Order — Mark Ploen v. AIG Specialty Insurance Company (District of Minnesota)

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Order of the United States District Court for the District of Minnesota, filed 12/10/24, in cases tried to the Court: Mark Ploen (Case No. 21-CV-2248) and Richard Enrico (Case No. 21-CV-2264) against AIG Specialty Insurance Company. The plaintiffs sought to make AIG pay stipulated judgments entered against its insured, AOM Holdings, LLC, under Miller-Shugart agreements arising from $3 million investments each made in AOM in July 2016. The court finds AOM was in financial difficulty and received bad news in the hours before the July 6 closing, but that the plaintiffs faced significant hurdles and had a substantial chance of recovering nothing at trial. It concludes the settlements were not reasonable and orders that plaintiffs recover nothing; the order is signed s/Patrick J. Schiltz, Chief Judge.

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CASE 0:21-cv-02248-PJS-JFD Doc. 174 Filed 12/10/24 Page 1 of 25

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA

MARK PLOEN, Case No. 21-CV-2248 (PJS/JFD)

Plaintiff,

v. ORDER

AIG SPECIALTY INSURANCE
COMPANY,

Defendant.

RICHARD ENRICO, Case No. 21-CV-2264 (PJS/JFD)

Plaintiff,

v. ORDER

AIG SPECIALTY INSURANCE
COMPANY,

Defendant.

Bryan R. Freeman, MASLON LLP; Rikke A. Dierssen-Morice, BLANK ROME
LLP, for plaintiff Mark Ploen.

Mark R. Bradford, BRADFORD ANDRESEN NORRIE & CAMAROTTO, for
plaintiff Richard Enrico.

Thomas H. Boyd and Kyle R. Kroll, WINTHROP & WEINSTINE, P.A., for
defendant.

Plaintiffs Mark Ploen and Richard Enrico brought these actions against

defendant AIG Specialty Insurance Company (“AIG”), contending that AIG is obligated
CASE 0:21-cv-02248-PJS-JFD Doc. 174 Filed 12/10/24 Page 2 of 25

to pay stipulated judgments that were entered in favor of plaintiffs and against AOM

Holdings, LLC (which was insured by AIG) pursuant to Miller-Shugart agreements.1

AIG contends that the Miller-Shugart agreements are unreasonable and therefore

unenforceable.

This matter was tried to the Court. Having heard the evidence and the

arguments of counsel and carefully reviewed the record, the Court makes the following

conclusions of law and findings of fact pursuant to Fed. R. Civ. P. 52(a)(1).

I. CONCLUSIONS OF LAW

1. “Under a Miller-Shugart settlement agreement, a plaintiff and an insured

defendant stipulate to a judgment against the defendant on the condition that the

plaintiff releases the defendant from any personal liability and agrees to seek recovery

solely from the insurer.” King’s Cove Marina, LLC v. Lambert Com. Constr. LLC, 958

N.W.2d 310, 320–21 (Minn. 2021).

2. “A Miller-Shugart settlement agreement is enforceable against the insurer

if the insurer receives notice of the settlement, and the settlement is reasonable and not

the product of fraud or collusion.” Id. at 321.

3. The reasonableness of the settlement is a question of fact. Id.

1
See Miller v. Shugart, 316 N.W.2d 729 (Minn. 1982).

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4. “The burden of proof is on the claimant, the plaintiff judgment creditor, to

show that the settlement is reasonable and prudent.” Miller, 316 N.W.2d at 735; see also

Jorgensen v. Knutson, 662 N.W.2d 893, 904 (Minn. 2003) (plaintiff bears the burden to

prove the settlement is reasonable).

5. “The test as to whether the settlement is reasonable and prudent is what a

reasonably prudent person in the position of the defendant would have settled for on

the merits of plaintiff’s claim.” Miller, 316 N.W.2d at 735. Applying this test requires

consideration of “the facts bearing on the liability and damage aspects of plaintiff’s

claim, as well as the risks of going to trial.” Id.; see also Jorgensen, 662 N.W.2d at 904

(courts may consider “what a jury could award” as well as “other relevant factors such

as an undisputed injury; the risks of trial; expert testimony for both parties on issues of

the likely size of a jury award, the extent of damages and liability; and the judge’s own

personal experience with jury awards in similar cases.”); Alton M. Johnson Co. v. M.A.I.

Co., 463 N.W.2d 277, 279 (Minn. 1990) (courts should consider evidence on liability and

damages as well as other evidence such as expert testimony, “verdicts in comparable

cases, the likelihood of favorable or unfavorable rulings on legal defenses and

evidentiary issues if the tort action had been tried, and other factors of forensic

significance”).

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6. This does not mean, however, that courts must “conduct[] the very trial

obviated by the settlement.” Alton M. Johnson Co., 463 N.W.2d at 279.

II. FINDINGS OF FACT

A. AOM Holdings, LLC

1. The underlying lawsuits that produced the Miller-Shugart agreements at

issue in these cases arose out of $3 million investments that each plaintiff made in AOM

Holdings, LLC (“AOM”) in July 2016.

2. AOM was a holding company that provided advertising services through

its subsidiary, AllOver Media LLC. Trial Tr. (“TT”) 192–93. For ease of discussion, and

because the specifics of AOM’s corporate structure are not relevant to the

reasonableness of the settlements, the Court will refer to the AOM entities (including

their corporate predecessors) collectively as “AOM.”

3. AOM was founded by Tony Jacobson in the early 2000s. TT 12–13. In July

2016, when plaintiffs made the $3 million investments at issue in these cases, Jacobson

was AOM’s CEO—and he, like each plaintiff, invested $3 million in the company. TT

192.

4. Plaintiffs are sophisticated businessmen and investors with experience in

owning and operating multimillion-dollar businesses. TT 68–69, 567, 570, 572, 575.

Ploen has also formed several investment groups. TT 69–70.

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5. Plaintiffs were friends of Jacobson’s. They were also early investors in

AOM and had previously served on its board of directors. TT 12–14, 284–85, 573–75. In

addition, Enrico was a client of AOM’s and, in fact, was its largest customer in the

2009–2010 time frame. TT 575.

6. Over the years, plaintiffs had each made a number of loans to AOM, all of

which were repaid in full, with interest. TT 17–18, 574.

7. In 2015, Audax, a private-equity company, bought a controlling interest in

AOM. Ex. P83 at 31; TT 191.

8. Following the acquisition, AOM began experiencing financial challenges

due to falling revenue. Ex. P41 at 3, 5; Ex. P83 at 75.

9. As of April 2016, AOM’s year-to-date revenue was down more than

20 percent from the corresponding period in 2015, and AOM’s EBITDA2 was down

almost 80 percent from that period. Ex. P41 at 3, 5.

10. In the underlying lawsuits, AOM’s president and CFO, Shaun Nugent,

testified that “our business was not doing as well as we had planned and . . . we were

falling behind on revenue.” Ex. P83 at 75.

2
“EBITDA” stands for “[e]arnings before interest, taxes, depreciation, and
amortization.” Black’s Law Dictionary 551 (8th ed.).

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11. Also following Audax’s acquisition, AOM took out a number of loans,

amassing around $50 million in debt. Ex. P83 at 33–34; Ex. P41 at 11; Ex. P43 at 3; TT

195.

12. AOM’s primary lender, BMO Harris (“BMO”), required AOM to maintain

certain financial covenants, with compliance being measured quarterly. Ex. P39 § 7.12;

Ex. P83 at 37–38; TT 197–198. If AOM fell out of compliance with any of the covenants,

AOM’s lenders would have the right to accelerate the repayment of their loans. TT 199;

Ex. P83 at 41; Ex. P39 § 8.02.

13. In 2016, State Farm, one of AOM’s largest customers, see Ex. P82 at 4,

provided AOM with a letter of intent to continue doing business. As of June of that

year, however, State Farm had not actually contracted with AOM for any services. Ex.

P70.

14. By June 1, AOM was projecting that, without State Farm’s business, it

would fail its quarterly loan-covenant tests in June, September, and December. Even

with State Farm’s business, AOM would still be at risk of failing the tests. TT 22–23; Ex.

P43 at 3; Ex. P56 at 1 (email from Nugent stating that if State Farm did not contract for

any services, “[t]hat would possibly blow the 3q covenants”).

15. In mid-June 2016, AOM’s internal analysis showed that it had been out of

compliance with its loan covenants in April and May. Ex. P42 at 8.

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B. Plaintiffs’ July 2016 Investments in AOM

16. In early June 2016, Nugent proposed that AOM seek capital contributions

from Ploen, Enrico, and Jacobson as a means of addressing AOM’s growing financial

problems. Ex. P43 at 1 (proposing “equity cure” from the “Trifecta”); TT 22 (“trifecta”

referred to Ploen, Enrico, and Jacobson); Ex. P45 at 1 (June 1 email from Nugent

suggesting that they “shoot for $5m from the boys”).

17. The idea was to use the capital infusion to retire high-interest debt. TT

16–17.

18. The proposed transaction was initially described to plaintiffs as a loan,

TT 15–16, Ex. P80, likely because Ploen and Enrico had positive experiences making

loans to AOM in the past. But because AOM’s agreement with BMO prohibited it from

borrowing money if it was out of compliance with its covenants, the transaction had to

be structured as an investment. TT 221–22; Ex. P39 § 7.01; Ex. P45 at 2.

19. Under the proposed investment, plaintiffs would each purchase 3,000

Class B shares of AOM. TT 287. The investments were otherwise intended to function

like the loans that plaintiffs had made in the past, with the same 10 percent “interest

rate” paid as quarterly dividends, and with the expectation that AOM would buy back

the shares within two years. Cf. Ex. P49 at 1 (10% “interest” would be paid quarterly);

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Ex. P58 at 2 (the money would be paid back within 12 to 18 months); Ex. P80 at 1 (email

from AOM executive referring to the transactions as a “loan”).

20. Nugent and Jacobson communicated to plaintiffs that the transaction was

a “win-win” and a “no brainer” and that the business was doing well. TT 44–45,

592–93; Ex. P59.

21. Based on his previous experiences loaning money to AOM, and because

AOM was backed by Audax, Ploen was comfortable proceeding with the proposed

transaction. TT 17–18. Similarly, based on his past experiences with AOM and

Jacobson, Enrico was comfortable with the proposed transaction and did not feel the

need to review any audited financial statements or similar documentation. TT 578, 583.

22. The parties eventually agreed to a $9 million investment, with Ploen,

Enrico, and Jacobson each investing $3 million. TT 24; Ex. D16. The increase in the

proposed investment appears to be related to AOM’s increasingly troubled financial

condition. Ex. P56 at 1 (email from Nugent stating that a $6 million investment would

provide “less than $500K of cushion”).

23. Plaintiffs each received emails and transaction documents making clear

that the transaction was an investment. TT 73–74, 98; Ex. D13. Plaintiffs also

understood that AOM had to satisfy its bank covenants before it could make cash

dividend payments. TT 101; Ex. D16. Plaintiffs were also informed that, in the event

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that AOM could not make dividend payments in cash, the payments would be made in

kind (i.e., by issuing additional shares). TT 74–75, 98; Ex. D13; Ex. D16; Ex. D21.

24. Before the July 6 closing, plaintiffs had the transaction documents

reviewed by their own respective outside counsel, who informed them that the

transaction was an investment. TT 80–84, 581–82, 605. Enrico’s lawyer also highlighted

the documents’ anti-reliance language and offered to assist with a due-diligence

investigation, if Enrico so desired. Ex. D34 at 2–3.

25. The transaction documents recite that plaintiffs had the right to obtain any

information necessary to make an informed decision and to verify the accuracy of any

information they had received. TT 94–95; Ex. D51 § 3.6. Plaintiffs also signed

warranties representing that they were accredited investors and capable of evaluating

the merits of the investment for themselves. Ex. D51 §§ 3.4–3.5.

26. Ploen and Jacobson financed their investments by borrowing $1.5 million

each from Enrico and jointly borrowing the remaining $3 million from Signature Bank.

TT 26, 30, 87, 631. The loans were at a quarterly interest rate of 4 percent and payable in

two years. TT 26, 30.

27. Enrico earned approximately $420,000 in interest off of the loans he made

to Ploen and Jacobson. TT 631–32. For his part, Ploen made approximately $290,000 in

interest payments through 2021 (including the interest payments that Ploen made on

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the Signature Bank loan and subtracting the tax benefits that Ploen received from

deducting the interest payments). Ex. P10; TT 59–60.

28. The transactions were set to close on July 6, 2016. TT 39.

29. A few weeks before the closing, Audax proposed to AOM’s lenders that,

in light of the anticipated $9 million investment, AOM’s lenders would amend the loan

covenants to make them easier to meet, while still applying the older, stricter covenants

to determine whether AOM would be permitted to make dividend payments in cash.

Ex. P61; TT 219–20. These changes were approved and were put in place in August

2016. TT 219–20.

30. Shortly before the closing, AOM’s lenders proposed adding a covenant

requiring AOM to have a minimum of $3 million of liquidity before AOM could pay

cash dividends. TT 98–99; Ex. P67.

31. On July 5, Nugent emailed Ploen and Jacobson about the proposed

liquidity covenant, letting them know that AOM planned to agree to the covenant and

that failing to meet the covenant would prohibit AOM from paying cash dividends.

Ex. P67. Nugent downplayed the significance of the requirement, stating that AOM’s

“current expectation is that we will be in excess of $8M at year end so it is not an issue

from our side.” Ex. P67.

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32. Based on the fact that Ploen and Jacobson were both informed of the new

liquidity requirement—and based on the fact that the record contains no evidence that

any important communication about the $3 million investments was made to Ploen but

not to Enrico—the Court finds it more likely than not that Enrico was also told about

the new liquidity requirement before the transactions closed. An email exchange

between Nugent and Audax demonstrates that Nugent intended that all three men be

informed of this change. Ex. P66. In addition, in his state-court complaint, Enrico

alleged that he relied on Nugent’s statement in the July 5 email that AOM would be in

excess of $8 million at year’s end and, with that and other representations in mind, he

went ahead with the closing. Ex. P24 ¶¶ 14–15, 17; see also Ex. P67. This allegation

strongly implies that Enrico was informed of the new liquidity requirement before the

closing. The Court therefore discredits Enrico’s testimony that he was not informed of

the new liquidity requirement. See TT 590.

33. In the days and hours leading up to the July 6 closing, AOM received a

slew of bad financial news. In particular, on July 5, just before Nugent told Ploen and

Jacobson that AOM expected to have in excess of $8 million in liquidity at the end of the

year, Nugent was told that AOM’s June sales were $1 million short of its forecasts and

that Starbucks had decided not to renew. Exs. P70, P74; TT 39. Nugent acknowledged

the bad news, calling it a “[b]ig miss.” Ex. P70 at 2.

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34. The next day, July 6, just hours before the closing, AOM learned that State

Farm had decided to cancel its letter of intent and would not be contracting for any

services from AOM. TT 36–37; Exs. P73, P74. Nugent emailed Jacobson and others

about the bad news, stating that he was not sure what it would mean, but “I think we

need to make a downward adjustment to our Forecast by at least $2M. This is going to

hurt!” Ex. P73; TT 36–37, 39.

35. The closing on plaintiffs’ $3 million investments took place as planned on

July 6, 2016. Later that evening, AOM produced an updated financial projection that

predicted that the company would not meet the covenants necessary to pay cash

dividends. TT 594–95; Ex. P79.

36. Plaintiffs never received any cash dividends from AOM, nor did AOM

ever buy back their shares. TT 47, 49–50, 596. Instead, plaintiffs received dividends in

kind—meaning that the amounts that would have been paid in cash had AOM met the

necessary covenants were instead added to the amount of principal owned by plaintiffs.

TT 49–51. Plaintiffs then had to pay taxes on this “phantom” income. TT 51, 597–98.

C. The Underlying Lawsuits

37. In early 2020, plaintiffs commenced separate state-court lawsuits against

AOM alleging both fraudulent inducement and negligent misrepresentation. Exs.

P23–24. Plaintiffs primarily sought rescission and return of their $3 million investments

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as well as interest, attorney’s fees, and reimbursement for the taxes they had to pay on

the phantom income. Both plaintiffs also alleged breach of the duty of good faith and

fair dealing, and Enrico brought a separate claim of intentional misrepresentation.

Exs. P23–P24. In addition, Ploen sought to recover for the interest that he had paid for

the loans he took out to fund the investment. TT 64.

38. Plaintiffs’ misrepresentation claims focused on statements concerning

AOM’s intent and ability to pay cash dividends. Plaintiffs further alleged that AOM

purposely took steps to ensure that it would be out of compliance with its loan

covenants so that it would not have to pay cash dividends to them. Exs. P23–P24.

39. In both Ploen’s action and Enrico’s action, AOM moved to dismiss the

complaint. The judges assigned to the cases agreed that (1) Delaware law governed

plaintiffs’ claims; (2) plaintiffs had adequately alleged claims of both negligent

misrepresentation and fraudulent inducement;3 (3) the anti-reliance language in the

transaction documents was insufficient, under Delaware law, to defeat plaintiffs’

claims; and (4) plaintiffs failed to state a claim for breach of the duty of good faith and

fair dealing. Exs. P25–P26.

3
The judge in Enrico’s case dismissed Enrico’s intentional-misrepresentation
claim, finding that it was duplicative of his fraudulent-inducement claim. Ex. P26.

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40. Following the courts’ rulings on the motions to dismiss, the parties

engaged in discovery, and AOM gave notice that it would be filing motions for

summary judgment. See, e.g., Exs. D133–135; TT 269.

D. The Settlements

41. In May 2021, around the time that AOM noticed the summary-judgment

motions, plaintiffs and AOM participated in a mediation before James Gilbert, a retired

Justice of the Minnesota Supreme Court. TT 64, 526.

42. About a month later, the parties executed Miller-Shugart settlements for a

stipulated judgment of $3 million each. TT 64–65; Exs. P92–P93. The parties allocated

the amounts entirely to plaintiffs’ negligent-misrepresentation claims; the parties did

not allocate a single cent to the fraudulent-inducement claims. Ex. P92 at 4–6; Ex. P93

at 4–6.

43. In addition to the stipulated judgment, the settlements required AOM to

pay Ploen and Enrico $250,000 each. Ex. P92 at 6; Ex. P93 at 6.

44. The settlements provide that, if they are found to be unenforceable for any

reason, plaintiffs have no recourse against AOM other than as provided in the

settlements, Ex. P92 at 8; Ex. P 93 at 8—meaning that plaintiffs cannot pursue their

claims against AOM even if the settlements are found to be unenforceable against AIG.

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45. In July 2021, the agreements were incorporated into $3 million judgments

entered in the underlying cases. Exs. P36–P37. Plaintiffs then filed these actions.

III. THE REASONABLENESS OF THE SETTLEMENTS

Having considered the Miller-Shugart agreements, the evidence, and the

arguments of counsel, the Court finds that the settlements are unreasonable and

therefore not enforceable against AIG.

As noted, determining whether a settlement is reasonable “involves a

consideration of the facts bearing on the liability and damage aspects of plaintiff’s

claim, as well as the risks of going to trial.” Miller, 316 N.W.2d at 735. Because

plaintiffs allocated all of the settlement amounts to their negligent-misrepresentation

claims, the Court analyzes the reasonableness of the settlement by considering the

liability and damage aspects of those claims (as well as the other factors identified in

Miller and its progeny).4

4
Plaintiffs argue that their allocation is irrelevant because both their negligent-
misrepresentation claims and their fraudulent-inducement claims are covered by
insurance. Further, they seem to invite the Court to evaluate the settlements in light of
both sets of claims, which, in turn, would seem to require the Court to make its own
judgment about how the settlements could or should have been allocated under the
two-step inquiry set forth in King’s Cove Marina, LLC v. Lambert Com. Constr. LLC, 958
N.W.2d 310 (Minn. 2021).

King’s Cove, however, applies when parties fail to allocate between covered and
uncovered claims. Id. at 323 (setting forth a two-step inquiry for evaluating the
“reasonableness of an unallocated Miller-Shugart settlement agreement” (emphasis
(continued...)

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Plaintiffs’ expert testified that AOM’s potential liability to Ploen was just over

$4 million.5 This included (1) the $3 million investment; (2) about $187,000 in tax

liability for the phantom in-kind dividend payments; (3) about $290,000 for the interest

Ploen incurred to finance the investment; and (4) about $500,000 in prejudgment

interest. TT 309–10. Likewise, the expert testified that AOM’s potential liability to

Enrico was around $3.5 million. TT 309–10. This included (1) the $3 million investment;

(2) about $53,000 in tax liability; and (3) about $500,000 in prejudgment interest.

TT 309–310. These amounts did not include attorney’s fees, which the expert admitted

plaintiffs were unlikely to be able to recover in the underlying lawsuits. TT 310–12.

The parties dispute whether Enrico’s maximum recovery should be reduced by

the interest that he earned on the loan that he made to Ploen. The Court is inclined to

agree with plaintiffs that those interest payments are not relevant in calculating the

amount to which Enrico would be entitled if his contract with AOM were rescinded, as

4
(...continued)
added)). In this case, plaintiffs allocated the settlements and, in so doing, assigned all of
the settlement proceeds to the negligent-misrepresentation claims and none to the
fraudulent-inducement claims. Because plaintiffs themselves allocated the settlements,
the type of inquiry called for in King’s Cove does not apply. Moreover, even if King’s
Cove did apply, the Court would still find the settlements unreasonable, as explained in
more detail below.
5
The expert testified that this amount (and the amount assigned to Enrico) did
not represent the “full value” of plaintiffs’ claims. TT 312. The expert did not explain
what additional amounts plaintiffs could potentially recover, however, and therefore
the Court gives no weight to this aspect of his testimony.

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the loan transaction was between him and Ploen and did not directly involve AOM. By

the same token, it is not at all clear to the Court that if Ploen were successful in

rescinding the contract (and thereby getting back his $3 million investment), he would

be entitled to recover, from AOM, the interest payments that he made to Enrico and the

bank.6 The purpose of rescission is to restore the parties to the status quo ante. See

Geronta Funding v. Brighthouse Life Ins. Co., 284 A.3d 47, 61 (Del. 2022) (“Generally,

rescission results in abrogation or unmaking of an agreement, and attempts to return

the parties to the status quo.” (cleaned up)). AOM did not receive Ploen’s interest

payments, and thus the Court doubts that AOM could have been required to disgorge

those payments.

But even taking plaintiffs’ calculation of their maximum recovery at face value,

the settlement amounts are astonishingly high: Ploen recovered 80 percent and Enrico

91 percent of the amounts that their expert witness identified as the maximum they

could have recovered under their best-case scenario—i.e., if everything had gone their

6
It is true that all of these transactions closed on the same day and that the loans
were expressly for the purpose of investing in AOM. Perhaps plaintiffs therefore
regard these various transactions as intertwined. Either way, however, one would
expect the interest payments to receive equal treatment on both sides of the ledger:
Either those payments are relevant to the rescission remedy, in which case they should
increase Ploen’s recovery but reduce Enrico’s, or they are not, in which case they should
not be included in the calculation for either plaintiff.

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way while litigating the underlying cases.7 See Case No. 21-CV-2248, ECF No. 169

¶ 113. As any experienced trial lawyer knows, only rarely does everything go well in

litigating a civil lawsuit. The Court agrees with defendant’s expert, retired Justice Sam

Hanson of the Minnesota Supreme Court, that one would expect to see such a large

settlement only in a “slam dunk” case—the kind of case that a party would almost

surely win on a motion for summary judgment. TT 697, 700–01. And as Justice Hanson

explained, this was far from a slam-dunk case.

Without question, plaintiffs had a lot of evidence in their favor. Most

importantly, plaintiffs had evidence that AOM concealed material negative information

that rendered it extremely unlikely that AOM would be able to pay cash dividends.

Even worse, at the same time that AOM was receiving this information, it was

reassuring plaintiffs that the business was doing well.

Despite this evidence, however, plaintiffs still faced significant hurdles to

prevailing on their negligent-misrepresentation claims:

7
The Court’s calculation includes the $250,000 payment that AOM made to each
plaintiff as part of the settlements. Plaintiffs contend that these sums should not be
considered because plaintiffs are not seeking to recover them from AIG. The Court
disagrees, as they are manifestly part of the total package that plaintiffs received in
exchange for dismissing their claims and therefore must be considered when
determining whether the settlements are reasonable. Even if plaintiffs are correct,
however, the settlements still represent a very high percentage of the maximum
potential recovery: 74 percent for Ploen and 84 percent for Enrico.

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To begin with, plaintiffs faced a real risk of losing the negligent-

misrepresentation claims altogether on the basis that AOM did not owe them a duty of

care. Although Delaware law8 is somewhat in flux on this issue, the recent trend

appears to be to require a showing of a “special relationship” between the parties. See

Blueacorn PPP, LLC v. Pay Nerd LLC, 310 A.3d 590, 593–94 (Del. Ch. 2024) (“Negligent

misrepresentation requires either a fiduciary or other special relationship. . . . The Court

of Chancery generally does not apply fiduciary duty doctrine to ordinary commercial

transactions.” (citation and quotation marks omitted)).

True, Delaware cases also recite that, in the alternative, a plaintiff can plead a

“justification for a remedy that only equity can afford.” Id. at 594 (citation and

quotation marks omitted). But Delaware courts have cast some doubt on the viability of

this method as an alternative way to state a claim for negligent misrepresentation: “In

my view . . . equitable fraud cannot be asserted simply by alleging common law fraud

minus scienter and tacking on a request for restitution.” LVI Grp. Invs., LLC v. NCM

Grp. Holdings, LLC, No. 12067-VCG, 2018 WL 1559936, at *18 & n.243 (Del. Ch. Mar. 28,

2018) (dismissing negligent-misrepresentation claim where the contract “was a carefully

drafted document” and the parties “were presumably represented by competent

counsel during the merger negotiations”).

8
As noted, both judges in the underlying cases ruled that plaintiffs’ claims were
governed by Delaware law.

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Even if a claim for an equitable remedy (such as restitution) were enough to

establish a basis for bringing a negligent-misrepresentation claim, it is by no means

certain that plaintiffs would have been granted that equitable remedy. In particular,

“rescission is a remedy rarely granted, as it results in the abrogation or unmaking of an

agreement and attempts to return the parties to the status quo.” Williams v. White Oak

Builders, Inc., No. Civ. A. 17556, 2006 WL 1668348, at *5 (Del. Ch.) (citation omitted),

aff’d, 913 A.2d 571 (Del. 2006). In short, plaintiffs faced a significant risk that their

negligent-misrepresentation claims would fail as a matter of law.

Somewhat relatedly, there was also a possibility that plaintiffs could have been

awarded damages instead of rescission. As noted, under Delaware law, rescission is

rarely granted and requires both that the party seeking rescission act with reasonable

diligence and that the court have the ability to “restore the parties substantially to the

same position which they occupied before making the contract.” Kostyszyn v.

Martuscelli, No. 8828-MA, 2014 WL 3510676, at *5 (Del. Ch. July 14, 2014). A court may

well have found that, by the time plaintiffs filed their lawsuits—nearly four years after

the transactions closed—returning the parties to the status quo was no longer possible.

In addition, in order to prevail, plaintiffs had to prove that their reliance was

justifiable. Blueacorn PPP, 310 A.3d at 594. Plaintiffs are wealthy, experienced,

sophisticated businessmen and investors who had their own lawyers and advisors.

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They had the contractual right to obtain whatever information they needed to make an

informed decision about whether to invest in AOM. They knew (or reasonably should

have known based on information available to them) that the transactions were

investments and that the ability of AOM to pay cash dividends—the whole point of the

investments—was conditioned on AOM meeting specific financial metrics.

Accordingly, they knew (or should have known) that AOM’s financial status was of

critical importance. And finally, plaintiffs learned, the day before the scheduled

closing, that AOM’s lenders were conditioning AOM’s ability to pay cash dividends to

plaintiffs on AOM having $3 million in liquidity. That was a red flag, and it should have

caused plaintiffs to postpone the closing and ask their lawyers to conduct due diligence

on AOM.

Despite all of this, plaintiffs failed to ask for any financial or other documentation

from AOM to verify what they were hearing from Nugent and others. Indeed, Enrico

testified that he relied on his “gut,” that he did not read the transaction documents

because of a strong “trust factor,” that he did not pay attention to his lawyer’s

explanation of the transaction, and that he “probably would have signed anything Tony

Jacobson asked [him] to sign.” TT 602–03, 614. At the same time, Enrico testified that

he “did not have a very high opinion of Shaun Nugent,” whom he regarded as a “bogus

phony,” and on whom he did not rely. TT 604–05. A factfinder could easily have

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concluded that plaintiffs’ reliance—and in particular their failure to conduct due

diligence—was not justifiable.

Plaintiffs contend that this is irrelevant because no documentation would have

informed them of the falsity of the statements that AOM made in the hours leading up

to the closing, when AOM found out that it was losing major clients and had fallen

significantly short of its financial projections. Nevertheless, as AIG’s expert pointed

out, due diligence would have uncovered the precarious nature of AOM’s business and,

in particular, that AOM’s financial forecasts and ability to pay cash dividends were

heavily dependent on retaining State Farm’s business even though State Farm had not

yet committed to working with AOM. TT 691–93. Plaintiffs’ own evidence

demonstrated that AOM was doing poorly long before the transactions were even

proposed; indeed, the deteriorating financial condition of the company was the very

reason why AOM was soliciting investments from plaintiffs. Based on these

circumstances, a finder of fact could have concluded that, had plaintiffs conducted due

diligence, they would have realized that AOM’s forecasts were too optimistic, and that

plaintiffs’ failure to conduct due diligence was both unreasonable and a cause of their

damages. Moreover, even if a factfinder found that plaintiffs justifiably relied on the

later misrepresentations, plaintiffs faced at least some risk that their recovery might be

reduced under comparative-fault principles due to their lack of due diligence. TT

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812–13 (defense expert opining that Delaware’s comparative-fault statute would likely

apply to a negligent-misrepresentation claim).

Plaintiffs point to various countervailing circumstances that, they claim, render

the settlements reasonable. The Court does not find that these circumstances

appreciably change the calculus. For example, plaintiffs point out that their lawsuits

put AOM at risk of bankruptcy. That may be true, but this factor is a wash. The risk of

AOM going bankrupt would have given AOM an incentive to settle, but it also would

have put plaintiffs at significant risk of being unable to collect any judgment, thereby

creating a concomitant incentive for plaintiffs to settle. TT 697–98, 706–07. Plaintiffs

contend that this analysis ignores the availability of insurance, but at the time of

settlement, AIG had denied coverage, so plaintiffs still faced a risk that any judgments

in their favor would be uncollectible. Similarly, while AOM would have wanted to

avoid incurring further litigation costs, the same is true of plaintiffs, whose own expert

opined that they would not be able to recover their attorney’s fees. TT 697–98, 704–06.

This factor is therefore also essentially a wash.

Finally, the Court notes that, even if the Court were required to consider the

value of the fraudulent-inducement claims, the settlements would still be unreasonable.

As plaintiffs acknowledge, the fraudulent-inducement claims “were simply alternative

legal theories that sought the exact same damages.” Case No. 21-CV-2248, ECF No. 169

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at 57. Accordingly, the only way that the fraudulent-inducement claims would

materially increase the settlement value of the overall case is if they were stronger than

the negligent-misrepresentation claims. Plaintiffs themselves, however, clearly

regarded the fraudulent-inducement claims as being more difficult to prove and

thereby having less value than the negligence claims. In particular, while plaintiffs

would not have had to prove a duty, they would have had to prove scienter. See id.

at 57 (arguing that “the negligent-misrepresentation claims were easier to prove

because, unlike fraud in the inducement, those claims did not require proof of

scienter”). The near-simultaneous emails in the hours leading up to the closing would

have been very helpful to plaintiffs in this regard, but plaintiffs nevertheless faced a

significant hurdle in that AOM shared the negative information with Jacobson, see Ex.

P73, who was not just one of the investors but also a trusted friend of both Ploen and

Enrico. This fact would have severely undermined any inference that AOM was

intentionally deceiving Ploen and Enrico. Accordingly, the Court finds that considering

the fraudulent-inducement claims would not alter its conclusion that the settlements

were unreasonable.

In sum, the settlements reached by plaintiffs would have been reasonable only if

plaintiffs had “slam dunk” cases against AOM. They did not. To the contrary,

plaintiffs faced significant hurdles, and had plaintiffs gone to trial, there was a

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substantial chance that they would have recovered nothing (after incurring significant

and unrecoverable attorney’s fees and costs). That risk should have been fully reflected

in the amount of the settlements. It was not, and therefore the settlements were not

reasonable.

ORDER

Based on the foregoing, and on all of the files, records, and proceedings herein,

IT IS HEREBY ORDERED THAT plaintiffs shall recover nothing on their claims against

defendant.

LET JUDGMENT BE ENTERED ACCORDINGLY.

Dated: December 10, 2024 s/Patrick J. Schiltz
Patrick J. Schiltz, Chief Judge
United States District Court

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