Opinion
C.A. No. 04C-06-068 RRC.
Submitted: July 14, 2006.
Decided: July 27, 2006
Upon Defendants T.C. Group, LLC, Carlyle Partners II, LP, Carlyle SBC Partners II, LP, Carlyle International Partners II, LP, Carlyle International Partners III, LP, C/S International Partners, Carlyle Investment Group, LP, Carlyle-IT International Partners, LP, Carlyle-IT International Partners II, LP, and Carlyle-IT Partners, LP's Motion to Dismiss Plaintiffs' Third Amended Complaint. DENIED.
Upon Defendants' Motion to Strike. DENIED AS MOOT.
Daniel K. Hogan, Esquire, Wilmington, Delaware, Attorney for Plaintiffs Highland Capital Management, LP, KZH Highland-2 LLC, Highland Loan Funding V Ltd., Emerald Orchard Limited, KZH Pamco LLC, and Pamco Cayman, Ltd.
Jeffrey L. Moyer, Esquire, Steven J. Fineman, Esquire, Richards, Layton Finger, P.A., Wilmington, Delaware, Attorneys for Defendants T.C. Group, LLC, Carlyle Partners II, LP, Carlyle SBC Partners II, LP, Carlyle International Partners II, LP, Carlyle International Partners III, LP, C/S International Partners, Carlyle Investment Group, LP, Carlyle-IT International Partners, LP, Carlyle-IT International Partners II, LP, and Carlyle-IT Partners, LP.
Dear Counsel:
Before this Court is a motion to dismiss filed pursuant to Superior Court Civil Rules 12(b)(6) and 9(b) by Defendants T.C. Group, LLC, Carlyle Partners II, LP, Carlyle SBC Partners II, LP, Carlyle International Partners II, LP, Carlyle International Partners III, LP, C/S International Partners, Carlyle Investment Group, LP, Carlyle-IT International Partners, LP, Carlyle-IT International Partners II, LP, and Carlyle-IT Partners, LP ("Defendants"). The operative complaint for this motion is the Third Amended Complaint filed by Plaintiffs Highland Capital Management, LP, KZH Highland-2 LLC, Highland Loan Funding V Ltd., Emerald Orchard Limited, KZH Pamco LLC, and Pamco Cayman, Ltd. ("Plaintiffs"). The main issue is whether this motion to dismiss should be converted to a motion for summary judgment, allowing Plaintiffs to undertake requested discovery, by virtue of the inclusion of and reference to various documents in both Plaintiffs' and Defendants' respective briefs in opposition to and in support of the motion to dismiss.
Initially, two motions to dismiss were filed. One, which was based on lack of personal jurisdiction, was filed by Carlyle International Partners II, LP, Carlyle International Partners III, LP, C/S International Partners, Carlyle-IT International Partners, LP, and Carlyle-IT International Partners II, LP (the "Cayman Defendants"). The remaining Defendants, T.C. Group, LLC, Carlyle Partners II, LP, Carlyle SBC Partners II, LP, Carlyle Investment Group, LP, and Carlyle-IT Partners, LP (the "Carlyle Defendants"), did not contest personal jurisdiction, but filed the instant motion to dismiss. However, the Cayman Defendants stated that if their motion was denied then they would "join in and incorporate by reference the arguments set forth" in the Carlyle Defendant's Opening Brief in Support of the Carlyle Defendants' Motion to Dismiss Plaintiffs' Third Amended Complaint. Defs.' Op. Br. 1 n. 1. The Cayman Defendants then withdrew their respective joint motion to dismiss for lack of personal jurisdiction. Letter to the Court from Steven J. Fineman, Esq., at 3 (May 4, 2006). Thus, all Defendants, both Carlyle and Cayman, are parties to the instant Motion to Dismiss.
I. FACTS AND PROCEDURAL HISTORY
The facts in this case are obviously much more complex and extensive then those recited here. However, for purposes of the present motions, only a brief summary of the facts is necessary.
This complex litigation arises from investments made by both Plaintiffs and Defendants in IT Group, Inc., a now-defunct company that specialized in, among other things, environmental engineering and remediation services. IT Group's long-term strategy for growth was to acquire competing businesses and then create profit through economies of scale. As part of that strategy and to raise capital, IT Group offered both debt and equity securities to investors. During the mid-1990's Defendants invested $51 million in IT Group's stock, which ultimately allowed Defendants to acquire 24% of the voting power in IT Group. Plaintiffs also later invested $26 million in IT Group debt, which was made available pursuant to a Credit Agreement between IT Group and Citibank, which acted as IT Group's agent.
However, IT Group's growth strategy did not succeed. As a result of a downturn in the economy as well as IT Group's own financial problems, IT Group declared bankruptcy on January 16, 2002. At that point, Plaintiffs had lost their $26 million debt investment and that Defendants had lost their $51 million equity investment. Such losses gave rise to this litigation, which is predicated on alleged misrepresentations made by Defendants to Plaintiffs concerning the financial stability of IT Group prior to Plaintiffs' investment in the company.
II. CONTENTIONS OF THE PARTIES
Defendants argue that Plaintiffs' complaint must be dismissed as "Plaintiffs are unable to allege any fraudulent or negligent conduct for which the [Defendants] may be held responsible under any legal theory." First, Defendants claim that the fraud and negligent misrepresentation claims must be dismissed as Plaintiffs have not identified any statements made to Plaintiffs by Defendants upon which the claims can be based. Defendants assert that the "few alleged `direct' misrepresentations were made not to Plaintiffs, but to Citibank, which syndicated the debt and with whom Plaintiffs contractually disclaimed any sort of general agency relationship." Defendants also argue that those alleged misrepresentations are immaterial as a matter of law and that such allegations are too vague to satisfy the particularity requirements for such pleadings. Second, as to Plaintiffs' claim that Defendants fraudulently failed to speak or "correct allegedly false or misleading statements by others," Defendants contend that such allegations also must fail because Defendants did not owe Plaintiffs any duty of disclosure. Defendants also claim that Plaintiffs' allegations of concealment by the Defendants were not pled with the requisite level of factual particularity. As a third basis for dismissal, Defendants claim that Plaintiffs cannot prove justifiable reliance, which is a necessary element of claims of fraud and negligent misrepresentation. Fourth, Defendants argue that Plaintiffs have failed to adequately state claims for secondary or vicarious liability as well as claims of aiding and abetting and conspiracy. Finally, Defendants also allege that all of Plaintiffs' claims must be dismissed as barred by the applicable three-year statute of limitations and Plaintiffs have failed to plead facts to toll the statute of limitations.
Defs.' Op. Br. 1.
Id. at 2.
Id.
Id. at 8.
Id. at 2, 15.
Id. at 16.
Id. at 26.
Id. at 29, 34.
Id. at 37-38.
In response, Plaintiffs assert, as a threshold argument, that Defendants' motion to dismiss should be converted to a motion for summary judgment because "Defendants argue the truth or falsity of many of Plaintiffs' factual allegations, and even include documents to `support' their contentions." Plaintiffs also argue that "in situations where a plaintiff cannot plead greater detail, he need not do so until he has had the opportunity to take discovery." Specifically, as to Defendants' allegation that the alleged misrepresentations were made to Citibank rather than to Plaintiffs, Plaintiffs argue that they were "not physically present" when the alleged misrepresentations were made and "cannot, without discovery, provide additional detail[,]" and that "[u]nder these circumstances, Plaintiffs are entitled to discovery before having to plead any greater detail."
Pls.' Br. in Opp. 2-3.
Id. at 20.
Id. at 20-21.
In reply to the Plaintiffs' claim that the instant motion should be converted to a motion for summary judgment, Defendants argue that the "`evidence' which Plaintiffs complain requires adjudication on summary judgment, rather than on the pleadings, consists of material expressly referenced in the Complaint, incorporated in the Complaint by reference, or filed with the SEC by IT Group."
Defs.' Reply 2-3 n. 1.
After oral argument, Defendants sent a letter to the Court on May 4, 2006, enclosing a decision of the District Court for the Western District of Pennsylvania in a "related shareholder class action case" that Defendants argue should control the outcome of the instant motion. Thus began a two month-long dialogue between the parties through this Court regarding the applicability and viability of the Payne case and a related case, In re Veritas Software Corp. Sec. Litig. However, because of this Court's decision to deny Defendants' Motion to Dismiss, the Court need not decide, at this juncture, the applicability, if any, of Payne and Veritas.
Payne v. DeLuca, 2006 WL 1157861 (W.D. Pa 2006).
See Letter to the Court from Steven J. Fineman, Esq., D.I. 70 (May 4, 2006); Letter to the Court from Daniel K. Hogan, Esq., D.I. 71 (June 2, 2006); Letter to the Court from Daniel K. Hogan, Esq., D.I. 72 (June 8, 2006) (citing In re Veritas Software Corp. Sec. Litig., 2006 WL 1431209 (D. Del. 2006)); Letter to the Court from Steven J. Fineman, Esq., D.I. 73 (June 28, 2006); Letter to the Court from Daniel K. Hogan, Esq., D.I. 74 (July 7, 2006); Letter to the Court from Steven J. Fineman, Esq., D.I. 75 (July 14, 2006).
III. DISCUSSION
A. Standard of Review
When deciding a motion to dismiss, "all factual allegations of the complaint are accepted as true." A complaint will not be dismissed under Superior Court Civil Rule 12(b)(6) "unless it appears to a certainty that under no set of facts which could be proved to support the claim asserted would the plaintiff be entitled to relief." Therefore, the Court must determine "whether a plaintiff may recover under any reasonably conceivable set of circumstances susceptible of proof under the complaint."
Plant v. Catalytic Constr. Co., 287 A.2d 682, 686 (Del.Super.Ct. 1972), aff'd 297 A.2d 37 (Del. 1972).
Id.
Spence v. Funk, 396 A.2d 967, 968 (Del. 1978).
Although the "complaint generally defines the universe of facts that the trial court may consider in ruling on a Rule 12(b)(6) motion to dismiss[,]" the procedural landscape changes when documents and matters outside the complaint are submitted by the parties and considered by the court. When that happens, "a motion to dismiss is usually converted into a motion for summary judgment and the parties are permitted to expand the record." This rule is encapsulated in Superior Court Civil Rule 12(b), which provides:
In re General Motors (Hughes) S'holder Litig., 897 A.2d 162, 168 (Del. 2006) (rejecting argument that trial court improperly relied on matters beyond complaint when granting all of defendants' motions to dismiss) (citing Malpiede v. Townson, 780 A.2d 1075, 1082 (Del. 2001) (holding that if a document or other evidence is "raised for the first time in the motion [to dismiss] or brief in support of the motion, it is a matter outside the pleading" and, if considered by the court, converts the motion to dismiss to one for summary judgment, for which discovery is allowed at the discretion of the trial court)).
Id.
If, on a motion asserting the defense numbered (6) to dismiss for failure to state a claim upon which relief can be granted, matters outside the pleading are presented to and not excluded by the Court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule 56.
When such a course is taken by the court, "[b]efore a motion for summary judgment is ripe for decision, the non-movant normally should have an opportunity for some discovery."
Id. at 168-69 (quoting In re Santa Fe Pac. Corp. S'holder Litig., 669 A.2d 59, 69 (Del. 1995) (holding that a document may not be considered in a motion to dismiss where it "is not put forth by plaintiffs as an admission of the truth of the facts referred to therein," but may be used to "establish formal, uncontested matters")).
However, there are certain limited situations where the trial court may rule on a motion to dismiss even though matters outside the pleadings were relied upon. Courts that have employed this relatively limited course when deciding a motion to dismiss will only consider those documents that are the "very documents that are alleged to contain the various misrepresentations or omissions and are relevant not to prove the truth of their contents but only to determine what the documents stated."
B. The Inclusion Of Certain Documents Converts Defendants' Motion To Dismiss To A Motion For Summary Judgment.
In re Santa Fe Pac. Corp. S'holder Litig., 669 A.2d at 69-70.
Id. at 70 (quoting Kramer v. Time Warner, Inc., 937 F.2d 767, 774 (2d. Cir. 1991)).
Under the jurisprudence concerning the court's consideration of matters outside the pleadings upon a motion to dismiss, this Court holds that the attachment by Defendants of the documents referenced in the motion to dismiss are sufficiently outside the pleadings as to convert the motion to one for summary judgment and to allow the parties to engage in further discovery.
In support of the motion to dismiss, Defendants submitted, in the form of an affidavit, various documents for this Court to consider, including, among others, the pertinent documents that were filed with the Securities and Exchange Commission as well as certain deposition testimony that was taken in a separate action in Texas. Defendants also submitted interrogatory answers given by Plaintiffs in a separate Texas action that Defendants use to show that Defendants "did not rely on any representations allegedly made by the Carlyle Defendants. The documents included by Defendants do not fit within the limited exception to the rule regarding matters outside the pleadings as they are not merely referenced by the Complaint or "determine what the documents stated." Instead, these documents, especially the deposition transcripts and interrogatory responses, attempt to prove the truth of their contents. Such reliance is not appropriate on a motion to dismiss, the scope of which is limited to the pleadings. This holding is in accord with a line of Superior Court cases that have converted a motion to dismiss to one for summary judgment where matters outside of the pleadings are submitted with the motion to dismiss and considered by the court. Further, the additional step of allowing a party to engage in discovery to create a more complete factual record has also been frequently endorsed and utilized by the Delaware Judiciary.
See Defs.' Op. Br. 1.
See In re Santa Fe Pac. Corp. S'holder Litig., 669 A.2d at 70.
See, e.g., Deputy v. Roy, 2003 WL 367827 (Del.Super.) (converting motion to dismiss to motion for summary judgment based on the addition of affidavits and medical records); Price Auto. Group v. Danneman, 2002 WL 31260007 (Del.Super.) (holding same with affidavit and deposition testimony); Gutheim v. Viacom, Inc., 2000 WL 1211511 (Del.Super.) (holding same with affidavit with attachments and defendant's Form 10-K Annual Report), aff'd, 2000 WL 1780778 (Del.Supr.); Degnars v. Kimmel, Weiss Carter, 1996 WL 527311 (Del.Super.) (converting motion to dismiss to motion for summary judgment and finding it "desirable to inquire more thoroughly into the facts to clarify the application of the law to the circumstances[,]" where evidence was submitted with the motion to dismiss); Schultz v. Delaware Trust Co., 360 A.2d 576, 578 (Del.Super.Ct. 1976) ("In view of the fact that Delaware Trust has offered affidavits and depositions in addition to the pleadings, its motion to dismiss must be considered a motion for summary judgment.").
In re General Motors (Hughes) S'holder Litig., 897 A.2d, at 168-69. See also Marvel v. Prison Industries, 884 A.2d 1065, 1070-71 (Del.Super.Ct. 2005) (denying motion to dismiss for failure to state a claim because plaintiff was not "afforded a reasonable opportunity" to engage in discovery); In re Walt Disney Co. Derivative Litig., 825 A.2d 275, 291 (Del.Ch. 2003) (denying motion to dismiss for failure to state a claim but allowing "extensive discovery" to take place in order to create a more complete factual record).
Therefore, based on the inclusion of documents and matters outside of the pleadings with Defendants' motion, Defendants' Motion to Dismiss is DENIED.
In support of their motion to strike, Defendants argue that certain allegations made by Plaintiffs in the Third Amended Complaint and the brief in opposition to Defendants' motion to dismiss should be stricken from both of those filings because those "allegations are factually unfounded, and brought solely to cast aspersions on and damage the reputation of [Defendants.]" Defs.' Mot. to Strike 1.
In response, Plaintiffs claim that the "challenged allegations [here] are allegations of business fraud in the context of a business fraud case that are highly relevant to the issues before the Court and are not unduly prejudicial." Pls.' Resp. 3.
However, as this Court has ruled that Defendants' motion to dismiss shall be converted to a motion for summary judgment by virtue of the inclusion of certain documents that are outside the pleadings, this Court need not rule on Defendants motion to strike as this Court did not rely on the allegations in reaching the instant decision. See Official Comm. of Unsecured Creditors of Integrated Health Services, Inc. v. Elkins, 2004 WL 1949290, * 3 n. 3 (Del.Ch.) (holding that the court need not reach decision on a motion to strike certain exhibits that were ultimately not relied upon by the court in its final decision). Therefore, Defendants' Motion to Strike is DENIED AS MOOT.
IV. CONCLUSION
For all of the above reasons, Defendants' Motion to Dismiss is DENIED. A scheduling conference shall be held on Friday, September 22, 2006, at 1:30 p.m., to set a trial date and other related dates and deadlines. (If this date and time is not convenient for all counsel, please advise and a new date and time for the scheduling conference will be selected).