Judge LeGrow Dismisses Bootstrapped Fraud Claim While Allowing Contract Claims to Proceed

June 18, 2020

Publication| Commercial Litigation

In Continental Finance Company, LLC v. ICS Corp., C.A. No. N19C-07-184 AML, Judge LeGrow granted in part and denied in part the defendant’s motion for partial dismissal. The dispute stemmed from an agreement between plaintiff Continental Finance Company, LLC and defendant ICS Corporation regarding the marketing and promotion of credit card products. The agreement required ICS to distribute and promote Continental’s credit card applications through mass-market mailings. In exchange, Continental agreed to reimburse ICS for postage and freight as well as compensate ICS for each credit card account opened as a result of its advertising. The parties’ relationship soured after Continental accused ICS of inflating its postage and freight costs. After ICS refused to repay disputed amounts to Continental or produce documents pursuant to an audit provision, Continental filed suit for breach of contract and fraud. ICS moved to dismiss the fraud claim in its entirety and moved to partially dismiss the breach of contract claim for any damages exceeding the three-year statute of limitations.

Judge LeGrow determined that the fraud claim was not based on an independent duty, but rather was an improper effort to bootstrap a breach of contract claim into a fraud claim. The court concluded that, distinct from a contract, Delaware law requires “a legal duty to support a fraud claim, not a vague reference to a moral duty to be truthful.” Judge LeGrow further concluded that Continental adequately pled that the statute of limitations tolled. The court determined that, based on the record, it could not determine whether Continental had inquiry notice that ICS charged an amount higher than the contracted rate. Further, the court found that Continental had no reason to assume fraudulent activity until it received substantially lower bids from other vendors. Finally, the court determined that Continental was not entitled to attorneys’ fees because the contract did not expressly provide for fee shifting and the bad faith exception did not apply.

Based on these findings, Judge LeGrow granted ICS’s partial motion to dismiss as to Continental’s fraud claim and request for attorneys’ fees. However, the court denied the motion as to the breach of contract claim.

Analysis: Motions seeking to dismiss fraud claims for improper bootstrapping are common. See ITW Global Investments Inc. v. Am. Indus. Partners Capital Fund IV, L.P., 2015 WL 3970908 (Del. Super. June. 2015). This case highlights the specific allegations needed to sustain a concurrent breach of contract claim and fraud claim beyond the pleadings stage. Delaware courts stand firm on the premise that there must be an independent legal duty and independent damages in a well-pled claim for fraud. Further, this case highlights that in breach of contract cases, attorneys’ fees are not readily available unless expressly negotiated for in the parties’ contract.

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