Alamo Grp., LLC v. A&G Realty Partners, LLC (In re Osc 1 Liquidating Corp.), Case No. 13-11565 (CSS) (Jointly Administered)

CourtU.S. Bankruptcy Court — District of Delaware
Writing for the CourtSontchi
Citation529 B.R. 825
PartiesIn re: OSC 1 Liquidating Corporation f/k/a Orchard Supply Hardware Stores Corporation, et al., Debtors Alamo Group, LLC and Kirin Alamo, LLC, Plaintiffs, v. A & G Realty Partners, LLC, Michael Jerbich, and Does 1–25 Defendants.
Docket NumberCase No. 13-11565 (CSS) (Jointly Administered),Adv. Case No. 14-50103 (CSS).
Decision Date12 May 2015

529 B.R. 825

In re: OSC 1 Liquidating Corporation f/k/a Orchard Supply Hardware Stores Corporation, et al., Debtors
Alamo Group, LLC and Kirin Alamo, LLC, Plaintiffs,
A & G Realty Partners, LLC, Michael Jerbich, and Does 1–25 Defendants.

Case No. 13-11565 (CSS) (Jointly Administered)
Adv. Case No. 14-50103 (CSS).

United States Bankruptcy Court, D. Delaware.

Signed May 12, 2015

Ballard Spahr LLP, Tobey M. Daluz, Jessica L. Case, 919 North Market Street, 11th Floor, Wilmington, Delaware 19801 and Brent Weisenberg, 425 Park Avenue,

[529 B.R. 827]

New York, New York 10022, Counsel for Defendants A & G Realty Partners, LLC and Michael Jerbich

Ashby & Geddes, P.A., William P. Bowden, Gregory A. Taylor, 500 Delaware Avenue, 8th Floor, Wilmington, Delaware 19899 and Burkhalter Kessler Clement & George LLP, Daniel J. Kessler, Eric J. Hardeman, 2020 Main Street, Suite 600, Irvine, California 92614, Counsel for Plaintiffs Kirin Alamo, LLC and Alamo Group, LLC

Sontchi, J.

Before the Court is Defendants' 12(b)(6) Motion to Dismiss for failure to state a claim for fraudulent misrepresentation. Because Plaintiffs fail to allege materiality, a necessary element of a Delaware common law fraud claim, the Court will grant Defendants' Motion.


This Court has jurisdiction over this matter under 28 U.S.C. §§ 157 and 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2) and the Court has the judicial power to enter a final order. Moreover, the Court retained jurisdiction over this matter in Article X (“Retention of Jurisdiction”) of the above-captioned Debtors' Amended Chapter 11 Plan 2, and in paragraph 50 of the Plan Confirmation Order.3 Finally, the Court retained jurisdiction over this matter in the Order approving an Amended Designation Rights Agreement: “The Court shall retain jurisdiction over disputes pertaining to this Order or the Agreement.” 4

Venue is proper in this District pursuant to 28 U.S.C. §§ 1408 and 1409.


This is an adversary proceeding alleging fraudulent misrepresentation. Plaintiffs are Alamo Group, LLC and Kirin Alamo, LLC (together, “Plaintiffs”). Each is organized under the laws of the State of California, with its principle place of business in Alamo, California. Defendants are A & G Realty Partners, LLC and Michael Jerbich (together, “Defendants” or “Defendant Brokers”). 5 A & G is a New York limited liability company, with its principal place of business in Melville, New York. Mr. Jerbich presently resides in Chicago, Illinois and is listed as an A & G principal on the company's website. Plaintiffs' claim relates to lease designation rights marketed by Debtors Orchard Supply Hardware Stores Corporation, et al. (“OSH” or “Debtors”). OSH was a retailer of home improvement and gardening products, with several stores throughout California. In June 2013, OSH and its affiliates filed for relief under chapter 11 of the Bankruptcy Code.

Subsequently, Debtors sold substantially all operating assets to an affiliate of Lowe's Home Improvement Stores. The

[529 B.R. 828]

remaining property of the bankruptcy estate included nine of Debtors' unexpired commercial leases (the “Remaining Leases”). Defendant A & G, through Defendant Jerbich, acted as Debtors' real estate broker. A & G was to assist Debtors in selling rights to the Remaining Leases, receiving a fee based on gross proceeds from any sale.

The most valuable of the Remaining Leases was a property in Merced, California (the “Merced Lease”). The Merced Lease was particularly attractive because it was a “ground lease,” which allows a landlord to assume all of a tenant's improvements to a property once that lease expires. Primarily interested in the Merced Lease, Plaintiffs negotiated with Defendant Brokers to purchase Debtors' rights to the Remaining Leases. Plaintiffs' resulting deal with Debtors was a Designation Rights Agreement for the Purchase of Designation Rights Relating to Leasehold Interests of Orchard Supply Hardware Stores Corporation, Orchard Supply Hardware LLC, and OSH Properties by Alamo Group (the “Designation Rights Agreement”).

The essential terms of the Designation Rights Agreement were that in exchange for $315,000 from Plaintiffs, Debtors would transfer, to Plaintiffs, the right to accept or reject assumption of any of the Remaining Leases for a specified period of time. The Bankruptcy Court scheduled a hearing regarding the proposed sale. One business day before the sale hearing, Defendant Brokers informed Plaintiffs of a competing bid from two individuals, Tom and Joe Gong. The form of the bid was a binding letter of intent offering $1.1 million to purchase rights to only the Merced Lease.

In response, Plaintiffs requested a copy of the Gongs' letter. Plaintiffs allege that Defendant Brokers refused to provide a copy unless Plaintiffs agreed to sign a nondisclosure agreement. The nondisclosure agreement allegedly prevented Plaintiffs from contacting the Gongs prior to the sale hearing. Accepting the nondisclosure agreement, Plaintiffs reviewed the letter of intent. Plaintiffs' Complaint states, “the LOI, which on its face, appeared to be legitimate, and which coupled with the Defendant Brokers' representations, led Plaintiffs to believe that the Gongs had done sufficient due diligence on the property, that the Gongs' deal with Debtors would work ...” 6

Facing the competing offer, Plaintiffs increased their bid to $1.2 million for rights to all of the Remaining Leases. Debtors accepted the new price, and the Designation Rights Agreement was amended accordingly. On October 21, 2013, the Court approved a sale based on the terms of the Amended Designation Rights Agreement.

Plaintiffs now allege that the Gongs' competing bid was a sham transaction. According to Plaintiffs, Defendant Brokers “engaged in a scheme to drive their commissions up by instructing the [Gongs] to submit an exponentially greater bid ...” 7 Plaintiffs allege that they contacted the Gongs after the sale had gone through, and found that the Gongs had done little due diligence regarding the Merced Lease. The proposed deal with the Gongs was not feasible, Plaintiffs claim, “since the Gongs would be unable to convert the Merced Lease property for use with their own business.” 8 Plaintiffs allege that the

[529 B.R. 829]

Gongs submitted the bid entirely at the instruction of Defendant Brokers.

Plaintiffs further allege that Defendant Brokers intentionally misrepresented certain details about the Gongs' counteroffer. Purportedly, Defendants said that the letter of intent was unsolicited and that Defendants did not have any previous contact with the Gongs. These statements were made directly in response to Plaintiffs' questions. Plaintiffs, however, concede that the terms of the Designation Rights Agreement did not prohibit another buyer from outbidding Plaintiffs.

Plaintiffs state that they relied on Defendants' alleged misrepresentations in increasing their bid. Specifically, Plaintiffs would have not made the higher offer if they had known of Defendants' earlier communications with the Gongs. Plaintiffs instead would “have let the proposed $1.1 deal with the Gongs fall though, and [revisited] the original $315,000 offer with Debtors, which Debtors would have accepted.” 9 Plaintiffs state that, at all relevant times, each Defendant acted as the agent or employee of the other Defendants and did all things alleged within the scope and course of such agency or employment. Further, Plaintiffs state that each Defendant authorized and ratified the actions of the other Defendants.

On March 26, 2014, Plaintiffs filed this adversary Complaint for fraudulent misrepresentation. On May 19, 2014, Defendants filed a Motion to Dismiss Plaintiffs' Complaint under Federal Rule of Civil Procedure 12(b)(6). Defendants offer several supporting theories, including that Plaintiffs fail to state a claim for common law fraud under Delaware law. The Court agrees that Plaintiffs fail to plead the necessary elements of a Delaware fraud claim, and therefore narrows its ruling to this particular issue.

LEGAL DISCUSSION A. Motion to Dismiss Standard

A motion under Rule 12(b)(6)10 serves to test the sufficiency of the factual allegations in the plaintiff's complaint. 11 “Standards of pleading have been in the forefront of jurisprudence in recent years.” 12 With the Supreme Court's recent decisions in Bell Atlantic Corp. v. Twombly13 and Ashcroft v. Iqbal,14 “pleading standards have seemingly shifted from simple notice pleading to a more heightened form of pleading, requiring a plaintiff to plead more than the possibility of relief to survive a motion to dismiss.” 15

In Iqbal, the Supreme Court makes clear that the Twombly “facial plausibility” pleading requirement applies to all civil suits in the federal courts.1...

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