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Cherry Bros., LLC v. Choice Products Usa

October 26, 2011

CHERRY BROS., LLC
v.
CHOICE PRODUCTS USA, LLC., ET AL.



The opinion of the court was delivered by: M. Faith Angell, U.S.M.J.

MEMORANDUM

This action arises out of a failed business relationship between Cherry Bros., LLC ["Cherrydale"] and Club's Choice, both of which are in the fundraising product sales business. In its complaint, Plaintiff Cherrydale alleges that, beginning in December 2008, it entered into a series of understandings and verbal and written agreements with Club's Choice in which the parties agreed to sell each other's products and, for agreed fees, provide each other various services including, inter alia, Club's Choice packaging, labeling and shipping all products sold by both companies. Complaint [Docket #1] at p. 3. Cherrydale brings this action against Club's Choice, Richard McHugh [President and major shareholder of Club's Choice] and Glen McHugh [Vice President of Club's Choice] alleging breach of contract and fraud. Presently before this Court is a motion by Defendants Richard McHugh and Glen McHugh to dismiss the fraud claim against them under Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure.*fn1 After considering the submissions of the parties, and for the reasons below, the motion to dismiss the fraud claim against the individually named Defendants is granted. I will also grant Plaintiff's request for leave to file an amended complaint.

I. Background.

The following is a summary of the allegations in the Complaint, which I must accept as true when deciding a motion under Rule 12(b)(6). See U.S. ex rel. Pilecki-Simko v. The Chubb Institute, No. 10-3907, 2011 WL 3890975 at *4 (3d Cir. September 6, 2011)("When reviewing a motion to dismiss, we construe the complaint 'in the light most favorable to the plaintiff'.").

For more than 100 years, Plaintiff Cherrydale has helped organizations (such as schools and charitable groups) with their fundraising efforts by providing a complete offering of products and services including premium chocolates and confections, magazine subscriptions, giftware, candles, frozen foods and jewelry. Cherrydale products are sold to consumers through catalogs distributed by students and members of participating organizations ["the sales force"]. Fundraising programs typically run in two seasons - Spring and Fall.

Defendant Club's Choice is also in the fundraising product sales business. It targets frozen foods such as pizza, sausages and cookies. Complaint at pp. 1-2.

Beginning in December 2008, Cherrydale and Club's Choice entered into a series of agreements, both written and verbal, in which the parties agreed to sell each others products ["the Service Agreements"]. It was agreed, inter alia, that Cherrydale would process all order forms, and Club's Choice would package, label and ship all products sold by both companies (pursuant to agreed-upon procedures set forth in an "Operations Manual").

For the period from January 1, 2009 through November 2010, Cherrydale's sales force generated over $6.5M in sales of Club's Choice Products. Through December 2010, Cherrydale paid Club's Choice in excess of $1.8M for the products and services provided by Club's Choice under the Service Agreements.

Cherrydale alleges that Club's Choice overcharged Cherrydale for products and services it provided and refused to pay for services and products provided by Cherrydale. Id. at pp. 3-5.

In its two count complaint, Cherrydale asserts (in Count 1: breach of contract) that Defendant Club's Choice "is obligated and required under the Parties' Service Agreements to pay to Cherrydale all amounts due for products, goods, royalties and commissions described above, in the amount of $218, 645.65. As more fully described above, Club's Choice violated the Parties' Service Agreements by overcharging Cherrydale for freight and by failing to handle and ship the products pursuant to the Operations Manual and otherwise in violation of the Parties' Service Agreements and industry standards. As a result of Club's Choice violations, Cherrydale was overcharged and/or wrongly charged $268, 410.99." Cherrydale also seeks additional damages in the form of lost business, business reputation and goodwill as a result of Club's Choice's breach of its agreements and failure to ship in accordance with the Operations Manual. Id. at p. 14.

In Count 2, Cherrydale alleges that all Defendants (Club's Choice, Richard W. McHugh and Glenn McHugh) are liable for fraud for the following acts:

(1) When the parties entered into their Service Agreements, Club's Choice and the McHughs made false representations (that Club's Choice would charge shipping and packaging rates as agreed upon and would invoice Cherrydale appropriately). These false representations were material to the Service Agreements because Club's Choice knew that Cherrydale would not be present at Club's Choice's warehouse at all times or otherwise able to monitor the charges. The consequent billings and charges imposed by Club's Choice were false and fraudulent.

(2) "McHughs made and/or directed their employees to make additional false statements and/or misrepresentations to Cherrydale in furtherance of their fraudulent overbilling scheme and an effort to conceal the fraudulent charges and pressure Cherrydale to succumb to Club's Choice's improper conduct and charges." Three examples are alleged by Cherrydale:

(A) In April 2010, Richard McHugh informed Cherrydale during a telephone conference that Club's Choice refused to release expense reports and categories which Club's Choice knew were immediately required by the auditors of Cherrydale's lenders. McHugh refused to release this information unless Cherrydale paid an exorbitant and improper $27, 000.00 fee for pre-packaging of prizes (a charge that was not part of the agreed upon terms in the Service Agreements). The ...


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