On February 19, 2016, Judge Brendan L. Shannon of the Delaware Bankruptcy Court granted in part the motion of K. Ivan F. Gothner (the “Defendant”) to dismiss a complaint filed by JLL Consultants, the Liquidating Trustee (the “Trustee”) in the AgFeed bankruptcy. I summarized that opinion in a prior post: Opinion in AgFeed USA – Another (Mostly) Successful Motion to Dismiss
Since publishing that post, the Trustee filed his amended complaint, to which the Defendant filed another motion to dismiss (the “Motion”). On September 13, 2016, Judge Shannon issued an opinion (the “Opinion”) deciding this Motion. The “Opinion” is available here.
Because of the length of the complaint and the Motion, the Opinion weighs in at 32 pages. The analysis in this Opinion is substantially similar to that of the prior opinion. The Opinion indicates several times that no new information was provided in support of, or against, several of the claims of the complaint. Thus, for purposes of this post I’ll focus on the single largest issue of new analysis provided by the Court – fraud.
The Third Circuit precedent that is followed in the Delaware Bankruptcy Court is provided in Seville Indus. Machinery Corp. v. Southmost Machinery Corp., 742 F.2d 786, 791 (3d Cir. 1984), cert. denied, 469 U.S. 1211, 105 S.Ct. 1179, 84 L.Ed.2d 327 (1985). For those of you without ready access to Lexis or Westlaw, here is a link to the case in Google Scholar.
As Judge Shannon provided in the course of dismissing the Trustee’s allegation of Intentional Misrepresentation by Nondisclosure (which is a common law fraud claim), “Fraud requires: (1) a false representation of material fact; (2) the knowledge or belief that the representation was false, or made with reckless indifference for the truth; (3) the intent to induce another party to act or refrain from acting; (4) the action or inaction taken was in justifiable reliance on the representation; and (5) damage to the other part as a result of the representation.” Opinion at *28.
In this claim, the Trustee failed to allege with particularity that any action was taken in reliance of the Defendant’s representations. Judge Shannon includes a quote from the Delaware Chancery Court that the “conclusory statement [that plaintiff ‘relied upon’ a statement] is insufficient; to plead reliance with particularity, plaintiff must explain what he did or refrained from doing, in justifiable reliance upon the statement.” Opinion at *29 (quoting Smith v. Smitty McGee’s, Inc., 2998 WL 246681, 15 *5 (Del. Ch. May 8, 1998)). In this case, the Trustee includes only the conclusory statement that shareholders relied upon the Defendant’s representations without providing any specific instance in which this occurred.
In the end, the result of the amended complaint was essentially identical to the original complaint. The same causes of action survived the Motion and no new actions survived the Motion. Judge Shannon closed the Opinion with what should be considered a firm warning to the Trustee – “the Court has previously expressed and now reiterates its profound concerns with respect to the dissipation of monies otherwise available for distribution to stakeholders being burned up in litigation of dubious merit and questionable collectability.” Opinion at *32.
Having already provided the Trustee a second bite at the apple, Judge Shannon declined to allow them another opportunity to amend the complaint. The Delaware Bankruptcy Court, like other courts across the U.S., takes a hard look at allegations of fraud, and requires them to comply with the elevated pleading standard of Fed. R. Civ. P. 9(b). Counsel looking to defeat a motion to dismiss may want to consider having a fresh set of eyes review complaints containing fraud allegations. Ideally, this ‘fresh set of eyes’ will handle the review with no more background than the Judge would have, and with either no bias or with a bias towards dismissal. This will help ensure that the complaint complies with the enhanced requirements of Fed. R. Civ. P. 9(b). It is said that you can’t make any shot you don’t take — but you also can’t make any shot you take with 1/2 the force needed to reach the goal.