Delaware Business Litigation Report

Even Though Evidence Supports Plaintiffs’ Fraudulent Inducement Claim, Chancery Denies Relief Where Plaintiff Never Gave Defendant Fair Notice of Claim Prior to Trial

HOMF II Investment Corp. v. Altenberg, C.A. No. 2017-0293-JTL (Del. Ch. May 19, 2020)

Due process requires that a plaintiff provide the defendant with fair notice of the plaintiff’s claims. As this recent post-trial decision shows, the failure to give fair notice can procedurally bar recovery -- even when the trial evidence establishes that the claims have substantive merit.

Plaintiffs were the only investors in a fund that Defendant Altenberg created for the purpose of acquiring solar projects and bringing them to commercial operation. Then, the fund would refinance the operational projects to recover the fund’s investment, and the fund would reap ongoing cash flows from the operational projects. Altenberg represented that taking projects from acquisition to refinancing would take as little as three to six months.

Yet that was not how the situation played out. Despite Plaintiffs’ over $6.8 million investment, the fund became insolvent -- but not before paying an Altenberg-controlled entity $2.37 million in fees to manage the fund. Plaintiffs filed numerous claims against Altenberg and the management entity. Just before trial, Altenberg caused the management entity to file bankruptcy, so claims related to the entity were stayed.

During post-trial briefing, Plaintiffs focused on three claims against Altenberg: Altenberg fraudulently induced Plaintiffs’ investment, Altenberg committed fraud in operating the fund, and Altenberg breached his fiduciary duties by engaging in self-interested transactions that were not entirely fair. Plaintiffs prevailed on fiduciary duties claim, and Altenberg prevailed on the fraud claim.

Regarding fraudulent inducement, the Court agreed that Altenberg used numerous fraudulent misrepresentations to induce Plaintiffs to invest in the fund to Plaintiffs’ detriment. These misrepresentations ranged from fabricating an illusory project, mischaracterizing project timelines, and misstating the availability of long-term financing. Despite this, the Court declined to afford Plaintiffs a remedy because Plaintiffs “never put Altenberg on notice before trial that they were pursuing a claim for fraudulent inducement.”

First, neither the Plaintiffs’ initial complaint nor its amended complaint pleaded a claim for fraudulent inducement. As the Court explained, Delaware’s notice-pleading standard does not require plaintiffs to plead a particular legal theory. Rather, Plaintiffs were only required to plead facts sufficient to put Altenberg on notice of a potential fraudulent inducement claim. Plaintiffs’ complaint did not meet this standard. Rather than focus on Altenberg’s attempts to gain Plaintiffs’ investment, the complaint discussed fraud in the context of how Altenberg operated the fund. That was insufficient to put Altenberg on notice of a fraudulent inducement claim.

Second, Plaintiffs failed to exercise any of their opportunities to assert the claim before or during trial. The claim was absent from their pre-trial brief, which again focused on the fund’s operation. The claim was also absent from the list of legal issues in the pre-trial order. Even after Altenberg objected to Plaintiffs’ presentation of evidence regarding fraudulent inducement, Plaintiffs failed to move under Rule 15(b) to amend the pleadings to conform to the trial evidence, despite reserving the right to request such amendment in the pre-trial order.

All of this, together, led the Court to conclude that Plaintiffs were procedurally barred from recovery on the fraudulent inducement claim -- notwithstanding that the substantive trial evidence supported the claim.

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