Kronenberg v. Katz

• Decision Date: 19 May 2004
• Docket Number: C.A. No. 19964.
• Citation: 872 A.2d 568
• Parties: William M. KRONENBERG, III, Frank A. Piliero, David M. Rosenberg, and Community Sports Partners, II, LLC, Plaintiffs, v. Samuel P. KATZ, and Community Sports Partners, LLC, Defendants. Samuel P. Katz, and Community Sports Partners, LLC, Counterclaim Plaintiffs, and Entersport Capital Advisors, Inc., Additional Counterclaim Plaintiff, v. William M. Kronenberg, III, Frank A. Piliero, David M. Rosenberg, and Community Sports Partners, II, LLC, Counterclaim Defendants.
• Court: Court of Chancery of Delaware

872 A.2d 568

William M. KRONENBERG, III, Frank A. Piliero, David M. Rosenberg, and Community Sports Partners, II, LLC, Plaintiffs, v. Samuel P. KATZ, and Community Sports Partners, LLC, Defendants.

Samuel P. Katz, and Community Sports Partners, LLC, Counterclaim Plaintiffs, and Entersport Capital Advisors, Inc., Additional Counterclaim Plaintiff, v. William M. Kronenberg, III, Frank A. Piliero, David M. Rosenberg, and Community Sports Partners, II, LLC, Counterclaim Defendants.

C.A. No. 19964.

Court of Chancery of Delaware, New Castle County.

Submitted: April 23, 2004.

Decided: May 19, 2004.

David C. McBride, Esquire, Martin S. Lessner, Esquire, Jessica S. Davis, Esquire, Young Conaway Stargatt & Taylor, LLP, Wilmington, Delaware, Attorneys for the Plaintiffs.

Gregory V. Varallo, Esquire, C. Malcolm Cochran, IV, Esquire, Kelly A. Green, Esquire, Richards, Layton & Finger, P.A., Wilmington, Delaware, Attorneys for the Defendants, Counterclaim Plaintiffs.

OPINION

STRINE, Vice Chancellor.

Defendant Samuel Katz met plaintiff William Kronenberg in the late 1990s. Kronenberg admired Katz and became a large contributor to Katz's campaign for Mayor of Philadelphia. Eventually, Katz and Kronenberg discussed going into business together. At that time, Katz had businesses—EnterSport Capital Advisors, Inc. ("EnterSport") and American Skating, LLC—that were focused on making money through the stimulation of the construction of community sports facilities such as ice skating rinks. The basic idea was to get communities to fund the construction and for Katz's business entities to operate the facilities, which would be available for use by youth and adult sports leagues and parents wanting to hold birthday parties.

Katz wanted Kronenberg and some of Kronenberg's business associates, plaintiffs Frank Piliero and David Rosenberg, to invest in this business concept through a successor to American Skating. In promoting this idea, Katz knew that Kronenberg was taking the lead for Piliero and Rosenberg and encouraged Kronenberg to share information with them.

During the course of these discussions, Katz highlighted the importance of obtaining independent feasibility studies regarding the viability of certain sports facilities the business would be seeking to develop. One of the reasons the feasibility studies were important was that the business intended for governmental authorities to fund the construction of the sports facilities through the issuance of bonds. The existence of a study—prepared by an independent, credible industry expert—verifying that the projected revenues from the facilities would be sufficient to repay the bonds needed to finance construction was therefore very important.

Another premise of Katz's idea was that he and his existing complement of employees would manage the new venture through EnterSport—which would be the actual co-member of the LLC that was to succeed American Skating, with Kronenberg and the other plaintiffs acting largely as equity investors in the successor LLC who would put up all of the cash equity. In particular, Katz's employee, Mark Robins, was to be a key executive in the venture, acting as the principal operating officer. Katz told Kronenberg and the other plaintiffs good things about Robins and Robins's track record in the industry.

Eventually, Katz's discussions with Kronenberg, Rosenberg, and Piliero led to an agreement, which was formalized in a contract to form defendant Community Sports Partners, LLC. Katz was not a party to the "LLC Agreement" but his entity, counterclaim-plaintiff EnterSport, was. Each of the plaintiffs signed the LLC Agreement and collectively initially invested $2.1 million in Community Sports Partners ("CSP"). Mark Robins became CSP's Chief Operating Officer.

Within two years of the signing of the LLC Agreement, CSP had burned through most of the cash the plaintiffs had invested and it was revealed that Robins had diverted several hundred thousand dollars of CSP's funds to himself. This led to heated discussions among Katz and the plaintiffs. Eventually, this suit was filed.

In this suit, plaintiffs Kronenberg, Rosenberg, and Piliero seek, among other things, rescission of their agreement to invest in CSP. Their basic reasons are two-fold.

First, they allege that the so-called "independent feasibility studies" they were shown when considering whether to invest were not what they purported to be. Rather than being authored by the purportedly independent consultant that supposedly produced the studies, the studies were in fact mostly written by Robins and Katz. Indeed, as to one of the studies shown to the plaintiffs, it appears that the entire study was written by Robins and Katz with no involvement by the third-party consultant. As to another study in which the third party was involved to some extent, the evidence is undisputed that the study was primarily drafted by Robins and Katz, who in fact worked as sub-contractors to draft the study—a fact never revealed to the plaintiffs or other recipients of the study. Indeed, the supposedly independent third party was in fact a party that hoped to be a co-venturer of Katz's and was not being paid like a genuine independent consultant. By any standard, all of the studies were not what they were purported to be—feasibility studies drafted by an independent expert. Rather, they were crafted by Katz and Robins themselves and labeled as having been drafted by a third party. In any academic community, the studies would be considered plagiarism if presented by the third party as its own work product.

In addition, after Robins was found to have diverted funds, it was discovered that he had a long and colorful past, which included numerous criminal convictions and personal bankruptcies, in which he had left even members of his family as unsatisfied creditors. None of this colorful history had been disclosed by either Katz or Robins in the negotiations leading to the LLC Agreement. Instead, Katz presented Robins as a trusted employee with a solid history of industry experience.

The plaintiffs allege that they never would have invested in CSP had they known that the independent feasibility studies were in fact prepared by Robins and Katz, and had they known that Robins was a person with a lengthy criminal record. They seek summary judgment because they contend that the discovery record reveals that there is no material dispute of fact regarding the reasonableness of their reliance on Katz's contrary (or, at the very least, materially misleading) assurances. Under Delaware principles of common law and equitable fraud—and analogous principles of Pennsylvania law—as well as the Pennsylvania Securities Act of 1972 (the "Pennsylvania Securities Act" or "Pennsylvania Act"),¹ the plaintiffs contend that Katz's misleading representations in connection with their investment decision are sufficient to sustain their demand for rescission, regardless of whether Katz knew he was misleading the plaintiffs.

Katz responds to this motion for summary judgment primarily by claiming that a standard integration clause in the LLC Agreement precluded the plaintiffs from reasonably relying upon any statements made by him that were not incorporated within the LLC Agreement itself. Relying on this argument, Katz and his co-defendant CSP themselves seek summary judgment on the plaintiffs' rescission claims.

In this opinion, I grant the plaintiffs' motion for summary judgment on their fraud in the inducement and Pennsylvania Securities Act claims. The independent feasibility studies were, as Katz himself represented, very important to the CSP business concept. CSP had to promote facilities to public officials, for whom the existence of an independent feasibility study would be important in deciding whether to put the public's finances at risk. The fact that the independent feasibility studies were not what they on their face purported to be was obviously material to any reasonable investor considering putting money into CSP and was, on this record, material to the plaintiffs. Had the plaintiffs known that Katz and Robins were, in reality, the primary authors of one of the feasibility studies and the sole authors of another of the feasibility studies, they would never have invested.² Among the obvious reasons this is so is this one: the presentation of such a feasibility study to a public official could expose the presenter to criminal liability for intentionally making a false statement to a public authority.

As to Robins, Katz himself admits that no reasonable person would have invested in CSP knowing of Robins's background. The business premise of CSP depended on credibility. The idea that prospective investors would proceed to put millions of dollars at risk after being told that the COO of the entity and a primary communicator with public authorities would be a person with a criminal record (including felony convictions of recent vintage) who was not forthcoming about his background is impossible to credit. Here, Katz told the plaintiffs orally and in writing things about Robins that led them to believe that Robins was a capable and experienced executive in whom Katz reposed confidence. What Katz never disclosed was Robins's true background, which, to put it mildly, is confidence-shattering and materially inconsistent with Katz's description of him, regardless of whether Katz knew of the true facts.

In view of these and other factors, I have little difficulty in concluding that the plaintiffs would not have invested in CSP had they known the true facts regarding either the independent feasibility studies or Robins.

The more difficult question this opinion addresses is whether the standard integration clause in the LLC Agreement precluded the plaintiffs from reasonably relying on Katz's statements regarding these issues, because those statements were not reflected as representations in the LLC Agreement. I conclude that...