True Gentlemen's Jerky, Inc. v. 1K1V TGJ Holdings, LLC

Background

True Gentlemen’s Jerky, Inc. alleged that 1K1V TGJ Holdings, LLC, One Thousand & One Voices Management, LLC, 1K1V Stormberg, LLC, and Hendrik Jordaan invested in True and later used their financial relationship and influence to advance their own interests.

1K1V TGJ invested $900,000 in True in September 2017 and made three additional investments, bringing the total to $3 million. It received the right to appoint one of True’s five directors, and that director had authority to veto certain transactions, including debt above $75,000.

True and 1K1V Stormberg also invested in Stormberg Foods. True alleged that it had a contractual right to receive notice of, and participate proportionally in, new Stormberg equity issuances. True claimed that it waived those rights under pressure after being told that the Stormberg investment and a proposed $1 million investment in True would otherwise be withdrawn. True’s ownership interest in Stormberg was then diluted after 1K1V TGJ made a follow-on investment.

True further alleged that Defendants later sought to obtain control of True through unfavorable financing terms and interfered with a more favorable financing proposal from King’s Hawaiian. According to True, Defendants threatened litigation, and King’s Hawaiian withdrew its proposal.

True asserted seven claims: breach of fiduciary duty; fraudulent concealment and misrepresentation; intentional interference with prospective economic relations concerning King’s Hawaiian; negligent interference with prospective economic relations concerning King’s Hawaiian; intentional interference with prospective economic relations concerning Stormberg; tortious breach of the implied covenant of good faith and fair dealing; and declaratory relief. True also sought punitive damages for six of the claims.

Legal standard

Defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. The court accepted well-pleaded factual allegations as true and viewed them favorably to True, but it did not accept unsupported legal conclusions. The court also noted that fraud must be pleaded with particularity, including the details of who made the alleged misrepresentation, what was said, when and where it was said, and how it was misleading.

Court’s analysis

Breach of fiduciary duty. The court granted the motion to dismiss this claim. It held that the alleged lender-borrower relationship between True and 1K1V TGJ generally did not create a fiduciary relationship. True’s allegations that it and 1K1V Stormberg were joint venturers were insufficient because the complaint did not allege a right of joint management and control. The right to appoint a director with veto power over certain financing transactions also did not establish the kind of undue control that would create fiduciary duties for Defendants. The court further concluded that True’s actions to obtain additional financing showed, at most, that 1K1V TGJ took advantage of True’s weakened bargaining position, not that Defendants assumed fiduciary duties.

Fraud. The court granted the motion to dismiss the fraud claim. True alleged that Defendants concealed a plan to carry out a hostile takeover and falsely promised to act as a seed-capital investor and business partner. The court found that the seed-capital-investor statement was consistent with the complaint’s allegation that 1K1V TGJ made substantial investments. The complaint also alleged that the terms of the later financing offer were disclosed, and it did not allege facts showing that Defendants had a duty to disclose those terms earlier or that they had planned a hostile takeover when they made the earlier investments. The additional allegations raised in True’s opposition brief also were insufficient because True did not identify a specific promise to make another loan on particular or acceptable terms and did not allege facts showing that the alleged assurances were false.

Implied covenant of good faith and fair dealing. The court granted the motion to dismiss this claim. The court explained that the implied covenant cannot prohibit conduct expressly allowed by a contract or impose duties that the contract assigns to someone else. The complaint acknowledged that the Stormberg Operating Agreement allowed the parties to participate in additional equity issuances, so Defendants’ participation could not itself violate the implied covenant. The complaint also alleged that Stormberg, rather than Defendants, was responsible for providing notice of the issuance. The covenant therefore could not impose that notice obligation on Defendants.

Interference involving Stormberg. The court granted the motion to dismiss True’s intentional-interference claim concerning Stormberg. True did not allege that Defendants’ follow-on investment was independently wrongful or unlawful. The fact that the investment diluted True’s ownership did not make the investment wrongful, particularly because True had the contractual right to participate in the investment but lacked sufficient capital to do so.

Interference involving King’s Hawaiian. The court stated that Defendants had shown that True did not allege enough facts to support an interference theory based on aiding and abetting a breach of fiduciary duty by Evans. The complaint did not allege facts showing a conflict of interest or improper motive sufficient to overcome the business-judgment rule’s protection for directors’ management decisions. However, True also relied on allegations that Defendants threatened True and King’s Hawaiian with litigation to disrupt the proposed investment. The court stated that Defendants had not shown that those allegations failed to state a claim and therefore denied the motion on that argument. The court nevertheless granted the motion to dismiss the King’s Hawaiian interference claims because True improperly lumped the several defendants together instead of identifying each defendant’s allegedly harmful conduct. The court described that ruling as granted on the grouping ground but otherwise denied.

Declaratory relief. The court granted the motion to dismiss the seventh claim. True sought a declaration placing Defendants’ claims, liens, and security interests behind True’s interests. The court held that equitable subordination was not a viable claim for relief in this case, explaining that the doctrine is a power of federal bankruptcy courts and that True cited no authority supporting its use outside bankruptcy proceedings. The court dismissed this claim without leave to amend.

Punitive damages. The court granted the motion to dismiss True’s request for punitive damages. True supported the request only with legal conclusions that Defendants’ conduct was malicious, oppressive, and despicable. The court held that those conclusions were insufficient.

Disposition

The court dismissed the first through sixth claims, including the punitive-damages request, with leave to amend. It dismissed the seventh claim for declaratory relief without leave to amend. True was ordered to file a first amended complaint within 21 days of the order. The order prohibited adding new parties or claims without prior permission from the district court.