CMS Investment Holdings, LLC v. Castle

COURT OF CHANCERY
OF THE
STATE OF DELAWARE

TAMIKA R. M ONTGOMERY-REEVES New Castle County Courthouse
VICE CHANCELLOR 500 N. King Street, Suite 11400
Wilmington, Delaware 19801-3734

Date Submitted: May 20, 2016
Date Decided: August 19, 2016

Seth A. Niederman, Esquire Rolin P. Bissell, Equire
Carl D. Neff, Esquire Richard J. Thomas, Esquire
Wali W. Rushdan II, Esquire Julia B. Ripple, Esquire
Fox Rothschild LLP Young Conaway Stargatt & Taylor LLP
919 North Market Street Rodney Square
Suite 300 1000 North King Street
Wilmington, DE 19801 Wilmington, DE 19801

Michael J. Barrie, Esquire
Stephen M. Ferguson, Esquire
Benesch, Friedlander, Coplan &
Aronoff LLP
222 Delaware Avenue, Suite 801
Wilmington, DE 19801

RE: CMS Investment Holdings, LLC v. Lawrence E. Castle, et al.
Civil Action No. 9468-VCMR

Dear Counsel:

This Letter Opinion addresses the third-party defendants’ motions to dismiss

the third-party plaintiffs’ amended third-party complaint. For the reasons stated

herein, the third-party defendants’ motions are granted.
CMS Investment Holdings, LLC v. Castle
C.A. No. 9468-VCMR
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I. BACKGROUND
This action arises out of the collapse of RP Holdings Group, LLC (“RPH” or

the “Company”), which provided non-legal administrative services to law firms

and their mortgage lender clients in connection with mortgage foreclosures.

On March 25, 2014, CMS Investment Holdings, LLC (“CMS Investment”)

filed a complaint in this action against certain defendants, including Lawrence E.

Castle, LEC Holdings, LLC, and The Castle Law Group, LLC (collectively, the

“Castle Parties”). Then, on August 11, 2015, the Castle Parties filed their own

third-party complaint (the “First Complaint”) against the following third-party

defendants: FTVentures III, LP, FTVentures III-N, LP, and FTVentures III-T, LP,

FTVentures Management III, LLC, FTV Management Company, L.P., Richard

Garman, Chris Winship, Bob Huret, Eric Byunn, Jim Hale, Benjamin Cukier, and

Brad Bernstein (collectively, the “FTV Defendants”); and the Estate of Michael

Bruder, Anthony Knight, and Ken Manqueros (collectively, and together with the

FTV Defendants, the “Third-Party Defendants”). The Castle Parties filed an

amended third-party complaint on January 15, 2016 (the “Amended Complaint”)

against the Third-Party Defendants, asserting claims for breach of fiduciary duty,

aiding and abetting breach of fiduciary duty, tortious interference with contractual
CMS Investment Holdings, LLC v. Castle
C.A. No. 9468-VCMR
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relations, civil conspiracy, and fraudulent and active concealment of material

information.

On January 22 and January 29, 2016, the FTV Defendants and Knight and

Manqueros, respectively, filed motions to dismiss the Amended Complaint.1 The

Third-Party Defendants advance four bases on which the Amended Complaint

should be dismissed: lack of personal jurisdiction, failure to state a claim upon

which relief can be granted, failure to comply with Court of Chancery Rule 23.1,

and unreasonable delay in bringing the Amended Complaint—i.e., laches.2

Because I conclude that the Castle Parties’ claims are barred by laches, I need not

address the Third-Party Defendants’ other proposed grounds for dismissal.

II. ANALYSIS
The standard of review for dismissal pursuant to Rule 12(b)(6) is well

established. A motion to dismiss will be denied if a complaint’s well-pled factual

allegations would entitle the plaintiff to relief under any reasonably conceivable set

of circumstances.3 The Court accepts all well-pled facts as true and draws all

1
Although the Estate of Michael Bruder is named as a Third-Party Defendant, that
Estate is unrepresented and was not included in either of the motions to dismiss.
2
See FTV Defs.’ Opening Br. 2-6; Knight & Manqueros Defs.’ Opening Br. 9.
3
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.2d 531, 537
& n. 13 (Del. 2011).
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reasonable inferences in favor of the plaintiff.4 The Court, however, need not

accept conclusory allegations unsupported by specific facts or draw unreasonable

inferences.5

Under Delaware law, laches generally bars a cause of action if a plaintiff

waited an unreasonable length of time before asserting the claim and that delay

unfairly prejudiced the defendant.6 The traditional laches analysis requires the

Court to determine whether a defendant can show three elements: “first,

knowledge by the claimant; second, unreasonable delay in bringing the claim; and

third, resulting prejudice to the defendant.”7 Because equity generally follows the

law, however, “a party’s failure to file within the analogous period of limitations

will be given great weight in deciding whether the claims are barred by laches.” 8

As such, “when claims are barred by a controlling statute of limitations, a court of

equity need not engage in a traditional laches analysis.”9 Instead, where, as here, a

4
Id.
5
Price v. E.I. duPont de Nemours & Co., Inc., 26 A.3d 162, 166 (Del. 2011).
6
Bean v. Fursa Capital P’rs, LP, 2013 WL 755792, at *4 (Del. Ch. Feb. 28, 2013).
7
Whittington v. Dragon Gp., L.L.C., 991 A.2d 1, 8 (Del. 2009) (citation omitted).
8
Id. at 9 (citing Adams v. Jankouskas, 452 A.2d 148, 157 (Del. 1982)).
9
State ex rel. Brady v. Pettinaro Enters., 870 A.2d 513, 527 (Del. Ch. 2005).
CMS Investment Holdings, LLC v. Castle
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plaintiff brings equitable and legal claims seeking only legal relief, the Court “will

bar claims outside the limitations period absent tolling or extraordinary

circumstances,”10 even in the absence of demonstrable prejudice.11

The parties agree that each of the Castle Parties’ claims is governed by a

three-year statute of limitations period. And, the Amended Complaint alleges that

the Third-Party Defendants’ most recent misconduct occurred in January 2012.

Consequently, to remain within the three-year statute of limitations period, the

Castle Parties must have brought their claims by January 2015.12 Because the

Castle Parties filed the First Complaint on August 11, 2015, the Amended

Complaint’s claims fall outside of the applicable limitations period. Thus, “absent

tolling or extraordinary circumstances,” the Castle Parties’ claims are barred by

laches.13

10
Kraft v. WisdomTree, Invs., Inc., 2016 WL 4141112, at *10-11 (Del. Ch. Aug. 3,
2016).
11
In re Sirius XM S’holder Litig., 2013 WL 5411268, at *4 (Del. Ch. Sept. 27, 2013)
(“After the statute of limitations has run, defendants are entitled to repose and are
exposed to prejudice as a matter of law by a suit by a late-filing plaintiff who had
a fair opportunity to file within the limitations period.”).
12
In re Coca-Cola Enters., Inc., 2007 WL 3122370, at *5 (Del. Ch. Oct. 17, 2007)
(“Under Delaware law, a plaintiff’s cause of action accrues at the moment of the
wrongful act-not when the harmful effects of the act are felt-even if the plaintiff is
unaware of the wrong.”).
13
Kraft, 2016 WL 4141112, at *11.
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The Castle Parties cite to IAC/InterActiveCorp v. O’Brien for the proposition

that laches should not bar a claim when “(1) the plaintiff had been pursuing his

claim, through litigation or otherwise, before the statute of limitations expired; (2)

the delay in filing suit was attributable to a legal determination in another

jurisdiction; and (3) the defendant was aware of, or participated in, any prior

proceedings.”14 According to the Castle Parties, just as in O’Brien, extraordinary

circumstances exist here that warrant avoidance of laches, as they brought

substantially the same claims against the Third-Party Defendants in Denver County

District Court in November 19, 2014 (the “Colorado State Action”).15 Because the

Colorado State Action was filed well before the three-year limitations period

ended, and because they “spent time, money and effort bringing suit against the

FTV Defendants, awaited determination of the proceeding in Colorado, and

directly participated in the action,” the Castle Parties contend that the analogous

statute of limitations does not bar their claims.16

14
Castle Pls.’ Answering Br. to FTV Defs.’ Mot. to Dismiss 41 (citing 26 A.3d 174,
178 (Del. 2011)).
15
Id., Ex. A.
16
Id. at 41-42 (citing Levey v. Brownstone Asset Mgmt., LP, 76 A.3d 764, 770-71
(Del. 2013) (holding, in part, that “this case involves unusual conditions and
extraordinary circumstances that counsel against applying the analogous statutory
period of limitations to bar [the plaintiff’s] claim” because the plaintiff asserted his
CMS Investment Holdings, LLC v. Castle
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As the Castle Parties acknowledge, however, the Denver County District

Court dismissed the Colorado State Action on June 15, 2015 pursuant to the forum

selection clause in RPH’s LLC agreement (the “Forum Selection Clause”).17 That

Forum Selection Clause “mandat[es] that any disputes relating to the [RPH LLC]

Agreement ‘shall be heard in the state or federal courts of Delaware.’” 18 In

dismissing the Colorado State Action, the Denver County District Court held that

“[u]nder the [Forum Selection Clause], Plaintiff is required to litigate its claims in

state or federal court in Delaware.”19 As the Delaware Superior Court held in

Huffington v. T.C. Group, LLC in the context of deciding whether to apply the

equitable doctrine of judicial estoppel in the plaintiff’s favor:

One must play fair to ask for fairness. Huffington
deliberately ignored a clear and unambiguous forum
selection clause in the Subscription Agreement and filed

claim in another action “before the analogous three-year statute of limitations
expired”); Stephen G. Perlman, Rearden LLC v. Vox Media, Inc., 2015 WL
5724838, at *13 (Del. Ch. Sept. 30, 2015) (declining to apply laches because
“Plaintiffs did pursue their claim diligently and in good faith before the statute of
limitations expired”)).
17
Id. at 37; Order Granting FTV Defs.’ Mot. to Enforce the Contractual Forum
Selection Clause in RP Holdings’ LLC Agreement, LEC Hldgs. LLC v. FTV
Capital et al., 2014CV34398 (Denver Cty. Dist. Ct. June 15, 2015) (“Colorado
State Decision”).
18
Colorado State Decision, Attach. at 2.
19
Id. at 1.
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suit in his home state of Massachusetts. Having been
dismissed there, because of the forum selection clause, he
now asks this Court to ignore the express language of its
borrowing statute and apply the Massachusetts statute of
limitations so his claims are not time-barred.
Huffington’s argument does not comport with the
principles of equity and fairness. Huffington consciously
decided to ignore the forum selection clause and file his
claim in another jurisdiction. He then chose to appeal the
dismissal. He consciously decided not to file his suit in
Delaware first. The Court will not invoke the equitable
doctrine of judicial estoppel to now save him from the
consequences of his strategic decisions in that regard.20
Further, in Carlyle Investment Management L.L.C. v. National Industries Group

(Holding), this Court applied the same principle in the context of enforcing a

forum selection clause, which subsequently resulted in the plaintiff’s claim being

time-barred.21 The facts here demand the same outcome. The Castle Parties

brought the Colorado State Action despite the “unambiguous, valid, and

enforceable” Forum Selection Clause, which ultimately precipitated that Action’s

20
2012 WL 1415930, at *6 (Del. Super. Apr. 18, 2012).
21
2012 WL 4847089, at *11 (Del. Ch. Oct. 11, 2012) (“Here, National deliberately
chose not to sue in the contractually proper forum, and failed to take repeated
chances to raise its claims in a timely manner in Delaware despite knowing that
Carlyle intended to enforce the forum selection clause. National gambled and lost.
There is nothing unreasonable about enforcing the forum selection clause against
National, because any harm it has suffered is entirely self-inflicted.”), aff’d, 67
A.3d 373 (Del. 2013).
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dismissal.22 Having chosen to disregard that clause and having made the decision

to file initially in Colorado rather than in the parties’ bargained-for jurisdiction, the

Castle Parties cannot now present the Colorado State Action as a basis for avoiding

application of laches.

In another attempt to avoid application of the principle articulated in both

Huffington and Carlyle, the Castle Parties point out that before they filed the

Colorado State Action, CMS Investment—which the Amended Complaint alleges

is controlled by the FTV Defendants—filed its own action against the Castle

Parties in the United States District Court for the District of Colorado (the

“Colorado Federal Action”).23 As such, the Castle Parties argue that the FTV

Defendants, through CMS Investment, “open[ed] the door to litigation in Colorado,

essentially taking the position through the filing of this complaint that these claims,

which otherwise would be triggered through the RPH LLC agreement, are suited

for litigation in Colorado.”24 Yet, CMS Investment’s complaint in the Colorado

Federal Action alleged “a breach by the [Castle Parties] of an independent

22
Colorado State Decision, Attach. at 2.
23
See Oral Arg. Tr. 59-60; Complaint & Jury Demand, CMS Inv. Hldgs., LLC v.
Castle, Case 1:14 cv 01814 (D. Colo. June 30, 2014) (“Colorado Federal Action
Compl.”).
24
Oral Arg. Tr. 60.
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agreement, not the RPH LLC agreement, but a securities purchase agreement”

without a forum selection clause.25 Further, the agreement at issue “included an

arbitration clause requiring claims to be arbitrated in New York,” and CMS

Investment only brought that action after the Castle Parties “refused to participate

in that arbitration in New York.”26 Therefore, CMS Investment’s complaint in the

Colorado Federal Action undermines the Castle Parties’ position because rather

than evidencing a willingness by the FTV Defendants to litigate issues related to

RPH’s LLC agreement in Colorado, it alleges another instance in which the Castle

Parties attempted to evade their venue-related contractual obligations.

The Castle Parties note that “Delaware law allows the statute of limitations

to ‘be tolled if a defendant engaged in fraudulent concealment of the facts

necessary to put a plaintiff on notice of the truth.’”27 The Castle Parties allege that

“the Third-Party Defendants fraudulently concealed their scheme to weaken and

destroy RPH” and, therefore, “[i]t was not until well after RPH’s destruction that

the Castle Parties had reason to believe that misconduct, rather than business

25
Id. at 93; accord Colorado Federal Action Compl.
26
Oral Arg. Tr. 93; accord Colorado Federal Action Compl.
27
Castle Pls.’ Answering Br. to FTV Defs.’ Mot. to Dismiss 42 (quoting In re Dean
Witter P’ship Litig., 1998 WL 442456, at *5 (Del. Ch. July 17, 1998), aff’d, 725
A.2d 441 (Del. 1999)).
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efficiency issues, were in fact to blame for the failure.”28 The Amended

Complaint, however, fails to plead “the circumstances constituting fraud . . . with

particularity.”29 While the Amended Complaint alleges broadly that certain of the

Third-Party Defendants made false statements to the Castle Parties in furtherance

of the Third-Party Defendants’ “scheme” to ruin RPH for their own benefit, 30 the

Castle Parties make no effort to demonstrate when they discovered such false

statements or how those statements contributed to their delay in bringing the First

Complaint.31 In other words, even if the Third-Party Defendants did make

fraudulent statements, the Castle Parties have not indicated how those statements

“prevent[ed] [them] from gaining knowledge of the facts” necessary to put them on

“the trail of inquiry.”32 Thus, because the First Complaint was filed after the

28
Castle Pls.’ Answering Br. to FTV Defs.’ Mot. to Dismiss 42.
29
Ct. Ch. R. 9(b); see also Boeing By Levit v. Shrontz, 1992 WL 81228, at *3 (Del.
Ch. Apr. 20, 1992) (“The allegations of fraudulent concealment necessary to toll
the statute of limitations must be set forth with the particularity required
by Chancery Court Rule 9(b).”).
30
See Am. Compl. ¶¶ 135-140.
31
See Bean, 2013 WL 755792, at *6 (“If a prima facie basis for laches exists from
the face of the complaint, the plaintiff bears the burden to plead specific facts to
demonstrate that the analogous statute of limitations was tolled.” (citing Dean
Witter, 1998 WL 442456, at *6)).
32
Dean Witter, 1998 WL 442456, at *5.
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relevant three-year limitations period and the Castle Parties failed to identify a

tolling doctrine or extraordinary circumstances that suffice to avoid application of

laches, I hold that their claims are time-barred.

III. CONCLUSION
For the reasons stated above, the Third-Party Defendants’ motions to dismiss

are granted.

IT IS SO ORDERED.

Sincerely,

/s/Tamika Montgomery-Reeves

Vice Chancellor

TMR/jp