Case Number:?BC667311????Hearing Date:?February 06, 2018????Dept:?309

Dept. 309
BC 667311
Smith, et al. v. American Addiction Centers, Inc., et al.
Feb. 5, 2018

Tentative Rulings:

Demurrer to Amended Complaint

Sustain the demurrer with leave to amend as to Defendant Jerrod Menz.? Sustain the demurrer without leave to amend as to the Fourth Cause of Action for Equitable Fraud.? Overrule the demurrer in all other respects.

Motion to Strike Jury Trial Demand


Demurrer to Amended Complaint

Defendant contends that the demurrer should be sustained as to all plaintiffs other than Patel on the ground that the Amended Complaint does not allege that any other plaintiff learned of the misrepresentations and omissions of defendants and relied on them.? However, Patel is alleged to have acted as the agent of the other plaintiffs, and thus a misrepresentation by defendants relied on by Patel in negotiating the transaction entered into by all plaintiffs gives rise to a claim by those plaintiffs (the principals, who in turn were bound by Patel?s representations on their behalf in negotiating the Agreement).? Indeed, as to the plaintiffs that are not natural persons, the entities can only act through a natural person as agent.? The fact that the recitation of the agency was embodied in the Agreement does not suggest that the agency only was effective from and after the date of the Agreement.? Rather, the recitation in the Agreement is more properly read to affirm an agency that existed in negotiating and in executing the Agreement.

Defendant also contends that the demurrer should be sustained as to all defendants other than Cartwright and Manz on the ground that misrepresentations and omissions are alleged to have been made by those persons only.? Cartwright and Manz, however, are alleged to have had positions as officers in American Addiction Center, Inc., AAC Holdings, Inc. and Sober Media Group, LLC, such that the entity defendants would be liable for the wrongdoing of Cartwright and Manz acting on behalf of those entities.? With respect to defendant Menz, however, there is no allegation that he participated in the negotiations or knew of the representations the others made.??Prairie Capital III, L.P. v. Double E Holding Corp.?(Del.Ch. 2015) 132 A.3d 35, 61, does not support Plaintiff?s position that the liability of defendant Menz has been adequately pleaded.? Hence the demurrer is sustained with leave to amend as to defendant Menz.

Scienter has been adequately pleaded, and therefore the demurrer as to the First Cause of Action and the fraud causes of action is overruled.? The pleading is adequate if one material misrepresentation has been pled with the requisite scienter.? A demurrer must be overruled if any aspect of the cause of action alleges an adequate basis for relief.? With respect to the pre-contract representation by Cartwright and Manz that AAC?s profit margin on its core business of treatment operations was 20-25% (Amended Complaint, paragraph 28), it is adequately alleged with particularity in paragraph 72 of the Amended Complaint that the corporate officers who made this representation knew that it was materially false at the time the statement was made.

With respect to the Fifth Cause of Action for Promissory Estoppel, defendants argue that the promises on which the claim is based are not specific enough to support a claim under Delaware law.? However, the Fifth Cause of Action alleges quite specifically that defendants? promised to reimburse plaintiffs for any loss in stock price after the July 29 announcement and did so to induce plaintiffs Patel and Smith to remain employed by defendant.? This promise is sufficiently specific under the Delaware authorities cited.? Whether it was appropriate for the plaintiffs to rely on this promise in light of the need for approval of such reimbursement by the Board of Directors is a factual issue for trial.

The exclusive remedy provision of the Agreement that defendants contend precludes the promissory estoppel cause of action pertains to claims in connection with any breach of the Agreement.? The promissory estoppel claim arises out of conduct by defendants subsequent to and separate from the Agreement.? The Sixth and Seventh Causes of Action also are not precluded by the exclusive remedy provision of the Agreement because those causes of action sound in fraud, which is expressly excepted from the exclusive remedy provision.

The plaintiffs concede that the Fourth Cause of action for Equitable Fraud cannot stand because it is premised on a fiduciary relationship, which is absent here.? The demurrer as to this cause of action is sustained without leave to amend.

Motion to Strike Jury Trial Demand

The Motion to Strike the jury trial demand is denied.? Some claims that survive demurrer are appropriately tried to a jury.