AIG Specialty Insurance Company, As Assignee and Subrogee v. McColgan

United States District Court

District of Massachusetts

)

AIG Specialty Insurance )

Company, )

)

Plaintiff, )

) Civil Action No.

v. ) 21-11112-NMG

)

Jude McColgan, et al., )

)

Defendants. )

)

MEMORANDUM & ORDER

GORTON, J.

This case arises from claims that Jude McColgan

(“McColgan”) and Rajeev Aggarwal (“Aggarwal”) (collectively,

with McColgan, “defendants”) fraudulently induced Upland

Software, Inc. (“Upland”) to purchase Char Software, Inc.

(“Char”). Both McColgan, who was the Chief Executive Officer

(“CEO”) of Char at the time of the transaction, and Aggarwal, a

founder, former director, advisor and stockholder of Char, are

alleged to have financially benefited from doing so. AIG

Specialty Insurance Company (“AIG” or “plaintiff”), as subrogee

and assignee of Upland, now seeks to recover the amount Upland

allegedly overpaid due to the fraud. Pending before the Court

are two motions to dismiss, one from each defendant.

I. Background

In February, 2020, McColgan, as Char CEO, finalized and

executed an Agreement and Plan of Merger (“Acquisition

Agreement”) with Upland. As part of that Acquisition Agreement,

Char provided Upland with a Material Customer list and

certified, inter alia:

to the Knowledge of the Company, no party to any

Material Contract intends to, terminate, cancel or

materially change the terms of, any such Material

Contract. The Company (i) has not received any notice,

and has no reasonable basis to believe, that any

Material Customer shall not continue as a customer of

the Company after the Closing or that such customer

intends to terminate or materially modify existing

Contracts with the Company or to reduce its

commitments or purchases thereunder....

As set forth in the Acquisition Agreement,

‘Knowledge’ means, when used with respect to the

Company, the actual knowledge of Jude McColgan...or

the knowledge [he] would have, after due inquiry with

respect to the subject matter so qualified with

Knowledge.

According to the facts alleged in the complaint, however,

McColgan and Aggarwal knew that one of Char’s most lucrative

customers, ESPN, Inc. (“ESPN”), which was included on the

Material Customer list, did not intent to renew its contract

with Char.

In December, 2019, Aggarwal had one or more calls with ESPN

representatives, including ESPN Senior Product Director Andrew

Machado (“Machado”). During those calls, Aggarwal attempted to

expand the relationship between the two business but was

rebuffed. In fact, as set forth in the complaint, ESPN

representatives instead conveyed that ESPN was considering

alternatives to Char due to cost. Subsequently, on January 21,

2020, Machado sent an email to Char’s Director of Account

Management (“the Director”) that ESPN was not going to renew its

contract with Char. That same day, the Director notified

McColgan via email that ESPN was “a churn risk for this year”

and explained that Aggarwal has “alluded” to ESPN considering

other partners.

The Director subsequently spoke with Machado to better

understand ESPN’s decision not to renew its contract with Char.

After that conversation, on January 27, 2020, the Director

emailed McColgan and others stating that ESPN was “not planning

on continuing with [Char] post contract expiration”. McColgan

responded, “I continue to hear the opposite.” As set forth in

the complaint, McColgan’s assertion was intentionally false as

McColgan had no basis to believe that ESPN would renew its

contract with Char.

Just one day after that email, representatives from Upland

spoke with an ESPN representative other than Machado as part of

Upland’s due diligence process pursuant to the acquisition.

During that call, the ESPN representative indicated uncertainty

about ESPN’s continued relationship with Char. Upland later

requested an additional phone call with ESPN to obtain more

information about the relationship.

Simultaneously, on January 28, 2020, McColgan and Aggarwal

each individually contacted Machado at his personal email

account about “providing a reference”. Aggarwal had previously

communicated with Machado only through his ESPN email account.

McColgan and Aggarwal both spoke with Machado via phone over the

course of the day.

A few days later, on January 30, 2020, Machado spoke with

Upland representatives about the relationship between ESPN and

Char. On that call, Machado stated that ESPN had a large

contract with Char and that ESPN was growing rapidly. Machado

indicated that ESPN’s use of products purchased from Char could

decline, but that it would do so because of price rather than

functionality or value. Machado allegedly assured Upland that

it would be very difficult for ESPN to replace the products Char

provided. As set forth in the complaint, McColgan is also

alleged to have altered an email reviewed by Upland to allay

concerns regarding the relationship between Char and ESPN.

In conjunction with the Acquisition Agreement, AIG and

Upland entered a Buyer-Side Representations and Warranties

Insurance Policy (“the Policy”). After Upland purchased Char

and ESPN ended its relationship with Char, Upland submitted an

insurance claim to AIG, alleging that Upland had received notice

of ESPN’s decision not to renew its contract with Char and that

Char had knowledge of that decision before the execution of the

Acquisition Agreement. After reviewing the claim, AIG

reimbursed Upland more than 5 Million dollars, the amount Upland

allegedly overpaid for Char due to the fraud. Both the

Acquisition Agreement and the Policy are governed by Delaware

law.

AIG, an Illinois corporation with a principal place of

business in New York, asserts three causes of action against

both defendants, who are residents of Massachusetts: fraudulent

inducement, fraud, civil conspiracy. A fourth cause of action,

aiding and abetting fraud, is brought only against Aggarwal.

This Court’s jurisdiction over the matter is based on diversity

pursuant to 28 U.S.C. § 1332(a) because AIG and defendants are

citizens of different states and the amount in controversy

exceeds 5 Million dollars.

II. Motions to Dismiss

A. Legal Standard

To survive a motion under Fed. R. Civ. P. 12(b)(6), the

subject pleading must contain sufficient factual matter to state

a claim for relief that is actionable as a matter of law and

“plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678

(2009), quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570

(2007)). A claim is facially plausible if, after accepting as

true all non-conclusory factual allegations, the court can draw

the reasonable inference that the defendant is liable for the

misconduct alleged. Ocasio-Hernandez v. Fortuno-Burset, 640 F.3d

1, 12 (1st Cir. 2011).

When rendering that determination, a court may not look

beyond the facts alleged in the complaint, documents

incorporated by reference therein and facts susceptible to

judicial notice. Haley v. City of Boston, 657 F.3d 39, 46 (1st

Cir. 2011). A court also may not disregard properly pled

factual allegations even if actual proof of those facts is

improbable. Ocasio-Hernandez, 640 F.3d at 12. Rather, the

inquiry required focuses on the reasonableness of the inference

of liability that the plaintiff is asking the court to draw. Id.

at 13. The assessment is holistic: “the complaint should be

read as a whole, not parsed piece by piece to determine whether

each allegation, in isolation, is plausible”. Hernandez-Cuevas

v. Taylor, 723 F.3d 91, 103 (1st Cir. 2013), quoting Ocasio-

Hernandez, 640 F.3d at 14.

A more demanding pleading standard is, however, imposed

upon claims sounding in fraud. Regarding those claims, a

plaintiff “must state with particularity the circumstances

constituting” the fraud. Fed. R. Civ. P. 9(b). Particularity

requires alleging the “time, place, and content of the alleged

misrepresentation with specificity.” SEC v. Tambone, 597 F.3d

436, 442 (1st Cir. 2010) (en banc) (quoting Greebel v. FTP

Software, Inc., 194 F.3d 185, 193 (1st Cir. 1999)).

B. McColgan’s Pending Motion

i. Right of subrogation

As an initial matter, McColgan asserts that AIG has failed

to state a claim upon which relief can be granted because AIG

lacks a right of subrogation. In so arguing, McColgan relies on

Section 8(c) of the Policy, which states:

The Insurer shall be entitled to subrogate against any

Seller only if such payment results from or arises out

of a Breach resulting from or arising out of fraud on

the part of such Seller.

In the Policy, Breach is defined as a violation of Article III

of the Acquisition Agreement. McColgan asserts that the kind of

Breach alleged by AIG in the complaint does not meet the

requirements of Section 8(c) and, thus, AIG has no right of

subrogation.

Setting aside the question of whether the effort to enforce

the subrogation limitation of Section 8(c) is an affirmative

defense and therefore not properly addressed on a motion to

dismiss, that Section does not shield McColgan. Referring to

the Acquisition Agreement, the Policy defines a “Seller” as that

term is used in Section 8(c), as a stockholder of Char’s Capital

Stock. According to the complaint, McColgan does not qualify as

a “Seller” because he did not own Char’s Capital Stock. Thus,

Section 8(c) of the Policy does not apply to McColgan and cannot

support a claim against him. Section 8(b) of the Policy,

however, which is not addressed in McColgan’s motion, provides

broad subrogation rights to AIG in circumstances beyond those

discussed in Section 8(c).

ii. Sufficiency of pleadings

McColgan contends that AIG has failed to state claims for

which relief can be granted on any of the four counts set forth

in the complaint. The Court considers the sufficiency of the

pleadings pertaining to each of those counts in turn.

Regarding the first two counts——for fraud and fraudulent

inducement——McColgan argues that AIG: (1) impermissibly relies

on extra-contractual statements to bolster those claims in

contravention to the language in the Acquisition Agreement which

limits the written materials to be relied upon; (2) fails to

allege that Upland reasonably relied upon the Material Customer

List and (3) is unable to identify any false information

contained in the Material Customer List that Char provided to

Upland.

Each of those contentions is unavailing. The first is

soundly refuted by the requirement of Delaware courts that only

express disclaimers of reliance upon extra-contractual

statements bar the use of such evidence to allege fraud. See FdG

Logistics LLC v. A&R Logistics Holdings, Inc., 131 A.3d 842, 860

(Del. Ch.), aff'd sub nom. A & R Logistics Holdings, Inc. v. FdG

Logistics LLC, 148 A.3d 1171 (Del. 2016). There is no such

language in the Acquisition Agreement. The language cited by

McColgan is instead a standard representations and warranties

clause that does not address reliance and is therefore

distinguishable from an effective express disclaimer. See Anvil

Holding Corp. v. Iron Acquisition Co., No. CIV.A. 7975-VCP, 2013

WL 2249655, at *8 (Del. Ch. May 17, 2013). The second

contention is ineffective because AIG has alleged sufficient

facts to maintain its claims that McColgan actively sought to

mislead Upland regarding Char’s relationship with ESPN and to

preclude Upland from discovering those falsehoods.

Finally, McColgan’s assertion that the Material Customer

List provided to Upland did not contain falsehoods and, thus,

the claims must be dismissed is preposterous based on the many

certifications in the Acquisition Agreement to which McColgan

allegedly subscribed. The Material Customer List is far from

the only source of alleged falsehoods. McColgan therefore

cannot, at this stage of litigation, dispense with either of the

first two claims, which have been alleged with sufficient

particularity.

AIG has also alleged facts sufficient to maintain counts

three and four for civil conspiracy and aiding and abetting

fraud. Having found that AIG sufficiently pled fraud and

fraudulent inducement, the Court rejects McColgan’s preliminary

contention that counts three and four must be dismissed because

there is no underlying tort. Moreover, although there are no

facts set forth that McColgan and Aggarwal communicated directly

with one another about the alleged fraud, there is sufficient

“circumstantial evidence” linking the two, i.e. the timing of

the defendants’ communication with Machado. That connection

extends beyond “speculation and innuendo” and is thus sufficient

to support the conspiracy claim. See Lipson v. Anesthesia

Servs., P.A., 790 A.2d 1261, 1289 (Del. Super. Ct. 2001).

Furthermore, although McColgan correctly notes that agents

of a corporation cannot conspire with one another or aid and

abet each in torts, see Cornell Glasgow, LLC v. La Grange

Props., LLC, 2012 WL 2106945, at *11 (Del. Super. Ct. June 6,

2012), he overlooks the fact that AIG does not allege that

Aggarwal was an agent of Char. As set forth in the complaint,

this claim falls within the well-charted precedent concerning

conspiracies amongst stockholders, such as Aggarwal, and

corporate officers, such as McColgan. See Agspring Holdco, LLC

v. NGP X US Holdings, L.P., No. CV 2019-0567-AGB, 2020 WL

4355555, at *21 (Del. Ch. July 30, 2020), and cases cited.

Moreover, defendant mistakenly relies heavily upon the recent

decision of Anschutz Corp. v. Brown Robin Cap., LLC, No. CV

2019-0710-JRS, 2020 WL 3096744, at *17 (Del. Ch. June 11, 2020),

re-argument granted, No. CV 2019-0710-JRS, 2020 WL 4249874 (Del.

Ch. July 24, 2020), in which the claims dismissed concerned a

conspiracy among corporate officers rather than, as here, a

corporate officer and a defendant, such as Aggarwal, further

removed from the corporate structure.

AIG has therefore proffered sufficient facts to survive

McColgan’s motion to dismiss.

C. Aggarwal’s Pending Motion

i. Right of subrogation

Similar to McColgan, Aggarwal argues that AIG has no

subrogation rights to pursue claims against him. Aggarwal

relies on Section 5.11 of the Acquisition Agreement which

requires that the representation and warranty insurance policy

executed in conjunction with the Agreement does

not permit subrogation or any other recovery of any

kind of the insurer [i.e., AIG] against any

Stockholder [e.g., Aggarwal]...under this Agreement.

As a result, Aggarwal contends that Upland waived any right to

subrogate claims against Aggarwal.

The problem with that argument is two-fold. First, while

Section 5.11 sets forth requirements for the insurance policy,

it is the policy itself from which AIG derives its subrogation

rights. Thus, by relying exclusively on language in the

Acquisition Agreement, Aggarwal asserts, at most, a discrepancy

between that Agreement and the subject Policy. Second, both the

Acquisition Agreement in Section 8.06(d) and the Policy in

Section 8(c) make it clear that AIG may pursue claims of fraud

against stockholders, notwithstanding limitations on subrogation

rights regarding other kinds of claims. Those provisions, as

AIG convincingly submits, do not contradict Section 5.11 because

AIG has not brought claims pursuant to the Acquisition Agreement

(i.e., “under this Agreement”) but rather claims for fraud. See

Cmty. Ass'n Underwriters of Am. v. Rhodes Dev. Grp., Inc., 488

F. App'x 547, 549 (3d Cir. 2012) (“the waiver of subrogation

clause only applies to [the non-party to the contract] to the

extent that it asserts claims arising under that contract”).

ii. Sufficiency of pleadings

Again, as is the case with McColgan, Aggarwal challenges

the sufficiency of the pleadings with which AIG has brought its

four claims for relief. At the outset, the Court notes that it

has already dispensed with two of Aggarwal’s arguments because

they are the same as those advanced by McColgan, i.e. (1) that

AIG may rely only upon written statements in proving its claims

for fraud and fraudulent inducement (not so) and (2) that AIG

cannot allege that McColgan and Aggarwal aided and abetted each

other in torts because both are agents of the same company

(again, not so).

Turning to the contentions specific to Aggarwal, he reasons

that the claims for fraud and fraudulent inducement must be

dismissed because AIG has failed to allege that Aggarwal himself

made any false representations to AIG or that he acted with the

requisite scienter. Those arguments do not warrant dismissal,

however, in light of relatively recent decisions of Delaware

state courts extending liability for fraud such that

a selling stockholder may face liability for

representations made by the company if the stockholder

either (i) knew that the company's representations

were false or (ii) lied to the buyer about those

representations.

ChyronHego Corp. v. Wight, No. CV 2017-0548-SG, 2018 WL 3642132,

at *10 (Del. Ch. July 31, 2018), and cases cited. Thus, in

Prairie Cap. III, L.P. v. Double E Holding Corp., 132 A.3d 35,

60 (Del. Ch. 2015), for example, stockholders were held liable

for fraud because they were alleged to have known that

representations made by the company in which they held stock

were false. Based on that development, AIG has pled, with

particularity, “facts and circumstances indicating fraudulent

intent,” In re Cabletron Sys., Inc., 311 F.3d 11, 29 (1st. Cir.

2002), sufficient to support the allegations that Aggarwal knew

Machado misrepresented the relationship between ESPN and Char to

Upland. Accordingly, those claims will not be dismissed.

Aggarwal also claims that AIG failed to plead the essential

elements of the conspiracy and aiding and abetting. At the

motion to dismiss stage, this Court accepts all plausibly

alleged facts as true. AIG has plausibly alleged that Aggarwal

knowingly worked in concert with McColgan in advance of the call

between Machado and Upland to misrepresent the relationship

between Char and ESPN with the goal of inflating the price at

which Upland would agree to purchase Char. The allegations

supporting that narrative include Aggarwal’s detailed knowledge

of the business relationship between Char and ESPN, as well as

the timing and circumstances of the communications among

Aggarwal, McColgan and Machado. Accordingly, AIG has

sufficiently pled that Aggarwal conspired with, and aided and

abetted, McColgan to commit the fraud alleged. See AeroGlobal

Cap. Mgmt., LLC v. Cirrus Indus., Inc., 871 A.2d 428, 437 n.8

(Del. 2005) (“The elements for civil conspiracy under Delaware

law are: (1) a confederation or combination of two or more

persons; (2) an unlawful act done in furtherance of the

conspiracy; and (3) actual damage.”); Wavedivision Holdings, LLC

v. Highland Cap. Mgmt. L.P., No. CIV.A. 08C-11-132JOH, 2011 WL

5314507, at *17 (Del. Super. Ct. Nov. 2, 2011), aff'd, 49 A.3d

1168 (Del. 2012) (“Liability for aiding and abetting requires

proof of three elements: (1) underlying tortious conduct; (2)

knowledge; and (3) substantial assistance.”).

ORDER

For the foregoing reasons, defendants’ motions to dismiss

(Docket Nos. 38 and 41) are DENIED.

So ordered.

/s/ Nathaniel M. Gorton

Nathaniel M. Gorton

United States District Judge

Dated September 7, 2022