Premier Technology Advisors, LLC v. Procure IT LLC et al.
A Closer Look at the Interplay Between Pleading Fraud and Breach of Contract Claims
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The Delaware Superior Court’s recent decision to grant in part and deny in part a motion to dismiss in the case of Premier Technology Advisors, LLC v. Procure IT LLC (fka Krewe Acquisition Company 1, LLC and Krewe Advisory Group, LLC is a good illustration of the interplay between pleading fraud and breach of contract claims within the same complaint.
The below provides a summary of the background, issues, the parties’ arguments and the court’s decision, together with some takeaways to consider for companies who may face similar situations in the future.
Background
In March 2023, Procure IT, LLC (“Procure IT”) purchased substantially all of the assets of Premier Technology Advisors, LLC (“Premier”) for $10 million. The purchase price was in the form of a promissory note, through which Procure IT would make monthly payments to Premier until March 2028 and whose terms provided for acceleration of the entire unpaid principal amount if an Event of Default occurred (including failure by Premier to make any monthly payment thereunder when due).
The parties also entered into a Master Services Agreement (the “MSA”) under which Premier and Jordan Solender (“Solender”), a Premier executive, would provide certain management services to Procure IT. The MSA contained, among other things, a non-compete obligation.
After learning new facts about the business’s customer relationships which were at odds with what Premier had represented to Procure IT prior to closing, Procure IT accused Premier of fraud and indicated that it would stop making payments under the promissory note. Premier then brought a lawsuit in Delaware claiming breach of contract. In response, Procure IT counter-claimed that they were fraudulently induced by Premier into entering the transaction as a result of Premier misrepresenting the financial health of the business and its key customer relationships.
Issues
The main issue faced by the Delaware Superior Court was whether and in what context can a fraud claim co-exist together with a breach of contract claim.
Parties’ Arguments
Procure IT’s main arguments were as follows:
Fraud: Premier knowingly misrepresented material facts about its business during the sale process, including:
That its top 3 customers (HTL, STCC, ADP) were at risk of ending their relationship with Premier, which Premier concealed and instead represented that all was well with its top customers, that no material adverse event was expected and that Premier’s financial documents were accurate representations of its finances; more specifically:
That HTL was in dire financial conditions and could not pay its invoices or continue its relationship with Premier, instead leading Procure IT to believe that HTL was a viable top customer;
That despite knowing that STCC was ending its relationship with Premier, it portrayed such customer to Procure IT as a dependable one; and
That Premier had committed to providing a Sales Development Representative to ADP, which it failed to disclose to Procure IT pre-closing, and when it failed to fulfill that commitment post-Closing, it caused ADP to threaten litigation and terminate the contract.
That its contracts with Century 21 and 1st Voice weren’t closed at the time of the acquisition despite being included in the list of valid and existing contracts as part of the Asset Purchase Agreement.
Breach of contract: By making certain representations about its customers and its financial statements, which were not true, Premier breached the Asset Purchase Agreement. In addition, Procure IT also claimed that Solender breached his non-compete obligations under the MSA (as well as under a separate Non-Competition Agreement he had signed with Procure IT) by running a separate competing business which prevented him from fulfilling his obligations.
In response, Premier argued the following:
Fraud: Procure IT’s fraud claims are precluded based on the economic loss rule which prevents a party from bootstrapping a claim for breach of contract into a fraud claim merely by alleging that a party to a contract never intended to perform its obligations. In addition, Procure IT did not suffer any damages (which is a necessary requirement for making a fraud claim) because it did not seek to rely on the downward purchase price adjustments available under the Asset Purchase Agreement. Finally, with respect to the Century 21 and 1st Voice contracts, the expected revenue related to these contracts were not included in the purchase price, and therefore cannot be the basis for fraud.
Breach of Contract: Procure IT breached its obligations under the Asset Purchase Agreement when it failed to make the requisite payments under the promissory note. Further, Solender was not in breach of its non-compete obligations under the MSA or the Non-Competition Agreement because these contracts included an exception in the case where Procure IT was in default under the promissory note, which was the case here.
Court’s Decision
Procure IT’s fraud claims survive the motion to dismiss
The Court started its analysis with a reminder that fraud claims must be pleaded with particularity under Rule 9(b), which the Court found Procure IT had satisfied. Noting that satisfying Rule 9(b) is functionally less burdensome in the contractual fraud context since the circumstances of the fraud are almost entirely evidenced by the contract itself, it found that Premier made various representations regarding the stability of its relationship with top customers and accuracy of its financial position, while knowing its top three customers were at risk of ending their relationship or being unable to pay their bills. Specifically, with respect to each of the top 3 customers, Procure IT provided sufficient evidence at this stage of the lawsuit (in the form of internal emails within the Premier team, etc.) to raise a reasonable inference that Premier knew its representations in the contract were materially misleading. The Court added that despite the fact that the expected revenue from the Century 21 and 1st Voice contracts were not explicitly included in the purchase price, it was a fair inference that the prospect of additional future revenue would induce Procure IT to enter into the agreement, and could therefore be the basis for a fraud claim.
Separately, the Court rejected the applicability of the economic loss rule to Procure IT’s fraud claims, relying on precedent which makes clear that when a party seeks rescission of a contract (as opposed to compensatory damages), it is entitled to plead a fraud claim next to a breach of contract claim if he can plead either that (i) the seller knew that the company’s contractual representations were false or (ii) the seller itself lied about a contractual representations. Similarly, it rejected Premier’s inference that Procure IT’s failure to rely on the purchase price adjustments in the Asset Purchase Agreement meant that Procure IT did not suffer any damages.
Procure IT’s breach of contract claims with respect to the MSA and Non-Competition Agreement by Solender do not survive the motion to dismiss
While the Court noted that Procure IT’s claims with respect to breach of representations contained in the Asset Purchase Agreement survived the motion to dismiss, it found that its claims against Solender regarding his alleged breach of the MSA and Non-Competition Agreement did not. Specifically, the Court reasoned that Procure IT’s allegations in that regard were conclusory in nature and did not point to any specific facts, such as how much time Solender devoted to his separate business, how that impacted his work for Procure IT, etc.
In addition, the Court added that since Procure IT’s breach of contract claims were pled in the alternative to its fraud claim, these claims would become unavailable if Procure IT could meet its burden of proof regarding the latter (whereas, if Procure IT was unable to prove fraud, its obligations under the promissory note would still have been in effect and it would have been in breach by withholding payments, in which case Solender would have been able to compete). Since the parties both agree that the MSA and Non-Competition Agreement’s non-compete obligations were not enforceable when Procure IT withheld payment, Solender was free to compete at that point.1
The Court rejected Procure IT’s attempt to rely on a more general provision in the MSA which provided that the non-compete obligations survived the termination of the agreement, noting that it was settled that a more specific provision (i.e., non-applicability of the non-compete obligation in the event of a default under the promissory note) prevails over a more general one.
Takeaways
This decision illustrates that the decision whether to plead (and if so, how to plead) breach of contract and fraud claims concurrently with each other within the same complaint can be a difficult exercise. As this case shows, there are specific circumstances where fraud claims can be pled alongside breach of contract claims without running afoul of the economic loss rule. However, bringing a fraud claim may limit a plaintiff from advancing other theories for other related matters (including breach of contract of ancillary agreements, as was the case here). To complicate matters further, since fraud is an affirmative defense, it is important to remember that it must be pled in the complaint or first response thereto (otherwise, it is waived).
As such, if certain circumstances may give rise to a fraud claim, plaintiffs should make sure to carefully craft their complaints to avoid inadvertently waiving this defense, while ensuring it is pled with sufficient particularity (which includes providing sufficient facts supporting the time, place and contents of the false representations, the facts that were misrepresented, the identity of the person making the misrepresentation and what that person gained from it). The Court’s observation that contractual fraud is functionally less burdensome when it comes to satisfying these requirements is noteworthy and should also be taken into account when plaintiffs decide whether to include a fraud claim as part of their complaint.
Finally, the fact that expectation of revenue (even if such revenue was not considered as part of the purchase price) was considered by the Court as sufficient to raise a reasonable inference that this would induce a buyer to enter into a contract is interesting and may give some hope to other buyers who face similar situations (bearing in mind that the other requirements for fraud would all still need to be met for a claim to be successful).
Procure IT argued that these agreements were void because of Premier’s fraud whereas Premier argued that the non-compete covenants within these agreements became ineffective upon Procure IT’s default on the promissory note.