Kostyszyn v. Martuscelli, et al., C.A. No. 8828-MA (July 14, 2014)

By Annette Becker and Lauren Garraux

On July 14, 2014, Master in Chancery Kim E. Ayvazian issued her draft report in Kostyszn v. Martuscelli, a dispute between the purchasers (“Plaintiffs”) and sellers (“Defendants”) of Paciugo Gelato and Café (the “Business”), an ongoing business which Plaintiffs purchased in December 2011 for a purchase price of $272,500.00.  According to Plaintiffs, their decision to purchase the Business and the purchase price were based on sales information provided to them by Defendants, as well as subsequent statements made by Defendants regarding, among other things, business earnings, on-site sales, catering sales and profits.

In August 2013, Plaintiffs commenced a lawsuit against Defendants in the Delaware Chancery Court alleging that this information and Defendants’ statements were false and misleading, and directly resulted in Plaintiffs both calculating a purchase price that was more than they otherwise would have been willing to pay for the Business and entering into a long-term lease exposing the assets of the Business to risk and the Plaintiffs to personal liability if the Business ultimately failed.  In their amended complaint (the “Amended Complaint”), Plaintiffs asserted claims against Defendants for breach of contract, breach of warranty, indemnification, equitable fraud, fraud, negligent misrepresentation, intentional misrepresentation and breach of the covenant of good faith and fair dealing, and sought indemnification and monetary damages from Defendants, as well as cancellation of the agreement to purchase the Business.  Defendants moved to dismiss the Amended Complaint on grounds that the Chancery Court lacked subject matter jurisdiction over Plaintiffs’ claims.  In her draft report, Master Ayvazian recommended that the Court dismiss Plaintiffs’ equitable claim (for equitable fraud) with prejudice, decline to apply the “clean up” doctrine to address Plaintiffs’ remaining legal claims and to allow Plaintiffs to transfer those remaining legal claims to a court of law.

Master Ayvazian first explained that none of the three bases for equitable jurisdiction (which is required to maintain an action in the Chancery Court) — (i) the invocation of an equitable right; (ii) the request for an equitable remedy where there is no adequate remedy at law; or (iii) a statutory delegation of subject matter jurisdiction — existed in the case before her.  Specifically, Master Ayvazian concluded that Plaintiffs’ claim for equitable fraud failed to state a claim for relief under either Delaware or Maryland law and, therefore, should be dismissed, leaving only legal claims for which jurisdiction was appropriate in a court of law.[1]  Master Ayvazian further held that none of the equitable remedies sought by Plaintiffs, namely rescission, cancellation and an accounting, gave rise to jurisdiction by the Chancery Court, as they were either inapplicable or unavailable based on the allegations of the Amended Complaint.

Master Ayvazian also recommended that the Chancery Court reject Defendants’ invitation to exercise the “clean up” doctrine to analyze the sufficiency of Plaintiffs’ remaining legal claims (over which the Chancery Court does not have jurisdiction) at the pleading stage.  According to the Master, none of the reasons for application of this doctrine applied to the case before her and, furthermore, that it would be more efficient for a Superior Court judge to assess the adequacy of Plaintiffs’ remaining legal claims in the first instance.

Under Chancery Court procedure, parties may file exceptions to the draft report within one week of its issuance, after which the Master may issue a final report.  If no exceptions are thereafter filed to the final report, the Court may, in its discretion, confirm the final report or set the matter for further proceedings.

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