Summary
holding that the Superior Court has subject matter jurisdiction over unjust enrichment claims when a plaintiff only seeks "money damages in order to be made whole"
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CA No. 03C-05-260-JEB.
Submitted: August 19, 2003.
Decided: January 6, 2004.
Upon Defendants' Motion to Dismiss. Granted in Part. Denied in Part.
Appearances:
James F. Kipp, Esquire, Trzuskowski Kipp Kelleher Pearce, P.A., Wilmington, Delaware. Attorneys for Plaintiffs.
Denise S. Kraft, Esquire, and Richard D. Beck, Esquire, Klehr, Harrison, Harvey, Branzburg Ellers LLP, Wilmington, Delaware. Attorneys for Defendants Theodore Morgan, Leslie Morgan, Brandywine Innkeepers, LLC, Brandywine Holding, LLC and Brandywine Hospitality, LLC.
John A. Elzufon, Esquire, Elzufon Austin Reardon Tarlov Mondell, P.A., Wilmington, Delaware. Attorney for Defendant Breckstone Group, Inc.
Victoria K. Petrone, Esquire, Tighe Cottrell Logan, P.A., Wilmington, Delaware. Attorney for Howard L. Robertson, Inc.
OPINION
This action in tort and contract pertains to a land transaction. Three individuals jointly owned two pieces of real estate. One of the properties was the Holiday Inn located on Concord Pike in Wilmington, Delaware. The other was an adjacent, undeveloped parcel of land ("the Property"), on which the three owners planned to construct buildings suitable for commercial use. The owners established five limited liability companies (LLC's), two for management of the Property and three for the Holiday Inn.
See DEL. CODE ANN. tit. 6, ch. 18.
After construction on the Property had begun, the three owners entered into an agreement of sale. This transaction left Plaintiff Joseph Grace as the sole owner of the property through his ownership of the LLC's, known as 4000 Associates and Gramor. Defendants Theodore Morgan and Leslie Morgan (father and daughter, respectively) became the sole owners of the Holiday Inn through ownership of Brandywine Innkeepers, Brandywine Holding, and Brandywine Hospitality. Prior to this transaction, Leslie Morgan had been managing partner of Gramor and was primarily responsible for the development of the Property.
As sole owner of the Property, Grace experienced numerous difficulties with the completion of the construction. For this reason, Grace and the related LLC's filed suit against the Morgans, the Brandywine LLC's, Breckstone (the architectural firm) and Robertson (the engineering firm). Plaintiffs allege negligence, breach of fiduciary duty, fraud, unjust enrichment, and breach of contract pertaining to events that occurred while the parties were joint owners of the Holiday Inn and the Property, as well as events leading up to the agreement of sale for the two properties. The Morgans and the Brandywine LLC's have moved to dismiss Counts III through VI of the Complaint for lack of subject matter jurisdiction. In the alternative, they seek to transfer the case to the Court of Chancery. For the reasons explained below, the Court grants the motion to dismiss the allegation of breach of fiduciary duty and denies the remainder of the motion.
Counts I and II address the alleged conduct of Defendants Breckstone and Robertson, who have not moved to dismiss.
For purposes of a motion to dismiss, the Court assumes that the material factual allegations set forth in the Complaint are true. All reasonable inferences are made in favor of Plaintiffs, who are the non-moving parties.
Diebold Computer Leasing, Inc. v. Commercial Credit Corp., 276 A.2d 586, 588 (Del. 1970).
Ramunno v. Cawley, 705 A.2d 1029, 1034 (Del. 1998).
Count III is a direct claim that Leslie Morgan breached her fiduciary duty as managing partner of Gramor and 4000 Associates. L. Morgan had complete responsibility for Gramor's day-to-day operations, as well as the overall development of the Property. According to Plaintiffs, L. Morgan failed to hire competent architectural and engineering firms to develop the Property and failed to consult with and oversee the architectural and engineering firms. Because of these alleged failures, Plaintiff Grace incurred substantial financial losses for which he seeks monetary relief.
Defendants argue that the Court of Chancery has exclusive jurisdiction over claims regarding a breach of a fiduciary duty. Plaintiffs respond that the Superior Court has jurisdiction over this claim because the requested relief is for money damages only. The issue before the Court is whether the fiduciary claim confers exclusive jurisdiction on the Court of Chancery or whether this Court may entertain the action.
The parties raise the two primary factors to be considered when determining whether Chancery has exclusive jurisdiction over a given case. According to statute, Chancery "shall not have jurisdiction to determine any matter wherein sufficient remedy may be had by common law, or statute, before any other court or jurisdiction of this State." Plaintiffs argue that this statute is determinative of the jurisdictional issue because they seek money damages only. However, Delaware courts have consistently interpreted this statute to be a "declaration of the ancient rule of equity, [which] neither grants nor divests equity of any jurisdiction."
The Court notes that the Limited Liability Company Act grants members great flexibility in organizing an LLC, even allowing the members to select a forum for resolution of disputes such as the one at bar. See, e.g., Elf Atochem North America, Inc. v. Jaffari, 727 A.2d 286 (Del. 1999) (affirming Chancery's holding that an LLC agreement was valid even to the extent that it provided that all disputes be resolved either by arbitration or in California courts because such provision does not vitiate the mandatory requirements of the Act). Since the parties make no reference to any of their LLC agreements, the Court assumes that none of the agreements specified a forum.
The Court also notes that Section 18-405 of the Act states that an LLC agreement may provide that a manager who fails to comply with the terms of the LLC agreement shall be subject to specialized penalties and consequences. Section 18-406 provides that a member or manager may rely on matters that are reasonably within a manager's expertise, including "information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits and losses of the limited liability company or any other facts pertinent to the existence and amount of assets from which distributions to members might properly be paid." The parties do not discuss the applicability of either statute to the issues in this case.
DEL. CODE ANN. tit. 10 Del. C. § 342.
Boxer v. Husky Oil Co., 429 A.2d 995, 998 (Del.Ch. 1981).
While the nature of the remedy is relevant, the focus of the jurisdictional inquiry regarding a fiduciary claim is whether a special relationship of trust existed between the parties sufficient to establish the fiduciary duty. The classic examples of such a relationship are the trustee responsible for the trust res for the beneficiary and the corporate officer or director responsible to shareholders. Other fiduciary relationships recognized in Delaware include general partners; administrators or executors; guardians; and, in some instances, joint venturers or principals and their agents. Where the relationship is a straightforward commercial relationship arising from a contract and involves no element of confidentiality, Chancery will not exercise jurisdiction even if the parties use the standard language used to articulate an equitable cause of action.
McMahon v. New Castle Assoc., 532 A.2d 601, 604-05 (Del.Ch. 1987).
Id. at 605.
Id.
Id. at 603.
In this case, Leslie Morgan, as managing partner of Gramor, had more than an armslength, commercial relationship with Joseph Grace. As a member of Gramor, Mr. Grace placed a very particular and special trust in L. Morgan in her position as managing partner to find and hire a competent architectural and engineering firm, to contribute meaningfully to the project plans, to oversee the planning and construction, and to ensure that goals as well as codes and specifications were met. As Chancery Court has said of the fiduciary duty of a general partner to a limited partner, "[t]he form of the enterprise does not diminish the duty of fair dealing by those in control of the investments."
Boxer v. Husky Oil Co., 429 A.2d 995, 997 (Del.Ch. 1981) (quoting Miller v. Schweickart, 405 F. Supp. 366 (S.D.N.Y. 1975)).
The Court concludes that as managing partner of Gramor, Leslie Morgan had a fiduciary duty to Grace. The Court of Chancery "still retains jurisdiction to hear nearly all claims for breach of a fiduciary duty and in many claims where a person by fraud, mistake or duress has been deprived of property." For these reasons, Moving Defendants' motion to dismiss the allegation of breach of fiduciary duty is Granted.
Clark v. Teeven Holding Co., Inc, 625 A.2d 869 (Del.Ch. 1992) (citing Restatement of Restitution, introductory note, p. 9).
Court IV alleges that the Morgans fraudulently induced Grace into trading his interest in the Holiday Inn for the Morgans' interest in the Property by failing to disclose significant defects and deficiencies of the construction. Plaintiffs allege that the Morgans knew that the new facility could not accommodate three commercial tenants and could not support any restaurant tenants, which were the most desirable tenants for that location.
Defendants argue that this claim should be dismissed because Plaintiffs did not plead that the Morgans knowingly or recklessly misled Grace about the condition of the Property but merely asserted only they should have known about the Property's shortcomings. Defendants argue that only equity recognizes claims of fraud based on simple negligence or innocent misrepresentations. The Complaint clearly alleges that the Morgans were aware of numerous problems that they did not disclose to Grace in order to convince him to purchase the Property. The Court finds that the allegations meet the well-established pleading requirements for common law fraud. The motion to dismiss Count IV is Denied.
Stephenson v. Capano Dev't, Inc., 462 A.2d 1069, 1074 (Del. 1983). See also Clark v. Teeven Holding Co., Inc., 625 A.2d 869, 877 (Del.Ch. 1992) (observing that a defrauded party who elects to affirm the challenged contract and seek money damages has an action at law, whereas a party who elects to disaffirm the contract and be restored to the status quo ante has an equitable action for rescission).
Count V is a claim for unjust enrichment against the Morgans for legal fees allegedly paid to the law firms who set up the limited liability companies. Plaintiffs allege that they paid the total fee but were never reimbursed by the Morgans for their portion. Plaintiffs seek money damages. Defendants argue for dismissal because unjust enrichment is an equitable claim over which the Court of Chancery typically has jurisdiction.
The elements of unjust enrichment are (1) an enrichment; (2) an impoverishment; (3) a relation between the enrichment and impoverishment; (4) the absence of justification; and (5) the absence of a remedy at law. The Court of Chancery has held that a claim for unjust enrichment is equitable and confers subject matter jurisdiction upon this Court. However, Chancery has also found that where plaintiff has pled the first four elements of the claim but sought money damages in order to be made whole, Chancery has no jurisdiction because no equitable remedy is sought. In this case, Plaintiffs seek a monetary award only and therefore have an adequate remedy at law. Unlike the claim for breach of fiduciary duty, this claim entails no special trust relationship between the parties, and therefore the nature of the remedy is dispositive. Defendants' motion to dismiss Count V is Denied.
Jackson Nat'l. Live Ins. Co. v. Kennedy, 741 A.2d 377, 393 (Del.Ch. 1999).
Pepsi-Cola Bottling. Co. of Salisbury, Md. v. Handy, 2000 WL 364199, *6 (Del.Ch.).
Khoury Factory Outlets, Inc. v. Snyder, 1996 WL 74125 at *11 (Del.Ch.).
Count VI alleges breach of contract. Plaintiffs assert that they paid for the construction of an easement and a storm management system, but received no contribution from the Morgans and were precluded from completing and using the easement. Plaintiffs seek reimbursement for half of the expenses pursuant to the contract.
Defendants argue that this issue should be handled by Chancery because Plaintiffs seek specific performance, an equitable remedy. Plaintiffs again reiterate that they seek a monetary judgment only and that this Court has jurisdiction over contractual disputes where the plaintiff seeks to be made whole by way of money damages. The Court agrees. Defendants' motion to dismiss Count VI is Denied.
See Clark v. Teeven, 625 A.2d at 877.
CONCLUSION
For all these reasons, Defendants' motion to dismiss the allegation of breach of fiduciary duty is Granted without prejudice for lack of subject matter jurisdiction pursuant to Super.Ct.Civ.R. 12(b)(1), unless Plaintiffs seeks leave within 60 days to transfer the matter to the Court of Chancery. The remainder of Plaintiffs' motion is Denied.
It Is So ORDERED.