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North American Communications, Inc. v. Herman

United States District Court, W.D. Pennsylvania

May 11, 2018

NORTH AMERICAN COMMUNICATIONS, INC., Plaintiff,
v.
MICHAEL HERMAN, Defendant and Third-Party Plaintiff
v.
NORTH AMERICAN COMMUNICATIONS, INC., ROBERT HERMAN and NICHOLAS ROBINSON, Third-Party Defendants.

          MEMORANDUM OPINION

          KIM R. GIBSON JUDGE

         I. Introduction

         Pending before the Court is the Motion to Dismiss Amended Counterclaims filed by Third-Party Defendants North American Communications, Inc. ("NAC"), Robert Herman, and Nicholas Robinson (ECF No. 59). The motion has been fully briefed (see ECF Nos. 60, 61) and is ripe for disposition. For the reasons that follow, the Court will GRANT in PART and DENY in PART Third-Party Defendants' motion.

         II. Background

         A. Factual History [1]

         Michael Herman founded NAC over forty years ago. (ECF No. 55 at ¶ 8.) Two families jointly owned NAC -the Hermans and the Paltrows. (Id. at ¶ 9.) The Hermans' half of NAC was technically owned by a limited partnership. (Id. at ¶ 10.) But Michael Herman managed and effectively controlled the partnership. (Id.) Michael Herman also received compensation from this entity in the form of dividends. (Id. at ¶ 12.)

         Michael Herman left NAC in 2013. (Id. at ¶ 11.) Michael Herman and NAC entered into a retirement agreement, under which Michael Herman would transfer control and decisionmaking authority of the limited partnership to his son, Robert Herman, who became the 50% owner of NAC. (Id. at ¶ 12.) Michael Herman also gave up his right to receive dividends from the limited partnership. (Id.) In exchange for transferring ownership and control to his son, NAC promised to pay Michael Herman a $130, 000 retirement benefit each month for ten years. (Id. at ¶ 13.)

         For the first ten months after Michael Herman retired, NAC paid him the full amount due under the retirement agreement. (Id. at ¶ 14.) For the next four months, NAC paid half of its monthly obligation. (Id.) And after making partial payments for four months, NAC stopped paying Michael Herman entirely. (Id.) Michael Herman has not received a payment from NAC since September 2014. (Id.)

         When NAC stopped paying Michael Herman, Robert Herman -NAC's president and Michael Herman's son -"represented" to Michael Herman that NAC lacked sufficient funds to make its payments. (Id. at ¶ 15.) Robert Herman "repeated the substance of that representation to his father on numerous occasions, " and falsely assured Michael Herman that NAC would resume payments once it achieved the requisite financial stability. (Id.) Contrary to Robert Herman's representations, NAC never intended to fulfill its obligations to Michael Herman. (Id.)

         Michael Herman makes three allegations to support his claim that NAC never intended to honor the retirement agreement. First, NAC did not list Michael Herman's retirement benefits as "liabilities" on financial documents. (Id.) Second, despite claiming that it lacked the funds to pay the retirement benefits, NAC continued to pay Robert Herman and Nicholas Robinson (NAC's CEO) "exorbitant" compensation that far exceeded market standards; between 2014 and 2017, Robert Herman and Nicholas Robinson paid themselves $6, 400, 000-approximately $3, 600, 000 more than the industry standard for executives of comparable companies. (Id. at ¶¶ 16, 28.) Third, despite representing to Michael Herman that it lacked sufficient funds to pay his retirement benefits, NAC remained current on payments for bank debt and trade payables. (Id. at ¶ 17.) In other words, while NAC claimed it possessed inadequate funds to pay Michael Herman, it simultaneously continued to service its other debts and pay its president and CEO unreasonably high salaries.[2]

         Alternatively, Michael Herman claims that Robert Herman and Nicholas Robinson knew that NAC lacked the ability to fulfill its obligations when Michael Herman entered into the retirement agreement. (Id. at ¶ 20.) If Michael Herman had known that NAC lacked the ability or the intention to make all of the required retirement payments, Michael Herman would not have entered into the retirement agreement. (Id. at ¶ 21.)

         B. Procedural History

         NAC filed a Complaint against Michael Herman (ECF No. 1), which it subsequently amended. (ECF No. 12.) NAC asks that this Court enter a declaratory judgment that Michael Herman breached the retirement agreement by violating its non-compete and non-solicitation clauses and that, as a result of Michael Herman's breach, NAC is released from any future obligations. (Id. at 1.)

         Michael Herman filed a motion to dismiss for improver venue (ECF No. 15), which this Court denied. (See ECF No. 30.)

         After this Court denied Michael Herman's motion to dismiss, he filed an answer and counterclaims (ECF No. 35), which he subsequently amended (ECF No. 55). Michael Herman asserts twelve counterclaims: breach of contract against NAC (Count I); in the alternative, quantum meruit/unjust enrichment against NAC (Count II); in the alternative, promissory estoppel against NAC (Count III); fraud in the inducement against all Counterclaim-Defendants (Count IV); negligent misrepresentation against all Counterclaim-Defendants (Count V); fraud, against NAC (Count VI); fraud, against Robert Herman and Nicholas Robinson (Count VII); fraudulent and voidable transfer under 12 Pa. C.S. § 5104, against all Counterclaim-Defendants (Count VIII); fraudulent and voidable transfer under 12 Pa. C.S. § 5105, against all Counterclaim- Defendants (Count IX); conspiracy against Robert Herman and Nicholas Robinson (Count X); unlawful, unfair and fraudulent business practices under the California Business and Professions Code against all Counterclaim-Defendants (Count XI); and declaratory judgment (Count XII). (See ECF No. 55.)

         Counterclaim-Defendants move to dismiss all of Michael Herman's amended counterclaims, except for breach of contract and declaratory judgment. (See ECF No. 59.)

         III. Standard of Review

         A complaint may be dismissed under Federal Rule of Civil Rule 12(b)(6) for "failure to state a claim upon which relief can be granted." Connelly v. Lane Const. Corp., 809 F.3d 780, 786 (3d Cir. 2016). But detailed pleading is not generally required. Id. The Rules demand only "a short and plain statement of the claim showing that the pleader is entitled to relief" to give the defendant fair notice of what the claim is and the grounds upon which it rests. Bell Atlantic Corp. v. Tivombly, 550 U.S. 544, 555 (2007) (quoting Fed. R. Civ. R 8(a)(2)).

         Under the pleading regime established by Twombly and Ashcroft v. Iqbal, 556 U.S. 662 (2009), a court reviewing the sufficiency of a complaint must take three steps.[3] First, the court must "tak[e] note of the elements [the] plaintiff must plead to state a claim." Iqbal, 556 U.S. at 675. Second, the court should identify allegations that, "because they are no more than conclusions, are not entitled to the assumption of truth." Id. at 679; see also Burtch v. Milberg Factors, Inc., 662 F.3d 212, 224 (3d Cir. 2011) ("Mere restatements of the elements of a claim are not entitled to the assumption of truth.") (citation omitted). Finally, "[w]hen there are well-pleaded factual allegations, [the] court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief." Iqbal, 556 U.S. at 679. "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id.; see also Connelly, 809 F.3d at 786. Ultimately, the plausibility determination is "a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Iqbal, 556 U.S. at 679.

         IV. Discussion

         A. The Gist of the Action Doctrine Bars Michael Herman's Fraud in the Inducement, Negligent Misrepresentation, and Fraud Claims Against NAC (Counts IV, V, and VI)

         Michael Herman bases his tort claims on the allegation that NAC never intended to honor his retirement agreement. Counterclaim Defendants argue that the gist of the action doctrine bars these claims. (ECF No. 60 at 4-11.) In response, Michael Herman contends that the gist of the action doctrine does not apply because these claims allege violations of duties imposed by society rather than duties imposed by the retirement agreement itself.

         Under Pennsylvania's gist of the action doctrine, a party cannot "bring a tort claim for what is, in actuality, a claim for breach of contract." Bruno v. Erie Insurance Company, 106 A.3d 48, 60 (Pa. 2014). "If the facts of a particular claim establish that the duty breached is one created by the parties by the terms of their contract-i.e., a specific promise to do something that a party would not ordinarily have been obligated to do but for the existence of the contract-then the claim is to be viewed as one for breach of contract. Id. at 68. "If, however, the facts establish that the claim involves the defendant's violation of a broader social duty owed to all individuals . . .then it must be regarded as a tort." Id.; see also Downs v. Andrews, 639 Fed.Appx. 816 (3d Cir. 2016); Dommel Prop. LLC v. Jonestown Bank and Trust Co., 626 Fed.Appx. 361 (3d Cir. 2015); Rogers v. Gentex Corp., 3:16-cv-137, 2018 WL 1370611 (M.D. Pa. Mar. 16, 2018); Telwell Inc. v. Grandbridge Real Estate Capital, LLC, 143 A.3d 421 (Pa. Super. Ct. 2016); B.G. Balmer & Co. v. Frank Crystal & Company, Inc., 148 A.3d 454 (Pa. Super. Ct. 2016); Munksjo Paper AB v. Bedford Materials Co., No. 3;16-CV-270, 2018 WL 1866086, at *5 (W.D. Pa. Apr. 18, 2018) (Gibson, J.).

         Pennsylvania district courts disagree about whether the gist of the action doctrine bars tort claims based on allegations that the promisor lied to the promisee about his or her intention to fulfill his or her contractual obligations. "[V]arious district courts in this Circuit have found fraudulent inducement claims that are 'predicated upon misrepresentations as to a party's intent to perform under a contract' barred by the gist of the action doctrine." Atl. Holdings, Ltd. v. Apollo Metals, Ltd., 263 F.Supp.3d 526, 531 (E.D. Pa. 2017) (quoting Vives v. Rodriguez, 849 F.Supp.2d 507, 520 (E.D. Pa. 2012)) (dismissing fraudulent inducement claim at motion to dismiss stage); see, e.g., Malone v. Weiss, No. CV 17-1694, 2018 WL 827433, at *4-5 (E.D. Pa. Feb. 12, 2018) (dismissing fraudulent inducement claim at motion to dismiss stage); Glob. Sourcing LLC v. DBDK Int'l, LLC, No. CV 17-325, 2018 WL 723098, at *2 (E.D. Pa. Feb. 5, 2018) (dismissing fraudulent inducement claim at motion to dismiss stage); Agrotors, Inc. v. Ace Glob. Markets, No. l;13-CV-1604, 2014 WL 690623, at *5 (M.D. Pa. Feb. 24, 2014) (dismissing fraudulent inducement claim at motion to dismiss stage); Aceros Recicilables de Mexico, S.A. de CV. v. ELG Haniel Metals Corp., No. CIV.A. 02-1935, 2006 WL 1429381, at *7 (W.D. Pa. Mar. 14, 2006) (Lancaster, J.) (dismissing negligent misrepresentation claim at the summary judgment stage).

         Other courts have held that the gist of the action doctrine does not bar these tort claims. These courts conceptualize the misrepresentation about one's intention to perform under the contract as distinct from the breach of the contract itself. See, e.g., Graham Packaging Co., L.P. v. Trans-place Texas, L.P., No. 1:15-CV-01186, 2015 WL 8012970, at *4 (M.D. Pa. Dec. 7, 2015) (holding that gist of the action doctrine does not preclude fraudulent misrepresentation and negligent misrepresentation claims); H Contractors, LLC v. E.J.H. Constr., Inc., No. CV 16-368, 2017 WL 658240, at *6 (W.D. Pa. Feb. 16, 2017) (denying motion to dismiss fraudulent inducement claim based on gist of the action doctrine); Morrison v. AccuWeather, Inc., No. 4:14-CV-0209, 2015 WL 4357346, at *6 (M.D. Pa. July 14, 2015) (holding that gist of the action doctrine does not bar fraud in the inducement claim); Stirone v. McHutchison Inc., No. 2;17-CV-1644-JFC, 2018 WL 1256777, at *5 (W.D. Pa. Mar. 12, 2018).

         After careful deliberation, the Court agrees with those district courts that have held that the gist of the action doctrine bars tort claims concerning the promisor's intent to perform under the contract. As one district court aptly noted, "[t]here can be little doubt that a misrepresentation as to a party's intent to perform contractual duties 'concern[s] the performance of contractual duties.'" Vives, 849 F.Supp.2d at 521 (quoting eToll, Inc. v. Elias/Savion Advert., Inc., 811 A.2d 10, 19 (2002)). And as one district court insightfully observed, "[p]ermitting a fraudulent inducement claim [based on the allegation that the defendant never intended to honor the contract] would essentially negate the entire . . . gist of the action doctrine because a [p]laintiff would have only to allege that [d]efendants never intended to abide by a provision in their contract in order to escape dismissal." Malone, 2018 WL 827433, at 5.

         The gist of the action doctrine precludes Michael Herman's fraud, fraudulent inducement, and negligent misrepresentation claims. These claims allege that NAC never intended to honor his retirement agreement. They involve duties imposed by the retirement agreement, not by society. They properly sound in contract, not tort. Therefore, the gist of the action doctrine bars these claims. Bruno, 106 A.3d at 60. Accordingly, the Court will dismiss Michael Herman's tort claims against NAC.

         B. The Gist of the Action Doctrine Bars Michael Herman's Fraud Claim Against Robert Herman and Nicholas Robinson (Count VII)

         Michael Herman argues that the gist of the action doctrine does not apply to his claims against Robert Herman and Nicholas Robinson because neither of them signed his retirement contract. (ECF No. 61 at 14.) The Court disagrees.

         "As the Pennsylvania courts have spelled out, the gist of the action doctrine bars tort claims against an individual defendant where the contract between the plaintiff and the officer's company created the duties that the individual allegedly breached."[4] Williams v. Hilton Grp. PLC, 93 Fed.Appx. 384, 387 (3d Cir. 2004) (collecting cases). Since Williams, numerous district courts have held that the gist of the action doctrine bars tort claims against non-parties to the contract if the defendants acted merely as agents or employees of the entity that was a party to the contract. See, e.g, Furniture Sols. & Res. v. Symmetry Office, LLC, No. CV 15-4774, 2015 WL 9302915, at *6 (E.D. Pa. Dec. 22, 2015) (holding that the gist of the action doctrine precludes tort claims against agents of corporate defendant because claims arose from corporate defendant's underlying breach of contract); Integrated Waste Sols., Inc. v. Goverdhanam, No. CIV.A. 10-2155, 2010 WL 4910176, at *12 (E.D. Pa. Nov. 30, 2010) (holding that gist of the action doctrine barred plaintiff's fraud, intentional misrepresentation, and negligent misrepresentation claims against individual defendant, who served as CEO of corporate defendant, despite the lack of contractual relationship with the individual defendant, because the CEO's misrepresentations concerned the subject matter of the contract between the plaintiff and the company); Velocity Int'l, Inc. v. Celerity Healthcare Sols., Inc., No. CV 09-102, 2012 WL 12895053, at *2 (W.D. Pa. Nov. 27, 2012) (Conti, J.) (dismissing tortious interference claim against agent of corporate defendant under gist of the action doctrine).

         The gist of the action doctrine bars Michael Herman's fraud claim against Robert Herman and Nicholas Robinson. Michael Herman's allegations against Robert Herman and Nicholas Robinson concern their actions as officers and agents of NAC. Further, Michael Herman merely alleges that these Defendants misrepresented NAC's intentions to fulfill its promise to pay him under the retirement agreement. As explained above, these "tort" claims are disguised breach of contract claims arising from NAC's failure to honor Michael Herman's retirement agreement. Therefore, the gist of the action doctrine bars these claims even though Robert Herman and Nicholas Robinson were not parties to the retirement agreement. Williams, 93 Fed.Appx. at 387.

         C. Michael Herman Stated Plausible Claims for Unjust Enrichment and Promissory Estoppel (Counts II and III)

         1.Michael Herman Properly Plead Quasi-Contract Claims in the Alternative to His Breach of Contract Claim

         Counterclaim-Defendants argue that the Court should dismiss Michael Herman's quasi-contract claims because Michael Herman and NAC have a valid contract. (See ECF No. 60 at 14- 16.) In response, Michael Herman argues that alternative pleading permits him to raise quasi-contract claims as alternative theories of recovery. In the alternative to his breach claim, Michael Herman alleges that his retirement agreement is void or voidable because of contract defenses such as fraud, mistake, and repudiation. (ECF No. 61 at 19-20.)

         "[T]he doctrine of unjust enrichment is inapplicable when the relationship between parties is founded upon a written agreement or express contract . . . ." Wilson Area Sch. Dist. v. Skepton, 586 Pa. 513, 520 (2006) (citing Third National & Trust Compamj of Scranton v. Lehigh Valley Coal Company, 353 Pa. 185 (1945)).[5] But "if a contract is unenforceable in whole or in part... unjust enrichment may apply." Cosby v. Am. Media, Inc., 197 F.Supp.3d 735, 745 (E.D. Pa. 2016) (citing Fish Net, Inc. v. ProfitCenter Software, Inc., No. CIV.A. 09-5466, 2011 WL 1235204, at *10 (E.D. Pa. Mar. 31, 2011)). As Judge Bissoon recently explained, "[t]he practice of alternate pleading means that '[t]he mere existence of a written contract between parties does not bar an unjust enrichment claim/" Germain v. Wisniewski, No. 15-1279, 2016 WL 4158994, at *6 (W.D. Pa. Aug. 5, 2016) (quoting PPG Industries, Inc. v. Generon IGS, Inc., 760 F.Supp.2d 520, 526 (W.D. Pa. 2011)). "A plaintiff is permitted to plead alternative theories of recovery based on breach of contract and unjust enrichment in cases where there is a 'question as to the validity of the contract in question.'" Premier Payments Online, Inc. v. Payment Sys. Worldwide, 848 F.Supp.2d 513, 527 (E.D. Pa. 2012) (quoting AmerisourceBergen Drug Corp. v. Allscripts Healthcare, LLC, Civ. A. No. 10-6087, 2011 WL 3241356, at *3 (E.D. Pa. July 29, 2011)); In re Prudential Ins. Co. of Am. Sales Practices Litig., 975 F.Supp. 584, 622 (D. N.J. 1996) (denying motion to dismiss unjust enrichment claim because "if the written document is unenforceable, the plaintiff may have an unjust enrichment claim."); Cornell Companies, Inc. v. Borough of New Morgan, 512 F.Supp.2d 238, 266 (E.D. Pa. 2007) (noting that "a plaintiff can plead in the alternative and a promissory estoppel claim is a permissible alternative cause of action to a breach of contract claim.").

         Michael Herman alleges that Robert Herman and Nicholas Robinson fraudulently induced him into entering into the retirement agreement. Accordingly, a "question as to the validity of the contract" exists. Premier Payments Online, 848 F.Supp.2d at 527. Therefore, Michael Herman permissibly plead ...


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