N. Am. Commc'ns, Inc. v. Herman, CIVIL ACTION NO. 3:17-157

• Decision Date: 11 May 2018
• Docket Number: CIVIL ACTION NO. 3:17-157
• Parties: 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.
• Court: U.S. District Court — Western District of Pennsylvania

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.

CIVIL ACTION NO. 3:17-157

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA

May 11, 2018

JUDGE KIM R. GIBSON

MEMORANDUM OPINION

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 History¹

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 decision-making 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 stoppedpaying 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. Twombly, 550 U.S. 544, 555 (2007) (quoting Fed. R. Civ. P. 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." Icjbal, 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 theassumption 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...