Pinnacle IV, L.P. v. Cyberlabs AI Holdings Ltd., C.A. No. N23C-04-021 MAA CCLD (Del. Super. July 11, 2024)
Who can be held liable for a fraudulent statement is often a key issue in fraud claims. In this decision from the Superior Court of Delaware’s Complex Commercial Litigation Division, the Court found that a lack of an agency relationship prevented the imputation of fraudulent statements to the seller of a business.
The defendants purchased a company from the plaintiff, a venture capital firm. When the buyers allegedly discovered fraudulent conduct at the company committed by its founders, they stopped making payments. After the seller brought suit, the buyers counterclaimed for fraud.
The seller moved to dismiss the counterclaim because the allegations did not attribute any alleged fraudulent acts to it (i.e., the owner), but rather to the founders who managed the company’s operations, and who were not parties to the litigation. In response, the buyers argued that there was an agency relationship between the seller and founders. Specifically, they argued that they had sufficiently alleged an agency relationship because the seller (1) owned the company; (2) put pressure to push through a sale of the company; and (3) had “hands-on” involvement with the company’s management. The Superior Court rejected this argument, observing that “an agency relationship does not sprout from the ground of total ownership or alignment of economic interests alone.” None of the buyers’ allegations supported an inference that the seller controlled the founders or even was aware of their alleged fraudulent conduct. Accordingly, the Court dismissed the buyers’ fraud claim.
