1.
speak”
told
devolves
them
Operating Agreement.
- 19 -
into
that
he
the
was
As such,
assertion
breaching
that
the
Under Plaintiffs’ interpretation of the law then, a breaching
party defrauds the victim if he does not tell the victim of his
breach.
tell
But as a general rule, people who breach contracts do not
their
counterparties
that
this
is
what
they
are
doing.
Adopting Plaintiffs’ argument would thus turn nearly every breach
of contract case into fraud, at least where the alleged victim is
owed a fiduciary duty by the defendant. Such a result would cut
against the principle established in Delaware law that a fraud
claim may not be bootstrapped from facts that tell only “the story
of
the
defendant’s
failure
to
perform
under
the
contract.”
Cornell Glasgow, 2012 Del. Super. LEXIS 266, at *24.
Since the
Court cannot do violence to Delaware law, it hereby rejects the
contention that Batterson had a duty to speak and tell Plaintiffs
that he was breaching his contractual obligations.
Furthermore, even assuming arguendo that Batterson was silent
when he should have spoken, the Court cannot find that Plaintiffs
justifiably relied on such silence.
By Plaintiffs’ own account of
the facts, Batterson kept silent about the affairs of the joint
venture for years.
He amended the Operating Agreement in 2010 and
told Plaintiffs nothing of the fact (but did not otherwise mislead
them) until at least 2015 when the IBM sale went through.
Also by
Plaintiffs’
against
account,
Batterson’s
silence
was
maintained
his fellow partners, those who were not just ordinary members of
- 20 -
the LLC but managers tasked with running the firm.
More still,
the silence descended over matters that either should have been in
the public record, e.g., the change in the name of the LLC, or at
least readily available to Plaintiffs as people who had access to
the books and records of the LLC (and in fact, were supposed to be
the people who kept such books and records).
In
the
face
of
such
facts,
the
Court
cannot
credit
Plaintiffs’ conclusorily pleaded allegation that they “justifiably
relied on Batterson to disclose the truth.”
Compl. ¶¶ 44, 46-48.
For one, “[t]he tenet that a court must accept as true all of the
allegations
contained
conclusions.”
another,
the
in
a
complaint
is
inapplicable
to
legal
Ashcroft v. Iqbal, 556 U.S. 662, 663 (2009).
Court
cannot
draw
reasonable
inferences
For
in
Plaintiffs’ favor that their reliance was indeed justifiable given
the factual content of what they have pleaded. See, id. at 663,
678 (“[D]etermining whether a complaint states a plausible claim
is context-specific, requiring the reviewing court to draw on its
experience
and
common
sense.”).
No
reasonable
person
in
Plaintiffs’ position would have stood idly by for years on end and
assumed from Batterson’s lack of communications that there was
nothing worth knowing.
In
element
short,
to
because
pleading
justifiable
fraud
and
reliance
Plaintiffs
- 21 -
is
have
an
not
essential
adequately
pleaded it, their claim must fail.
See, Stephenson, 462 A.2d at
1074; Great Lakes Chem. Corp. v. Pharmacia Corp., 788 A.2d 544,
551 (Del. Ch. 2001) (citing cases to support the position that
“justifiable
omissions
reliance
[is]
an
on
the
element
alleged
misrepresentations
essential
to
maintain
the
and
fraud
claims”); Vichi v. Koninklijke Philips Elecs, N.V., 85 A.3d 725,
776 (Del. Ch. 2014) (“[I]n Delaware, a plaintiff’s reliance must
be reasonable, even in cases of intentional deceit.”).
Accordingly,
action
(Count
Plaintiffs’
III)
is
fraudulent
dismissed
both
concealment
because
it
is
cause
a
of
poorly
disguised contract claim and because Plaintiffs have not pleaded
the necessary elements of fraud.
B.
Count II: Breach of Implied Covenant
of Good Faith and Fair Dealing
Unlike the multi-prong approach he adopted in dealing with
Count III, Batterson advances one simple reason why Count II’s
action for breach of the implied covenant of good faith and fair
dealing should be dismissed:
where,
as
here,
an
the covenant has no applicability
express
contract
controls
the
conduct
complained of.
Batterson is correct.
The implied covenant of good faith and
fair dealing “is best understood as a way of implying terms in
[an]
agreement,”
and
it
is
“employed
- 22 -
to
analyze
unanticipated
developments or to fill gaps in the contract’s provisions.” Dunlap
v. State Farm Fire & Cas. Co., 878 A.2d 434, 441 (Del. 2005)
(internal
intended
quotation
to
marks
“imply[]
omitted).
terms”
and
Because
“fill
the
gaps,”
“supersede[d]” by express contractual provisions.
doctrine
it
is
is
always
See, Gerber v.
Enter. Prods. Holdings, LLC, 67 A.3d 400, 419 (Del. 2013) (quoting
with
approval
the
proposition
that
“[e]xpress
contractual
provisions always supersede the implied covenant”), overruled on
other grounds by Winshall v. Viacom Int’l Inc., 76 A.3d 808, 815
n. 13 (Del. 2013).
“It follows, then, that the implied covenant
of good faith and fair dealing does not apply when the contract
speaks directly to the alleged gap in the contract the implied
covenant has been proffered to fill.” Flores v. Strauss Water,
Ltd.,
No.
11141-VCS,
2016
Del.
Ch.
LEXIS
145,
at
*30-32
(Ch.
Sep. 22, 2016).
In this case, Plaintiffs’ cause of action for breach of the
implied covenant fails at the earliest threshold:
Plaintiffs have
identified no gap in the Operating Agreement which the covenant
could
be
Plaintiffs
used
to
fill.
incorporate
all
In
the
pleading
this
allegations
cause
that
of
make
action,
up
their
breach of contract claim but add nothing to support a breach of
the implied covenant.
Instead, Plaintiffs say, “Batterson has, in
bad faith, prevented Cross and Zakin from receiving the benefits
- 23 -
of the BCZ Agreement, among other ways, by failing to provide to
Cross and Zakin their required share of the fees resulting from
IBM’s acquisition of Cleversafe, and by failing to provide Cross
and Zakin with their required share of any money received or to be
received
by
Cleversafe.”
BCZ
a
result
of
BCZ’s
direct
investment
in
Compl. ¶ 39.
Plaintiffs’
failure.
as
pleading
thus
contains
the
seeds
of
its
own
Any “benefits of the BCZ Agreement” Cross and Zakin are
to receive are provided for by that agreement.
Batterson’s
part
to
turn
contractual agreement.
over
such
money
is
Any failure on
a
breach
of
the
As such, the express terms of the contract
control the situation, and no gap exists for the implied covenant
to fill.
See, Stewart v. BF Bolthouse Holdco, LLC, No. 8119-VCP,
2013 Del. Ch. LEXIS 215, at *57-58 (Ch. Aug. 30, 2013) (dismissing
the implied covenant claim when “there was never a ‘gap’ that the
implied covenant could have filled”); Veloric v. J.G. Wentworth,
Inc., No. 9051-CB, 2014 Del. Ch. LEXIS 178, at *52 (Ch. Sep. 18,
2014) (“The parties to the TRA [contract] considered this issue,
as evidenced by the TRA’s thorough and detailed Change of Control
definition, which covered a wide variety of transactions involving
Wentworth
and
its
subsidiaries.
The
fact
that
the
parties
considered this issue . . . demonstrates that there is no ‘gap’ in
this provision of the TRA for the implied covenant of good faith
- 24 -
and fair dealing to fill.”); Kuroda v. SPJS Holdings, L.L.C., 971
A.2d
872,
888
(Del.
Ch.
2009)
(“To
the
extent
that
Kuroda’s
implied covenant claim is premised on the failure of defendants to
pay money due under the contract, the claim must fail because the
express terms of the contract will control such a claim.”).
Put differently, the implied covenant of good faith and fair
dealing finds application when, because a contracting party is
exercising a discretionary right, it “must exercise its discretion
reasonably.”
See, Gerber, 67 A.3d at 419 (“The implied covenant
requires that . . . [w]hen exercising a discretionary right, a
party to the contract must exercise its discretion reasonably.”)
(quoting ASB Allegiance Real Estate Fund v. Scion Breckenridge
Managing
Member,
LLC, 50
A.3d
434,
440-42
(Del.
Ch.
2012))
(emphasis removed); Amirsaleh v. Bd. of Trade of N.Y., Inc., Civil
Action No. 2822-CC, 2008 Del. Ch. LEXIS 131, at *29 (Ch. Sep. 11,
2008)
(stating
that
“[t]he
implied
covenant
is
particularly
important in contracts that endow one party with discretion in
performance”).
In this case, Batterson has no discretion as to
whether he could withhold from Plaintiffs their “required share.”
Indeed, Plaintiffs have alleged that he simply cannot under the
terms
of
the
Operating
Agreement.
Likewise,
Batterson
has
no
discretion as to whether he can remove Plaintiffs as managers,
modify the agreement, or reduce their ownership interests without
- 25 -
their
consent
–
the
means
by
which
he
“prevented
receiving the benefits of the BCZ Agreement.”
short,
because
there
is
no
room
for
[them]
from
Compl. ¶ 39.
discretion,
the
In
implied
covenant plays no role in determining whether Batterson exercised
that discretion reasonably.
For
these
reasons,
the
Court
dismisses
the
breach
of
the
implied covenant of good faith and fair dealing claim (Count II).
C.
Count IV:
Unjust Enrichment
Given Plaintiffs’ early admission that their “claims arise
out of the relationship between Defendant Batterson and Plaintiffs
Cross and Zakin that was formed by an Agreement,” it should not be
a
surprise
express
that
Batterson
agreement
to
enrichment claim.
has
seek
seized
on
dismissal
Compl. ¶ 2.
the
of
existence
Plaintiffs’
of
an
unjust
This is because “in evaluating a
party’s claim for an equitable remedy based on unjust enrichment,
courts
engage
contract
in
already
a
threshold
governs
the
inquiry
parties’
to
determine
whether
relationship.”
Addy
a
v.
Piedmonte, Civil Action No. 3571-VCP, 2009 Del. Ch. LEXIS 38, at
*75
(Ch.
Mar.
complaining
18,
party
2009).
and
the
“If
party
a
contract
alleged
to
exists
have
between
been
the
unjustly
enriched that governs the matter in dispute, then the contract
remains
the
measure
of
the
plaintiff’s
right”
and
the
unjust
enrichment claim must fail. Id. (internal alteration and quotation
- 26 -
marks omitted); Tolliver v. Christina Sch. Dist., 564 F.Supp.2d
312,
315
(D.
Del.
2008)
(“[T]he
existence
of
an
express,
enforceable contract that controls the parties’ relationship will
defeat an unjust enrichment claim[].”) (citing Bakerman v. Sidney
Frank Importing Co., Inc., No. Civ. A. 1844-N, 2006 Del. Ch. LEXIS
180, at *18 (Del. Ch. Oct. 10, 2006)).
Plaintiffs urge the Court to spare Count IV on the basis that
they are allowed to plead in the alternative.
That is, Plaintiffs
say they may seek relief under a theory of unjust enrichment as an
alternative to relief sought under the contract claim. They are
not wrong.
See, FED. R. CIV. P. 8(a)(3) (providing that “a demand
for the relief sought [] may include relief in the alternative”);
Hiller, 2016 Del. Super. LEXIS 328, at *6-7 (recognizing that “it
is permissible for a party to seek quasi-contractual relief in the
alternative to its contract claims”) (emphasis in original).
The
problem
the
is
that
Plaintiffs
have
not
actually
pleaded
in
alternative.
As a court has explained, pleading in the alternative in this
context means that Plaintiffs may claim in Count I that “there was
a contract and that it was breached by [the defendant],” and then
to claim in Count IV that “there was no valid contract and that
[the defendant] was unjustly enriched.” Samuels v. Old Kent Bank,
Case No. 96 C 6667, 1997 U.S. Dist. LEXIS 11485, at *38 (N.D. Ill.
- 27 -
July 31, 1997).
unjust
Here, however, Plaintiffs incorporated in their
enrichment
contract.
claim
the
allegations
that
there
is
a
valid
See, Compl. ¶ 51 (incorporating by reference all of the
allegations set forth in the previous paragraphs, which include
the allegations that the Operating Agreement governed the parties’
relationship).
As
such,
they
have
not
pleaded
an
alternative
theory.
Instead, they (however inadvertently) acknowledge that
there
a
is
valid
contract
but
then
assert
that
Batterson
was
unjustly enriched.
Count IV can be dismissed on this basis alone.
At least two
different courts in this district have done exactly that.
In
Homestead Ins. Co. v. Chi. Transit Auth., Judge Nordberg first
noted that “[t]he unjust enrichment claim (Count III) adopts by
reference
all
including
paragraphs
parties.”
the
allegations
the
an
alleging
in
contract
express
claim
contract
(Count
between
I)
the
Homestead Ins., No. 96 C 4570, 1997 U.S. Dist. LEXIS
716, at *9 (N.D. Ill. Jan. 16, 1997).
He then concluded that
because “the unjust enrichment claim alleges an express contract,
the unjust enrichment claim must be dismissed.”
Id. (applying
Illinois law, which mirrors Delaware law in not countenancing an
unjust
enrichment
Likewise,
enrichment
in
action
Samuels,
claim
when
Judge
because
it
an
express
Andersen
contract
dismissed
“incorporates
- 28 -
these
controls).
the
unjust
paragraphs
[alleging the existence of a contract].”
Samuels, 1997 U.S. Dist.
LEXIS 11485 at *38-39 (further faulting the plaintiffs because
“[n]owhere does the Amended Complaint, much less Count IV, allege
there
was
no
plaintiffs’
late.”).
valid
response
contract.
to
this
Such
a
motion
to
claim
first
dismiss.
arises
That
is
in
too
Cf. Song v. PIL, L.L.C., 640 F.Supp.2d 1011, 1016 (N.D.
Ill. 2009) (“Song . . . has avoided the problem of incorporating
allegations of an express contract in his unjust enrichment and
promissory estoppel claims.”) (Grady, J.).
More
however.
than
The
just
sloppy
pleadings
pleading
as
a
plagues
whole
leave
Plaintiffs’
no
doubt
claim,
that
the
parties’ relationship is governed by a contract, regardless of
whether
Plaintiffs
enrichment claim.
specifically
plead
that
in
their
unjust
This is problematic, as “alternative pleading
allows a party to seek recovery under theories of contract or
quasi-contract . . . only when there is doubt surrounding the
enforceability or the existence of the contract.”
Albert v. Alex.
Brown Mgmt. Servs., Nos. 762-N, 763-N, 2005 Del. Ch. LEXIS 133, at
*28 (Ch. Aug. 26, 2005).
dismiss
the
unjust
Without such doubt, courts generally
enrichment
action.
Id.
(“Courts
generally
dismiss claims for quantum meruit on the pleadings when it is
clear from the face of the complaint that there exists an express
contract that controls.”).
In this case, an enforceable contract
- 29 -
exists
whether
Defendant’s.
Operating
one
adopts
Under
Plaintiffs’
Plaintiffs’
Agreement
controls
version
telling
this
of
dispute;
of
events
the
story,
under
or
the
Batterson’s
narrative, the 2010 amended version of the Operating Agreement
controls.
In either case, “it is clear from the face of the
complaint [and the answer to the complaint] that there exists an
express contract.” Id.
Accordingly, the Court finds that dismissal of the unjust
enrichment claim (Count IV) is proper.
D.
Lastly,
Batterson
Count V: Accounting
seeks
to
dismiss
Plaintiffs’
accounting
claim on the basis that an accounting is not “so much a cause of
action as it is a form of relief.”
Rhodes v. Silkroad Equity,
LLC, No. 2133-VCN, 2007 Del. Ch. LEXIS 96, at *42 (Ch. July 11,
2007).
Although such a remedy may be maintained in a suit where
other equitable causes of action exist, no equitable ground for
relief
survives
the
motion
to
dismiss
in
this
case.
See,
Kirschner v. W. Co., 300 F.2d 133, 135 (3d Cir. 1962) (“A prayer
for
an
accounting
will
cognizable in equity.
not,
in
itself,
render
a
complaint
There must be some equitable ground of
relief in addition to the mere demand for an account.”) (internal
citations,
alteration
and
quotation
marks
omitted).
As
such,
Batterson presses that dismissal of this claim is appropriate.
- 30 -
See, Garza v. Citigroup Inc., 192 F.Supp.3d 508, 511-15 (D. Del.
2016)
(crediting
the
defendant’s
argument
that
the
plaintiff
“fails to state a claim for the relief of an accounting when it
has alleged no substantive claim entitling [it] to that remedy”).
Plaintiffs
did
not
dismissal of Count V.
Br.).
respond
to
Batterson’s
argument
for
See, generally, ECF No. 16 (Pls.’ Resp.
The argument is thus waived.
See, Bonte v. U.S. Bank,
N.A., 624 F.3d 461, 466-67 (7th Cir. 2010) (“Failure to respond to
an argument – as the [plaintiffs] have done here – results in
waiver.”); Stevanov v. O’Connor, Civil Action No. 3820-VCP, 2009
Del. Ch. LEXIS 62, at *48 (Ch. Apr. 21, 2009) (“Because [the
plaintiff] did not respond to this argument, she has waived any
objection to it.”).
In the face of plausible case law supporting
Batterson’s
for
request
Court grants the request.
dismissal
and
Plaintiffs’
waiver,
the
See, Bonte, 624 F.3d at 467; Kirksey v.
R.J. Reynolds Tobacco Co., 168 F.3d 1039, 1041 (7th Cir. 1999)
(“Our system of justice is adversarial, and our judges are busy
people.
If they are given plausible reasons for dismissing a
complaint, they are not going to do the plaintiff’s research and
try to discover whether there might be something to say against
the defendants’ reasoning.”).
The
Court
thus
dismisses
Counts
complaint.
- 31 -
II
through
V
of
the
III.
CONCLUSION
For the reasons stated herein, Batterson’s Partial Motion to
Dismiss [ECF No. 9] is granted.
Plaintiffs’ lawsuit proceeds as a
single count complaint for breach of contract.
IT IS SO ORDERED.
Harry D. Leinenweber, Judge
United States District Court
Dated: June 28, 2017
- 32 -
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