Expotech Eng'g, Inc. v. Cardone Indus., Inc.

EXPOTECH ENGINEERING, INC., Plaintiff, v. CARDONE INDUSTRIES, INC., Defendant/Counterclaim Plaintiff, v. EXPOTECH ENGINEERING, INC.,ROD GHANI, MARSHALL HOSEL Counterclaim-Defendants.

CIVIL ACTION NO. 19-1673

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA

April 7, 2020

MEMORANDUM OPINION

This case is about a business deal gone sour - and then some. It stems from an agreement that Defendant Cardone Industries, Inc. entered into with SAP America, Inc. whereby SAP was to provide Cardone with Enterprise Resource Planning ("ERP") software, systems and technology. Cardone sought vendors to assist it with its implementation and chose Plaintiff, Expotech Engineering, Inc.. In February 2016, Cardone and Expotech entered into a Consulting Services Agreement ("CSA") whereby Expotech was to provide the agreed upon services and Cardone was to pay for those services. That is, alleges Expotech, until Cardone, did not.

In a one count breach of contract lawsuit, Expotech claims that Cardone owes it north of a million dollars. This opinion is not, however, about that single breach of contract claim. Rather, it concerns the Counterclaim Cardone has brought against Expotech, Rod Ghani (Expotech's principal as well as its sole shareholder), and Marshall Hosel (who was Cardone's Vice President of Finance at the time the CSA was negotiated and signed). Unbeknownst to Cardone, Hosel and Ghani knew each other before Cardone and Expotech began negotiating the CSA; the two conducted business transactions with each other in the past and companies at which Hosel previously held management positions had contracts with Expotech. Cardone alleges that Hosel understood Expotech was not qualified to perform the CSA, but aggressively championed for it to receive the contract because he was bribed by Expotech and Ghani to do so. Over the course of two years, Expotech deposited $817,762.92 into Hosel's bank account.

The allegations in Cardone's Counterclaim involve a commercial bribery scheme, portray Expotech as a sham corporation for Ghani's monetary benefit, describe Ghani commingling his affairs with Expotech and his many business entities, and contend that Expotech misrepresented its ability to handle the SAP ERP implementation project, failed to perform the work that it had agreed it would do, and stopped work on the project before the work was completed.

In its Counterclaim, Cardone sues Expotech for two counts of breach of contract, as well as claims for breach of warranty of workmanlike performance, breach of warranty of merchantability, and breach of fiduciary duty and seeks a declaratory judgment against Expotech.¹ It also sues Expotech, Ghani, and Hosel for unjust enrichment, conversion, violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), and for a conspiracy to violate RICO, as well as for civil conspiracy. Cardone also filed a separate lawsuit against Hosel (now consolidated with this case and arising from the same set of interactions) setting forth two counts of breach of contract, as well as counts for fraud in the inducement and breach of fiduciary duty.

Expotech and Ghani ("Counterclaim Defendants") jointly move to dismiss all counts of the Counterclaim pursuant to Federal Rule of Civil Procedure 12(b)(6). Hosel moves under Rule 12(b)(6) to dismiss all counts made in the Counterclaim against him, moves under Rule 12(e) for a more definite statement of the RICO counts, and moves under Rule 12(b)(6) to dismiss thefraud in the inducement and breach of fiduciary duty counts from Cardone's Complaint against him.

I. LEGAL STANDARD

To survive a motion to dismiss, the Counterclaim must contain "sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotations omitted). The claims are construed in the light most favorable to the non-moving party. Warren Gen. Hosp. v. Amgen, Inc., 643 F.3d 77, 84 (3d Cir. 2011). Factual allegations must be separated from legal conclusions and recitations of the element of the claim, as legal conclusions are not sufficient to state a plausible claim. Iqbal, 556 U.S. at 678. At the motion to dismiss stage, all well-pleaded allegations in the Counterclaim are accepted as true and all reasonable inferences are drawn in favor of Cardone, the non-moving party. See In re Rockefeller Ctr. Properties, Inc. Sec. Lit., 311 F.3d 198, 215 (3d Cir. 2002). Thus, the pleading standard on a motion to dismiss is favorable to the non-moving party which has not yet had the benefit of discovery. Accordingly, "a well-pleaded [counterclaim] may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and 'that a recovery is very remote and unlikely.'" Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007).²

II. ANALYSIS

A. Piercing the Corporate Veil

As a preliminary matter, Cardone contends that Expotech is a "mere façade" designed to mislead potential customers about Expotech's qualifications in order to win contracts it is not equipped to perform. It alleges that neither Ghani nor Expotech's employees have sufficient skill related to SAP implementation, which is what they were hired to perform. According to Cardone, Expotech did not even receive its SAP certification until after it received the CSA. And despite representations otherwise, Expotech has never performed an SAP implementation project of the size and scope of that which was set forth in the CSA.

Counterclaim Defendants seek dismissal of any counts against Ghani premised on this theory, arguing that the veil piercing allegations are insufficient to pass muster on a motion to dismiss standard.

Although it is "notoriously difficult" to pierce the corporate veil, Pearson v. Component Tech. Corp., 247 F.3d 471, 485 (3d Cir. 2001), Cardone proposes that this is one of those rare sets of circumstances where it is must be done. The corporate form was created to allow shareholders to invest in companies without incurring personal liability for the corporation's actions. Id. "The 'classical' piercing of the veil is an equitable remedy whereby a court disregards the existence of the corporation to make the corporation's individual principals and their personal assets liable for the debts of the corporation." Trustees of Nat. Elevator Indus. Pension, Health Benefit & Educ. Funds v. Lutyk, 332 F.3d 188, 192 (3d Cir. 2003) (citing In re Blatstein, 192 F.3d 88, 100 (3d Cir. 1999)). This only occurs when it is necessary to "prevent fraud, illegality, or injustice, or when recognition of the corporate entity would defeat public policy or shield someone from liability for a crime," Pearson, 247 F.3d at 485, and "the debtorcorporation is little more than a legal fiction." Lutyk, 332 F.3d at 194.

A holistic, fact-specific inquiry into multiple factors - in Pennsylvania, those factors include: "gross undercapitalization, failure to observe corporate formalities, nonpayment of dividends, insolvency of debtor corporation, siphoning of funds from the debtor corporation by the dominant stockholder, nonfunctioning of officers and directors, absence of corporate records, and whether the corporation is merely a facade for the operations of the dominant stockholder,"³ Pearson, 247 F.3d at 484-85 - must be made.⁴

1. Corporate Formalities

Although failure to observe corporate formalities, such as holding scheduled meetings and keeping accurate records, generally weighs in favor of piercing the veil, see E. Minerals & Chems. Co. v. Mahan, 225 F.3d 330, 333 n.7 (3d Cir. 2000), when the entity at issue is a closely held corporation, informalities are considered to be of less importance. Zubik, 384 F.2d at 271 n.4. Cardone makes several allegations related to Expotech's purported failure to observe formalities. Expotech's principle place of business is identified as Ghani's home address in Arizona (which is also the principle place of business for sixteen other limited liability companies in which he has an ownership interest), even though Expotech is not licensed to dobusiness in Arizona. Further, Expotech's registered corporate address remains Ghani's former residence in Ohio, which was sold in 1996.⁵ Next, Ghani is the only officer or director of Expotech. And, Expotech does not hold shareholder meetings or otherwise keep proper corporate records.

But, if Expotech is an Ohio corporation, it complies with Ohio law that permits a closely held corporation to dispense with annual shareholder meetings. See Ohio Rev. Code Ann. § 1701.591(C)(12). And, if Pennsylvania law applies to this issue, as the CSA suggests it does, despite Ghani being the sole stockholder, it would still typically be viewed as an independent entity under Pennsylvania law. Lumax Indus., Inc. v. Aultman, 669 A.2d 893, 895 (Pa. 1995). And as a closely held corporation, the informalities are of less importance. Zubik, 384 F.2d at 271 n.4.

Nevertheless, Cardone's allegations related to corporate formalities do some work in determining whether to pierce the veil. Even though Ghani is not required to hold shareholder meetings or have a functioning board of officers, the alleged slippage regarding where Expotech is registered and where it is authorized does raise an eyebrow.

2. Intermingling and Siphoning Funds

Cardone makes numerous allegations related to intermingled funds. In December 2016, Expotech transferred $1.5 million from its checking account to a securities brokerage and investment advisory services firm - which funds were not reported on either Expotech's or Ghani's tax returns in 2016 or 2017. Throughout 2016 and 2017, Expotech made three payments totaling $1.8 million to an insurance company for property related to one of Ghani's other businesses. In May 2017, Expotech made two payments totaling $25,000 described as "Resale-Tempe Maaco." Tempe Maaco is the name of one of Ghani's businesses. In June 2017, Expotech paid $1.3 million from its...