Opinion
1:22-cv-01411 (JGLC) (SDA)
12-01-2023
LifeSci Capital LLC, Plaintiff, v. Revelation Biosciences, Inc., Defendant.
HONORABLE JESSICA G. L. CLARKE, UNITED STATES DISTRICT JUDGE:
REPORT AND RECOMMENDATION
STEWART D. AARON, UNITED STATES MAGISTRATE JUDGE
Before the Court is a motion by plaintiff LifeSci Capital LLC (“Plaintiff” or “LifeSci”), pursuant to Rule 56 of the Federal Rules of Civil Procedure, seeking summary judgment against defendant Revelation Biosciences, Inc. (“Defendant” or “Revelation”). (Pl.'s 10/13/23 Mot., ECF No. 65.) Also before the Court is Defendant's motion, pursuant to Rule 15(a)(2), for leave to file a Second Amended Answer. (Def.'s 9/14/23 Mot., ECF No. 53.) For the reasons set forth below, I respectfully recommend that Plaintiff's motion for summary judgment be GRANTED and that Defendant's motion to amend be DENIED.
RELEVANT FACTS
This is an action seeking to recover damages based on the failure to pay banking and advisory fees allegedly due from a successful merger transaction. (See Compl., ECF No. 1, ¶ 1.)
The facts below are derived from Plaintiff's Rule 56.1 Statement (Pl.'s 56.1, ECF No. 67), Defendant's response thereto (Def.'s 56.1 Resp., ECF No. 79) and the paragraphs of Defendant's counter-statement of facts that are included at the end of Defendant's 56.1 response (to which Plaintiff did not respond). (See Def.'s 56.1 Resp. at pp. 20-22; cited herein with the prefix “Def.'s Counter 56.1”.) The facts are supplemented by other record evidence, construed in the light most favorable to Defendant (the nonmoving party), as needed to support and/or explain the recommendations contained herein.
I. Dramatis Personae
Defendant Revelation is the surviving company of a business combination between Petra Acquisition, Inc. (“Petra”), which is Revelation's predecessor company, and Revelation Biosciences, Inc. (“Old Revelation”). (Pl.'s 56.1, ECF No. 67, ¶ 1; Def.'s 56.1 Resp., ECF No. 79, ¶ 1.) Plaintiff LifeSci is a broker dealer registered with the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”). (Pl.'s 56.1 ¶ 2; Def.'s 56.1 Resp. ¶ 2.)
Petra was a special purpose acquisition company (“SPAC”) formed under the laws of the State of Delaware on November 20, 2019, for the express purpose of entering into a business combination with another company.(Pl.'s 56.1 ¶ 3; Def.'s 56.1 Resp. ¶ 3; Pl.'s 10/13/23 Mem., ECF No. 66, at 1; Def.'s 11/10/23 Opp. Mem. at 2.) Petra's Chief Executive Officer (“CEO”) was Andreas Typaldos (“Typaldos”)and its five-member board included David Dobkin (“Dobkin”), a Managing Director of LifeSci. (Pl.'s 56.1 ¶ 4; Def.'s 56.1 Resp. ¶ 4.) Petra completed its IPO on October 7, 2020, raising $72,781,510 from investors. (Pl.'s 56.1 ¶ 5; Def.'s 56.1 Resp. ¶ 5.)
As explained in a 2021 Opinion in the Southern District of Texas:
A [SPAC] is essentially a shell company that exists solely to raise funds through an initial public offering (“IPO”) that are then used to acquire another company.... The target company cannot be identified before the [SPAC] completes its IPO.... At least 90% of the capital raised in the IPO must be deposited into a trust account, with the interest paid to the investors.... The [SPAC]'s management team must identify and acquire a target company within a specified time period . . . If the [SPAC]'s management team fails to acquire a target company within the specified time period, then the special purpose acquisition company is dissolved and the IPO proceeds are returned to the investors.Camelot Event Driven Fund v. Alta Mesa Res., Inc., No. 4:19-CV-00957 (GCH), 2021 WL 1416025, at *1 (S.D. Tex. Apr. 14, 2021). In the present case, the deadline to complete the merger was one year after the Petra IPO closed. (See Def.'s 11/10/23 Opp. Mem., ECF No. 77, at 3.)
As CEO, Typaldos had “general powers and duties of supervision and management usually vested in the office of Chief Executive Officer of a corporation,” including “general supervision, direction and control of the business of the corporation.” (Pl.'s 56.1 ¶ 4; Def.'s 56.1 Resp. ¶ 4.)
II. Petra Agreements With LifeSci
Pursuant to a letter agreement (referred to as the Business Combination Marketing Agreement or “BCMA”), dated October 7, 2020, Petra engaged LifeSci and three other firms (Ladenburg Thalmann & Co. Inc., Ingalls & Snyder LLC and Northland Securities, Inc.) (collectively, the “Advisors”). (Pl.'s 56.1 ¶ 6; Def.'s 56.1 Resp. ¶ 6.) The BCMA provided that the Advisors would “assist [Petra] in connection with [its] merging with, acquiring, engaging in a share exchange, or engaging in any other similar business combination.” (Id.) Petra's Board of Directors approved the execution of the BCMA by unanimous written consent. (Pl.'s 56.1 ¶ 7; Def.'s 56.1 Resp. ¶ 7.)
Under Section 1 of the BCMA, Petra agreed to compensate LifeSci (and the other Advisors) on the following terms:
(b) As compensation for the foregoing services, the Company will pay the Advisors a cash fee equal to, in the aggregate, 4% of the gross proceeds received by the Company in the IPO (the “Fee”). The Company will allocate 52.5% of the Fee to LifeSci, 10% of the Fee to Ingalls, 22.5% of the Fee to Ladenburg and 15% of the Fee to Northland. The Fee shall be exclusive of any finder's fees which may become payable to the Advisors pursuant to any other agreement between the Advisors and the Company or the Target.
(c) The Fee shall be payable in cash and is due and payable to the Advisors by wire transfer at the closing of the Business Combination (“Closing”); provided that the Fee shall not be paid prior to the date that is 90 days from the effective date of the Registration Statement unless [FINRA] determines that such payment would not be deemed underwriters' compensation in connection with the IPO. If a proposed Business Combination is not consummated for any reason, no Fee shall be due or payable to the Advisors hereunder.(Pl.'s 56.1 ¶ 8; Def.'s 56.1 Resp. ¶ 8.)
Pursuant to a letter agreement dated November 3, 2020, Petra engaged LifeSci to provide investment banking and financial advisory services to Petra with respect to Petra's efforts to engage in a “Transaction” with a “Target” (the “LifeSci Engagement Letter”). (Pl.'s 56.1 ¶ 9; Def.'s 56.1 Resp. ¶ 9.) The independent members of Petra's Board of Directors approved the retention of LifeSci under the LifeSci Engagement Letter in a contemporaneous exchange of emails. (Pl.'s 56.1 ¶ 10; Def.'s 56.1 Resp. ¶ 10.)
Both agreements (namely, the BCMA and the LifeSci Engagement Letter) were duly executed by Petra's CEO, whose powers under the company's Bylaws included executing contracts on its behalf. (Pl.'s 56.1 ¶ 9; Def.'s 56.1 Resp. ¶ 9.) The BCMA and LifeSci Engagement Letter were publicly disclosed in Petra's SEC filings, including in the final prospectus. (Id.)
III. Introduction Of And Petra's Letter Of Intent With Old Revelation
In the six-month period following the IPO, LifeSci introduced Petra to 40 potential merger candidates, six of which received non-binding letters of intent and three of which progressed to formal merger discussions. (Pl.'s 56.1 ¶ 11; Def.'s 56.1 Resp. ¶ 11.) Ultimately, in May 2021, LifeSci found Old Revelation, a life sciences company developing therapeutics and diagnostics for respiratory viral infections, including COVID-19. (Id.) The introduction came from an affiliate of LifeSci, which itself was a significant investor in Old Revelation. (Id.)
The members of Petra's Board of Directors knew that LifeSci and Dobkin had conflicts of interest. (Pl.'s 56.1 ¶ 12; Def.'s 56.1 Resp. ¶ 12.) Nevertheless, the Petra Board decided that LifeSci could continue fulfilling its role as financial advisor for the merger negotiations. (Id.) “Between August 20 and 23, 2021, Petra management, together with their counsel at Loeb [& Loeb], determined that Petra's Current Charter require[d] that a third party valuation expert render a fairness opinion prior to consummation of the Business Combination due to David Dobkin's potential conflict of interest as a member of the board of Petra and as a managing director at LifeSci Capital, an affiliate of LifeSci Ventures, which is an existing investor in [Old] Revelation.” (Petra 12/17/21 Proxy Stmt., ECF No. 68-4, at 117; see also Pl.'s 56.1 ¶ 12; Def.'s 56.1 Resp. ¶ 12.)
After the introduction, Old Revelation and Petra negotiated terms for a letter of intent. (Pl.'s 56.1 ¶ 14; Def.'s 56.1 Resp. ¶ 14.) Old Revelation proposed that the Advisors, including LifeSci, should be penalized if Petra's investors redeemed their investments above a certain level, rather than allowing those investments to fund the post-merger company. (Pl.'s 56.1 ¶ 14; Def.'s 56.1 Resp. ¶ 14.) Old Revelation also suggested that a maximum redemption level would be a condition to closing. (Id.) Neither provision was accepted. (Id.) On July 11, 2021, Petra and Old Revelation executed a Letter of Intent. (Pl.'s 56.1 ¶ 15; Def.'s 56.1 Resp. ¶ 15.) In doing so, the key senior officers on all sides knew of the risk that Petra shareholder funds would not be available to the post-merger company. (Id.)
IV. July 2021 Communications Between And Among Petra, Its Counsel And LifeSci
On the morning of July 23, 2021, Typaldos of Petra sent an email to Dobkin stating, among other things, that Typaldos “need[ed] to understand capital needs and process and timing for that.” (7/23/21 Email from Typaldos to Dobkin, ECF No. 68-10, at LIFESCI 48002.) Typaldos also stated that he needed to “reach into Loeb [& Loeb] regarding [an extension] and regarding [the] sp[e]ed of working on [R]evelation without first getting some of [his] questions answered.” (Id.) On July 23, 2021, at 12:36 p.m., Typaldos sent an email to Petra's lawyer, Mitchell Nussbaum (“Nussbaum”) at Loeb & Loeb, to “pause” work on merger documents with Old Revelation until Typaldos “g[o]t [his] arms around” how much capital Revelation would have “after we merge.” (See 7/23/21 Email from Typaldos to Nussbaum, ECF No. 68-11, at LIFESCI12226; see also Def.'s Counter 56.1 ¶ 3.)
Later in the day on July 23, 2021, Dobkin sent an email to Typaldos, among others, stating:
I just got a call from Mitch [Nussbaum] that you asked him to stop work on [R]evelation. There is no cash issue with the company. They have at minimum a
20mm back stop from their investors. This is a very simple deal and something we can announce immediately and potentially close before the [SPAC] expires. There is no other deal that could close in time whatsoever. If you delay on this, the only thing that happens is that no deal will happen at all.(7/23/21 Email from Dobkin to Typaldos, ECF No. 68-10, at LIFESCI48001; see also Def.'s Counter 56.1 ¶ 4.)
The parties dispute whether Dobkin's statement regarding the $20 million backstop was true or false. Dobkin testified that there was an oral commitment for a $20 to $25 million backstop, but Defendant's witnesses testified that no such backstop existed. (See Def.'s 11/10/23 Opp. Mem. at 6; see also Def.'s Counter 56.1 ¶ 9.)
On July 24, 2021, Typaldos sent an email to Nussbaum, copying Dobkin, and stating:
I got an email yesterday from Dave Dobkin where he assured that [R]evealtion will have a backstop to fund as needed; so, they won't run out of money this year as per the presentation deck I was given.
Given that, there is no longer a need for a pause on merger document production as I wrote you.
Please resume work expeditiously so we can close as quickly as possible.(7/24/21 Email from Typaldos to Nussbaum, ECF No. 68-11, at LIFESCI12225.) Dobkin then forwarded Typaldos' email to others at LifeSci, stating: “Jesus.” (Id.; see also Def.'s Counter 56.1 ¶ 5.)
V. Merger Agreement
After a due diligence period, on August 29, 2021, the disinterested members of Petra's Board voted unanimously in favor of the merger with Old Revelation. (Pl.'s 56.1 ¶ 16; Def.'s 56.1 Resp. ¶ 16.) Effective as of that date, Petra and Old Revelation executed a certain Agreement and Plan of Merger (the “Merger Agreement”). (Pl.'s 56.1 ¶¶ 1, 16; Def.'s 56.1 Resp. ¶¶ 1, 16.)
In proceeding with the Merger Agreement, the Board emphasized its confidence in Old Revelation's product mix, its management team, and its belief that the opportunity was the best available to Petra. (Pl.'s 56.1 ¶ 16; Def.'s 56.1 Resp. ¶ 16.) The Board also knew the risks and uncertainties of proceeding with the merger. (Id.) These included Old Revelation's limited operating history, the chance that its drug candidates would prove unsuccessful, regulatory issues, and competition. (Id.) The Board also considered the general risk that if the merger did not close, Petra would have to liquidate. (Id.)
The closing conditions in the Merger Agreement included board and stockholder approval and that Petra receive an independent “Fairness Opinion.” (Pl.'s 56.1 ¶ 18; Def.'s 56.1 Resp. ¶ 18.) It also required that “[Petra] shall have net tangible assets of at least $5,000,001 upon consummation of the Merger.” (Id.) There were no other financial or liquidity conditions. (Id.) The Merger Agreement allowed for termination at any time by mutual written consent [of Old Revelation and Petra].” (Id.)
On August 30, 2021, Petra, Revelation and Petra Acquisition Merger, Inc. (a wholly owned subsidiary of Petra, created to facilitate the intended merger) issued a joint press release announcing the merger. (Pl.'s 56.1 ¶ 19; Def.'s 56.1 Resp. ¶ 19.) The press release notified public investors that Old Revelation would be advised in the merger negotiations by Roth Capital Partners (as financial advisor) and Fox Rothschild LLP and J.P. Galda & Co. (as legal counsel), while Petra would be advised by LifeSci (as financial and capital markets advisor) and Loeb & Loeb (as legal counsel). (Id.)
VI. Amendment To Agreement Between Petra And LifeSci
By letter dated September 17, 2021, Petra and LifeSci executed an amendment to the LifeSci Engagement Letter (the “Amendment to Agreement”). (Pl.'s 56.1 ¶ 20; Def.'s 56.1 Resp. ¶ 20.) The Amendment to Agreement contained the following provision concerning LifeSci's right to compensation:
2. Paragraphs 6(a) and 6(b) of the [LifeSci Engagement Letter] Agreement are hereby amended by deleting them in their entirety and replacing them with the following:
(a) In the event there is a transaction (or series of related transactions) (a “Transaction”) pursuant to which Petra effectuates a merger, consolidation, reorganization, equity sale, asset sale or other business combination or similar acquisition transaction with or involving one or more potential target companies (each a “Target”) or a Target's affiliate which qualifies as Petra's initial business combination as described in Petra's final prospectus, dated as of October 7, 2020 and filed with the U.S. Securities and Exchange Commission (File No. 333-240175) on October 13, 2020 that is consummated during the term of the LifeSci Engagement Letter (as extended under paragraph 5(a)), Petra shall pay LifeSci as compensation for investment banking and financial advisory services an advisory fee (the “M&A Advisory Fee”) of three and one-half percent (3.5%) of the Total Consideration (as defined below). The M&A Advisory Fee shall be payable as follows:
(i) Petra shall pay to LifeSci a cash fee equal to one percent (1.0%) of the Total Consideration in accordance with clause (b) below; and
(ii) Petra shall issue to LifeSci (or another entity designated by LifeSci) equity interests in the post-Transaction surviving entity with value upon issuance to LifeSci equal to two and one half percent (2.5%) of the Total Consideration in accordance with clause (b) below.(Pl.'s 56.1 ¶ 21; Def.'s 56.1 Resp. ¶ 21.)
The Amendment to Agreement also imposed a fee cap on LifeSci, limiting its success fees under the Amendment to Agreement and the BCMA to a maximum of $2,650,000 in cash and $2,650,000 in common stock in Petra. (Pl.'s 56.1 ¶ 22; Def.'s 56.1 Resp. ¶ 22.) The fee cap was specifically included to account for the overall fee cap in the Merger Agreement. (Pl.'s 56.1 ¶ 23; Def.'s 56.1 Resp. ¶ 23.) The Amendment to Agreement and the original LifeSci Engagement Letter were filed with the SEC and described in a Form 8-K. (Id.)
VII. Petra Registration Statement
On September 17, 2021, Petra filed a Registration Statement with the SEC to register 10,500,000 shares of common stock for issuance to the equity holders in Old Revelation. (Pl.'s 56.1 ¶ 24; Def.'s 56.1 Resp. ¶ 24.) The filing explained, among other things, the intended structure of the merger: Petra would create a wholly-owned subsidiary, the “merger sub,” which would merge with Old Revelation; Old Revelation would survive the merger as a wholly-owned subsidiary of Petra; and Petra would be renamed “Revelation Biosciences, Inc.,” which is the defendant in this action. (Pl.'s 56.1 ¶ 25; Def.'s 56.1 Resp. ¶ 25.)
The “Background of the Business Combination” section of the Registration Statement states that on “November 3, 2020, we [Petra] executed a financial advisory agreement with LifeSci Capital LLC.” (Pl.'s 56.1 ¶ 26; Def.'s 56.1 Resp. ¶ 26.) The section describes the work that LifeSci did, culminating in the Merger Agreement, and discusses other target companies LifeSci introduced to Petra. (Pl.'s 56.1 ¶ 27; Def.'s 56.1 Resp. ¶ 27.) The section discloses that Paul Yook, the Managing Partner of LifeSci Venture Partners II, a LifeSci affiliate and existing investor in Old Revelation, introduced Old Revelation as a potential merger target to plaintiff LifeSci's Dobkin. (Pl.'s 56.1 ¶ 28; Def.'s 56.1 Resp. ¶ 28.) The section also disclosed that Dobkin advised Petra's Board of Directors of this connection and possible conflict, and that the independent members, advised by counsel, determined that Petra would need to have “a third party valuation expert render a fairness opinion regarding the transaction with [Old] Revelation.” (Pl.'s 56.1 ¶ 29; Def.'s 56.1 Resp. ¶ 29.)
VIII. Fairness Opinion
An independent member of the Petra Board recommended, and Petra's CEO retained, Scalar, LLC (“Scalar”) to render a fairness opinion regarding the transaction. (Pl.'s 56.1 ¶ 29; Def.'s 56.1 Resp. ¶ 29.) Subsequently, Dobkin recused himself from certain discussions and abstained from certain votes relating to the transaction. (Id.)
Scalar rendered its fairness opinion to Petra's Board on September 17, 2021, concluding that “the consideration payable to the shareholders of [Old Revelation] was fair, from a financial point of view, to the holders of shares of Petra.” (Pl.'s 56.1 ¶ 30; Def.'s 56.1 Resp. ¶ 30.) The disinterested members of Petra's Board voted unanimously in favor of the merger. (Id.)
IX. Backstop Financing
On October 15, 2021, LifeSci sent to Petra's counsel an email stating that “[m]ultiple of [Old] Revelation's investors have agreed to enter into backstop agreements with Petra in order to help support the close of the deal and ensure that a minimum of cash remains in the company upon the close of the transaction.” (10/15/21 Email from LifeSci to Loeb & Loeb, ECF No. 68-15, at LIFESCI28916.) The email enclosed a form of backstop agreement to use with Old Revelation's investors. (See id.) In late October and November 2021, LifeSci made efforts to line up other forms of backstop financing for the transaction. (See 10/26/21 Email from Dobkin to Zygmont, ECF No. 68-17; 11/10/21 Email from Dobkin to Zygmont, ECF No. 68-18; Nov. 2021 Email Chain between LifeSci and Zygmont, ECF No. 68-19.)
X. Petra Proxy Statement
The Merger required Petra's shareholders' approval. (Pl.'s 56.1 ¶ 32; Def.'s 56.1 Resp. ¶ 32.) For the shareholder vote, Petra issued to the shareholders, on December 16, 2021, a proxy statement (the “Proxy”) stating that it contained “all important facts about the issues on which shareholders are asked to vote.” (See id.)
The Proxy recited, repeatedly and at length, the details of LifeSci's and Dobkin's conflicts of interest. (Pl.'s 56.1 ¶ 33; Def.'s 56.1 Resp. ¶ 33.) For example:
LifeSci Capital's interests in the Business Combination may be different from or in addition to (and may conflict with) the interests of Petra's stockholders.
* * *
David Dobkin, one of our directors, is a principal of LifeSci Capital, which (i) was one of the representatives of the underwriters in the Petra IPO, (ii) is entitled to certain fees upon the completion of the Business Combination under the terms of the BCMA, and (iii) is the exclusive financial and mergers and acquisitions advisor to Petra in the Business Combination, under the terms of the LifeSci Engagement Letter.(Id.) The Proxy also disclosed the amount payable to LifeSci upon closing of the merger: “[T]he fees that would be payable to LifeSci Capital upon consummation of the Business Combination amount to approximately $5,203,411.” (Pl.'s 56.1 ¶ 34; Def.'s 56.1 Resp. ¶ 34.)
XI. Backstop Agreements
In December 2021, Old Revelation's investors executed backstop agreements. (Pl.'s 56.1 ¶ 35; Def.'s 56.1 Resp. ¶ 35.) The total commitment was disclosed in a contemporaneous SEC filing:
On December 21, 2021, Petra entered into certain backstop agreements (the “Backstop Agreements”) with AXA Prime Impact Master Fund (“AXA”) (through a backstop agreement with [Old] Revelation, LifeSci Venture Partners (“LifeSci”) and other Petra and [Old] Revelation institutional, and individual investors (such additional institutional and individual investors, together with LifeSci and [Old]
Revelation collectively, the “Backstop Subscribers”). Pursuant to the Backstop Agreements, the Backstop Subscribers have agreed to subscribe for and purchase, in the aggregate, up to $4.5 million of shares of Petra's common stock, par value $0.001 per share (the “Petra Common Stock”), in the event that more than $31.5 million of shares of Petra Common Stock are submitted for redemption in connection with Petra's proposed business combination with [Old] Revelation (the “Business Combination”).(Id.)
XII. Closing Of Merger
At a special meeting on January 6, 2022, Petra stockholders voted on the proposed merger. (Pl.'s 56.1 ¶ 35; Def.'s 56.1 Resp. ¶ 35.) Stockholders holding 4,773,067 shares (representing 98% of shares voted) voted in favor of the transaction; only 111,070 shares voted against. (Id.)
On January 6, 2022, Old Revelation's Chief Financial Officer (“CFO”), Chester Zygmont, sent a spreadsheet to Petra's lawyers (at Loeb & Loeb) entitled “REVB Merger Closing Transaction Expenses.” (Pl.'s 56.1 ¶ 36; Def.'s 56.1 Resp. ¶ 36.) The spreadsheet contained the following data:
LifeSci Capital LLC - M&A Cash Fee: $1,050,000 (1.0% of Target Valuation Payable)
LifeSci Capital LLC - M&A Equity Fee: $2,625,000 (2.5% of Target Valuation Payable)
LifeSci Capital LLC Deferred Underwriting Fee: $1,528,411.71.
Revelation Bio Valuation: $105,000,000.(Id.)
On January 10, 2022, Old Revelation completed the business combination with Petra, with defendant Revelation being the surviving company. (Pl.'s 56.1 ¶¶ 1, 37; Def.'s 56.1 Resp. ¶¶ 1, 37.) The 10,500,000 shares of common stock in the new company (defendant Revelation) that Petra had registered were transferred to, or reserved for, the equity investors in Old Revelation. (Pl.'s 56.1 ¶ 37; Def.'s 56.1 Resp. ¶ 37.)
After processing the redemption to Petra's shareholders, as calculated by Old Revelation, the post-merger company was to receive approximately $4.2 million. (Pl.'s 56.1 ¶ 39; Def.'s 56.1 Resp. ¶ 39.) No one suggested calling off the merger. (Id.) No one blamed LifeSci, suggested that it should not be paid, or took it to task because the insider investors did not provide $20 million in backstop funding. (Id.) Indeed, Typaldos pointed the finger at Old Revelation, which had been unable to release any positive news to the marketplace about its drug candidates. (Id.) On January 6, 2022, Typaldos wrote, “Obviously we are all upset about the cash position. Just like we are upset that no news or data was possible that could have helped keep more in [the Petra SPAC] trust and that no financing deals were done that could also have helped.” (Id.)
XIII. Deferral Letter
On the day of the closing, i.e., January 10, 2022, Revelation, on the one hand, and LifeSci and the other Advisors (Ladenburg, Ingalls and Northland), on the other, agreed to defer the payment of fees. (Pl.'s 56.1 ¶ 40; Def.'s 56.1 Resp. ¶ 40.) The terms of deferral were set out in a certain letter agreement dated January 10, 2022 (the “Deferral Letter”). (Id.) Old Revelation, by CFO Zygmont, also “Agreed and Acknowledged” the Deferral Letter. (Id.) In the letter, Revelation also acknowledged its obligations to LifeSci under the prior agreements: “Except as expressly modified in this letter agreement, all of the terms and provisions of the Underwriting Agreement, BCMA and M&A Fee Agreement remain unchanged and in full force and effect.” (Id.)
Under the Deferral Letter, Petra and LifeSci (and others) agreed to defer payment of the deferred underwriting commissions under the BCMA payable to LifeSci of $1,528,411.71 and the M&A Cash Fee payable to LifeSci under the Amendment to Agreement in the amount of $1,050,000.00 to the earlier of 6 months or the surviving company's completion of a post-merger debt or equity financing. (Pl.'s 56.1 ¶ 42; Def.'s 56.1 Resp. ¶ 42.)
The precise cash amounts to be paid by the “Combined Company” (i.e., the post-merger
Revelation) were set out in Schedule 1 to the Deferral Letter:
Schedule I
(Pl.'s 56.1 ¶ 43; Def.'s 56.1 Resp. ¶ 43.)
Deferred Underwriting Commissions Payable:
Amount
LifeSci Capital LLC
SI,528,411-71
Ladcnburg Thalmann & Co. Inc.
$655,033.59
Northland Securities, Inc.
$436,689.06
Ingalls & Snyder LLC
$291,126.04
Total
$2,911,260.40
Cash M&A Fees Payable:
Amount
LifeSci Capital LLC
$ 1,050,000.00
Also, on the day of the closing, i.e., January 10, 2022, Old Revelation's CFO Zygmont sent an email attaching two excel spreadsheets: “Total Petra/Revelation Merger Expenses” and “Flow of Funds from Trust Account.” (Pl.'s 56.1 ¶ 41; Def.'s 56.1 Resp. ¶ 41.) The Total Petra/Revelation Merger Expenses chart showed that LifeSci Capital's share of the Deferred Underwriting Fee was $1,528,411.71, the calculation of the “LifeSci Capital LLC - M&A Cash Fee” was $1,050,000.00 and the calculation of the “LifeSci Capital - M&A Equity Fee” was $2,625,000.00. (Id.) According to the spreadsheet, the M&A Cash Fee and M&A Equity Fee were calculated based on “1% of Target Valuation Payable in Cash” and “2.5% of Target Valuation Payable in Equity.” (Id.) The spreadsheet indicated that the “Revelation Bio Valuation” was $105,000,000.00, which was the valuation used to calculate the M&A Cash Fee and M&A Equity Fee. (Id.) All of these calculations matched the approximations disclosed to shareholders in the Proxy. (Id.)
The Deferral Letter provides that “any outstanding balances of payable fees will accrue interest monthly in an amount equal to one and one-half percent (1.5%) of the outstanding payable balance, until such fees have been paid in full, including any accrued interest.” (Deferral Ltr., ECF No. 19-13, at PDF p. 4; see also Pl.'s 56.1 ¶ 49; Def.'s 56.1 Resp. ¶ 49.)
XIV. Post-Merger Equity Financing
On January 25, 2022, Revelation (post-merger) closed a $7.76 million equity financing. (Pl.'s 56.1 ¶ 44; Def.'s 56.1 Resp. ¶ 44.) The January 25, 2022 equity financing qualified as “any debt or equity financing of the post-business combination company (the ‘Combined Company')” under the Deferral Letter. (Pl.'s 56.1 ¶ 45; Def.'s 56.1 Resp. ¶ 45.)
XV. Revelation's Failures To Pay And Issue Equity To LifeSci
Revelation did not pay LifeSci its share of the Deferred Underwriting Fee, which CFO Zygmont had calculated to be $1,528,411.73. (Pl.'s 56.1 ¶ 46; Def.'s 56.1 Resp. ¶ 46.) Revelation did not pay LifeSci the M&A Cash Fee, which CFO Zygmont had calculated to be $1,050,000.00. (Pl.'s 56.1 ¶ 47; Def.'s 56.1 Resp. ¶ 47.) Revelation did not issue equity to LifeSci for the M&A Equity Fee, which CFO Zygmont had calculated to be $2,625,000.00. (Pl.'s 56.1 ¶ 48; Def.'s 56.1 Resp. ¶ 48.) The equity was to be issued within five trading days after the consummation of the merger transaction. (Id.)
PROCEDURAL HISTORY
On February 18, 2022, Plaintiff filed its Complaint asserting three causes of action based upon breach of contract. (Compl., ECF No. 1, ¶¶ 55-74.) On May 2, 2022, Defendant filed its Answer. (Def.'s Ans., ECF No. 11.) In its Answer, Defendant asserted five affirmative defenses: (1) that “[t]he Engagement Letter and the BCMA were interested transactions between Petra and LifeSci” and therefore that “[t]he Engagement Letter and the BCMA [were] not enforceable by LifeSci against Petra, now named Revelation, to the extent that they were not properly approved by Petra's disinterested directors and were not fair to Petra” (id. at 8 (First Aff. Defense)); (2) that Plaintiff breached the implied covenant of good faith and fair dealing implied in the Engagement Letter and the BCMA (id. (Second Aff. Defense)); (3) that “[i]n the event LifeSci is entitled to a stock fee, any determination of the number of Revelation shares it is to receive must be based on the implied per share value of such shares at the time the de-SPAC merger closed” (Third Aff. Defense)); (4) that “Revelation is not obligated to pay fees to LifeSci to the extent such payments would result in a violation of the cap on total costs and expenses set forth in section 11.5 of the Merger Agreement” (id. (Fourth Aff. Defense)); and (5) that the Court lacked subject matter jurisdiction “in the event there is a lack of complete diversity.”(Id. (Fifth Aff. Defense).)
As set forth below, Defendant later withdrew the fifth affirmative defense. The parties have acknowledged that “Plaintiff (a limited liability company) has the citizenship of its two members: one is a citizen of New Jersey; the other, a citizen of Hawaii” and that “Defendant (a corporation) has the citizenship of its principal place of business (California) and its place of incorporation (Delaware).” (6/9/22 Joint Ltr., ECF No. 14, at 2.)
On June 22, 2022, Plaintiff filed its first motion for summary judgment. (Pl.'s 6/22/22 Mot., ECF No. 17.) On July 22, 2022, Defendant opposed the motion, arguing that it had valid defenses requiring discovery. (Def.'s 7/22/22 Opp. Mem., ECF No. 20, at 7-17.) For reasons stated on the record on March 27, 2023, the Court denied Plaintiff's motion for summary judgment, and held that Defendant was entitled to discovery and an opportunity to assert its defenses. (3/27/23 Tr., ECF No. 30, at 10.) In so holding, the Court stated:
And to be clear: the Court expresses no view on whether Revelation will be able to substantiate its bold claims of self-dealing or fraud with the benefit of discovery. Indeed, as LifeSci amply demonstrates, Petra appears to have repeatedly disclosed to shareholders that LifeSci was underwriting the acquisition and that Dobkin, then working for LifeSci, was also one of Petra's seven initial board members. Petra appears to have also made multiple express conflict-of-
interest disclosures to shareholders, who themselves overwhelmingly approved the merger.(Id.)
On March 28, 2023, the Court entered a Case Management Plan and Scheduling Order. (Case Mgt. Plan, ECF 29). The Case Management Plan provided that “[n]o amendments to the pleadings may be made after April 17, 2023 without leave of the Court.” (Id. ¶ 5.) It also set August 21, 2023 as the deadline for completion of fact discovery. (Id. ¶ 7.) On April 13, 2023, Defendant filed an Amended Answer. (Def.'s Am. Ans., ECF 33.) The Amended Answer asserted the same first four affirmative defenses. (Id. at 8.) Defendant also withdrew its fifth affirmative defense of lack of subject matter jurisdiction, and replaced it with a fifth affirmative defense asserting that enforcement of the Engagement Agreement and the BCMA was barred by the faithless servant doctrine. (Id.)
Between April and August 2023, the parties engaged in discovery, during which time the Court resolved a dispute regarding the appropriate time frame for Plaintiff's document collection. (See 6/2/23 Order, ECF No. 42; 7/21/23 Joint Ltr., ECF No. 46.) On the day discovery closed, i.e., August 21, 2023, the parties submitted a status report advising the Court that discovery was complete, except for two depositions that had to be scheduled in September 2023 due to witness unavailability. (8/21/23 Joint Ltr., ECF No. 51.)
On September 14, 2023, Defendant filed its motion for leave to file a Second Amended Answer that now is before the Court. (See Def.'s 9/14/23 Mot.) In its Second Amended Answer, Defendant seeks to add a counterclaim for breach of fiduciary duty. (See Proposed Second Am. Answer, ECF No. 55-1, at 9-13.) No new affirmative defenses were pled. (See id. at 8.) On September 27, 2023, Plaintiff filed its opposition to the motion to amend. (Pl.'s 9/27/23 Opp. Mem., ECF No. 56.) On October 4, 2023, Defendant filed it reply memorandum in further support of its motion to amend. (Def.'s 10/4/23 Reply, ECF No. 58.)
On October 11, 2023, Defendant stipulated to the withdrawal of its first affirmative defense. (10/12/23 Stip. & Order, ECF No. 64.) On October 13, 2023, Plaintiff filed its motion for summary judgment that now is before the Court. (See Pl.'s 10/13/23 Mot.) On November 10, 2023, Defendant filed its opposition to the motion for summary judgment. (See Def.'s 11/10/23 Opp. Mem.) On November 29, 2023, Plaintiff filed its reply memordandum in further support of its motion for summary judgment. (Pl.'s Reply, ECF No. 82.)
DISCUSSION
I. Plaintiff Should Be Granted Summary Judgment On Its First And Second Causes Of Action For Breach Of Contract
A. Legal Standards
1. Summary Judgment
Summary judgment is appropriate where there are no genuine issues of material fact and the movant is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). The moving party has the initial burden of demonstrating the absence of a disputed issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 321-23 (1986). A dispute concerning material fact is genuine “if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Aldrich v. Randolph Cent. Sch. Dist., 963 F.2d 520, 523 (2d Cir. 1992) (quoting Anderson, 477 U.S. at 248). In making its determination, the court must resolve all ambiguities and draw all reasonable inferences in favor of the non-movant. Anderson, 477 U.S. at 255.
To defeat summary judgment, it is not sufficient for the non-moving party to present evidence that is conclusory or speculative, with no basis in fact. See Anderson, 477 U.S. at 50. Indeed, the non-moving party must go beyond the pleadings and “must do more than simply show that there is some metaphysical doubt as to the material facts.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). Instead, the nonmoving party must present “specific facts showing that there is a genuine issue for trial.” Beard v. Banks, 548 U.S. 521, 529 (2006) (quoting Fed.R.Civ.P. 56(e)).
“The moving party bears the initial burden of showing that there is no genuine dispute as to a material fact.” Jaffer v. Hirji, 887 F.3d 111, 114 (2d Cir. 2018) (quoting CILP Assocs., L.P. v. PriceWaterhouse Coopers LLP, 735 F.3d 114, 123 (2d Cir. 2013)). “But where ‘the burden of proof at trial would fall on the nonmoving party,' the moving party can shift the initial burden by ‘point[ing] to a lack of evidence to go to the trier of fact on an essential element of the nonmovant's claim.'” Id. (alteration in original) (quoting Simsbury-Avon Pres. Soc'y, LLC v. Metacon Gun Club, Inc., 575 F.3d 199, 204 (2d Cir. 2009)). “[W]here a plaintiff's motion for summary judgment would be meritorious absent the assertion of an affirmative defense, in order to avoid summary judgment, the defendant must adduce evidence which, viewed in the light most favorable to and drawing all reasonable inferences in favor of [it], would permit judgment for [it] on the basis of that defense.” Jose Luis Pelaez, Inc. v. McGraw-Hill Glob. Educ. Holdings LLC, 399 F.Supp.3d 120, 127 (S.D.N.Y. 2019) (alterations in original) (quotation marks omitted).
When a dispute centers on a written contract, summary judgment may be granted when the terms are clear and unambiguous. See Fischer & Mandell, LLP v. Citibank, N.A., 632 F.3d 793, 799 (2d Cir. 2011).
2. Breach Of Contract
To recover for breach of contract under New York law, which governs here according to the contracts at issue,a plaintiff must prove “(1) a contract; (2) performance of the contract by one party; (3) breach by the other party; and (4) damages.” Bank of Am., N.A. v. Vergest Ltd., No. 10-CV-04682 (JGK), 2011 WL 92751, at *2 (S.D.N.Y. Jan 11, 2011) (quoting Rexnord Holdings, Inc. v. Bidermann, 21 F.3d 522, 525 (2d Cir. 1994)).
The Court already found that New York law controls here (see 4/7/23 Tr. at 4-5), which neither party disputes.
B. Analysis
1. Plaintiff's First And Second Causes Of Action For Breach Of Contract
The Court finds that no genuine issue of fact exists as to any of the elements of Plaintiff's breach of contract claims alleged in its First and Second Causes of Action. The First Cause of Action alleges a breach of the BCMA and the Second Cause of Action alleges a breach of the Amendment to Agreement. (Compl. ¶¶ 55-67.)
Plaintiff states that it “is prepared to abandon its Third Cause of Action if the Court grants summary judgment on the first two causes of action” (Pl.'s 10/13/23 Mem. at 24 n.7), which is what the Court is recommending. Thus, the Court does not consider Plaintiff's Third Cause of Action for placement fees.
First, there is no dispute that the BCMA and the Amendment to Agreement were valid contracts. Second, Plaintiff performed under both agreements, and Defendant does not contend otherwise. Third, Defendant breached the agreements by failing to make the required payments and failing to issue equity to LifeSci. Fourth, Plaintiff has suffered monetary damages as a result of Defendant's breaches. On its First Cause of Action, for breach of the BCMA, Plaintiff has suffered damages in the amount of $1,528,411.71. (See Pl.'s 56.1 ¶¶ 36, 42-43; Def.'s 56.1 Resp. ¶¶ 36, 42-43.) On its Second Cause of Action, for breach of the Amendment to Agreement, Plaintiff has suffered damages in the amount of $1,050,000.00, plus the value of the equity due to Plaintiff. (See id.) Thus, Plaintiff is entitled to summary judgment against Defendant, unless Defendant can show that it has one or more valid defenses.
2. Defendant's Affirmative Defenses
In opposition to Plaintiff's summary judgment motion, Defendant raises three affirmative defenses, which are addressed in turn.
a. Faithless Servant Doctrine
Revelation asserts that its fifth affirmative defense, based upon the faithless servant doctrine, bars Plaintiff's enforcement of the BCMA and Amendment to Agreement. (See Def.'s 11/10/23 Opp. Mem. at 9-16.) Specifically, Revelation contends that LifeSci was acting as the agent of Petra and that “Dobkin, as Petra's agent and a member of its board of directors, provided dishonest advice that persuaded Petra to pursue an ill-advised merger for LifeSci's benefit, not Petra's.” (See Def.'s 11/10/23 Opp. Mem. at 9-10.)
i. Legal Standards
Under the faithless servant doctrine, “[o]ne who owes a duty of fidelity to a principal and who is faithless in the performance of his services is generally disentitled to recover his compensation, whether commissions or salary.” Phansalkar v. Andersen Weinroth & Co., L.P., 344 F.3d 184, 200 (2d Cir. 2003) (quoting Feiger v. Iral Jewlery, Ltd., 41 N.Y.2d 928, 928 (1977)). “New York law with respect to disloyal or faithless performance of employment duties is grounded in the law of agency, and has developed for well over a century.” Id. (citing Murray v. Beard, 102 N.Y. 505 (1886)).
“In order to establish a principal/agent relationship, a party must demonstrate the following elements: (1) the manifestation by the principal that the agent shall act for him; (2) the agent's acceptance of the undertaking; and (3) an understanding between the parties that the principal is to be in control of the undertaking.” Nuevo Mundo Holdings v. Pricewaterhouse Coopers LLP, No. 03-CV-00613 (GBD), 2004 WL 112948, at *4 (S.D.N.Y. Jan. 22, 2004); see also Bigio v. Coca-Cola Co., 675 F.3d 163, 175 (2d Cir. 2012) (“New York common law provides that an agency relationship results from a manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and the consent by the other to act.” (quoting N.Y. Marine & Gen. Ins. Co. v. Tradeline (L.L.C.), 266 F.3d 112, 122 (2d Cir. 2001)). “The importance of control by the principal is paramount[;] ‘[t]here is no agency relationship where the alleged principal has no right of control over the alleged agent.'” Nuevo Mundo Holdings, 2004 WL 112948, at *5 (quoting Morgan Guar. Trust Co. of N.Y. v. Republic of Palau, 657 F.Supp. 1475, 1481 n.2 (S.D.N.Y. 1987)); see also In re Shulman Transp. Enterprises, Inc., 744 F.2d 293, 295 (2d Cir. 1984) (“An essential characteristic of an agency relationship is that the agent acts subject to the principal's direction and control.” (citing Restatement (Second) of Agency § 1(1) (1958)).
“New York courts have used two different standards to determine whether an employee's [or agent's] misbehavior warrants forfeiture” of promised compensation. Phansalkar, 344 F.3d at 201.“Both standards derive from decisions of the New York Court of Appeals from the late nineteenth century.” Id. Under the first standard, “a disloyal employee [or agent] forfeits promised compensation only when the misconduct and unfaithfulness substantially violates the contract of service.” Id. (cleaned up). Under the second standard, “if [an employee or agent] acts adversely to his employer in any part of the transaction, or omits to disclose any interest which would naturally influence his conduct in dealing with the subject of the employment, it amounts to such a fraud upon the principal, as to forfeit any right to compensation for services.” Id. at 202 (citation omitted).
In the Discussion section of its Opinion in Phansalkar, the Second Circuit uses the terms “employee” and “agent” interchangeably. See Phansalkar, 344 F.3d at 199-211.
ii. Application
Even assuming, arguendo, that LifeSci was acting as agent for Petra, Defendant has not met either standard for LifeSci to forfeit its compensation under the faithless employee doctrine. The only conduct by LifeSci referred to by Defendant as a basis for invocation of the faithless employee doctrine is the July 2021 email from Dobkin stating that Petra “ha[d] at minimum a 20mm back stop from their investors,” which Defendant contends was false. (See Def.'s 11/10/23 Opp. Mem. at 5-6, 9-10, 16.) Under the first standard, Dobkin's single disputed statement regarding $20 million in backstop financing, in the entire context of the services provided by LifeSci, did not, as required, “substantially violate” the agreements under which Plaintiff seeks recovery on its motion. See Phansalkar, 344 F.3d at 201.
Both of the relevant agreements, i.e., the BCMA and the LifeSci Engagement Letter, contain provisions regarding LifeSci's relationship with Revelation, which undercut Revelation's position that LifeSci was acting as an employee or agent of Revelation. The BCMA provides:
Each Advisor [which includes LifeSci] shall perform its services as an independent contractor and not as an employee of the Company or affiliate thereof. It is expressly understood and agreed to by the parties that no Advisor shall have authority to act for, represent or bind the Company or any affiliate thereof in any manner, except as may be expressly agreed to by the Company in writing. In rendering such services, the Advisors will be acting solely pursuant to a contractual relationship on an arm's-length basis....(BCMA, ECF No. 1-1, ¶ 7.) Similarly, the LifeSci Engagement Letter provides:
The parties agree that LifeSci shall act solely as an independent contractor with respect to the duties contemplated by this Agreement incremental to those already in place as a result of LifeSci's role as the Company's underwriter in its initial public offering, and that LifeSci shall owe no further fiduciary or similar duties to the Company.(LifeSci Engagement Ltr., ECF No. 1-2, ¶ 8; but see Def.'s Counter 56.1 ¶ 15 (“Dobkin and Typaldos considered themselves to be in a fiduciary relationship.”)
The record contains no evidence that backstop financing had any influence on the Petra Board's decision to approve the transaction or the shareholders' vote approving the transaction. Defendant has provided no evidence that backstop financing was discussed by Petra's Board. (See Typaldos Dep., ECF No. 83-1, at 88:5-10.) In addition, backstop financing was not addressed in the Proxy issued to public shareholders. (See generally Petra 12/17/21 Proxy Stmt.) Nor was backstop financing made a condition to closing. (See Typaldos Dep., ECF No. 68-24, at 94:9-18.) The Court finds the following colloquy at the deposition of Petra's CEO Typaldos most telling:
Q. And as of the date of [the] prospectus [in December 2021] you knew that there
-- that Old Revelation had not lined up $20 million of backstop financing, right?
A. Correct.
Q. Okay. And the board knew that, right?
A. Correct.
Q. But you were still going to go forward -- you were still recommending to go forward with the transaction?
A. Correct.
Q. And the reason that you're recommending going forward with the transaction is because you believed that -- you and the board believed that Old Revelation presented a good investment opportunity, right?
A. Correct.(Id. at 94:25-95:18.)
Indeed, the record reflects contemporaneous evidence that Defendant did not believe that Plaintiff had substantially violated its agreements. Upon the closing of the transaction, in January 2022 (again, by which time Defendant was aware that $20 million in backstop financing had not been provided (see Pl.'s 56.1 ¶¶ 35, 39; Def.'s 56.1 Resp. ¶¶ 35, 39)), Defendant did not refuse to pay Plaintiff any fees, but rather agreed to defer the payment of such fees. (See Pl.'s 56.1 ¶ 40; Def.'s 56.1 Resp. ¶ 40.) Surely, if Defendant believed that Plaintiff had substantially violated its agreements, Defendant would have raised an issue at the time of the closing and not entered into a new agreement requiring it to pay the fees due to LifeSci.
Under the second standard, Plaintiff did not, as required, “act[] adversely to [Petra] in any part of the transaction, or omit[] to disclose any interest which would naturally influence [Plaintiff's] conduct in dealing with the subject of the employment.” See Phansalkar, 344 F.3d at 202. In fact, the record reflects that Plaintiff facilitated the transaction and fully disclosed its conflict of interest.
“New York courts have applied the faithless-servant doctrine only in the limited circumstances ‘where the employee has acted directly against the employer's interests-as in embezzlement, improperly competing with the current employer, or usurping business opportunities.'” Ebel v. G/O Media, Inc., No. 20-CV-07483 (PAE), 2021 WL 2037867, at *7 (S.D.N.Y. May 21, 2021) (citing Veritas Cap. Mgmt., L.L.C. v. Campbell, 82 A.D.3d 529, 530 (1st Dep't 2011)). None of these circumstances is present here.
b. Implied Covenant Of Good Faith And Fair Dealing i. Legal Standards
Under New York law, every contract contains an implied covenant of good faith and fair dealing that “embraces a pledge that ‘neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.'” Dalton v. Educ. Testing Serv., 87 N.Y.2d 384, 389 (1995) (quoting Kirke La Shelle Co. v. Armstrong Co., 263 N.Y. 79, 87 (1933)). The implied covenant, “however, is not without limits, and no obligation can be implied that ‘would be inconsistent with other terms of the contractual relationship.'” Id. (quoting Murphy v. Am. Home Prods. Corp., 58 N.Y.2d 293, 304 (1983)). “Furthermore, the obligation of good faith does not create obligations that go beyond those intended and stated in the language of the contract.” Wolff v. Rare Medium, Inc., 210 F.Supp.2d 490, 497 (S.D.N.Y. 2002) (citation omitted), aff'd, 65 Fed.Appx. 736 (2d Cir. 2003).
ii. Application
The only conduct by LifeSci referred to by Defendant as a basis for its defense based upon breach of the implied covenant of good faith and fair dealing is the July 2021 email from Dobkin containing the disputed statement regarding $20 million in backstop financing. (See Def.'s 11/10/23 Opp. Mem. at 17.) However, this email in no way destroyed or injured the rights of Defendant under the BCMA or Amendment to Agreement, which are the agreements upon which Plaintiff seeks summary judgment. The record reflects that LifeSci performed services under the BCMA in assisting Petra in connection with a business combination and that Petra received the benefit of those services. The record also reflects that LifeSci performed services under the Amendment to Agreement (and the predecessor LifeSci Engagement Letter) and that Petra received the benefit of those services. Since the objectives of the relevant agreements were achieved, there was no breach of the implied covenant of good faith and fair dealing. See EBC I, Inc. v. Goldman, Sachs & Co., 5 N.Y.3d 11, 22 (2005).
c. Calculation Of Stock Fee Damages
In its third affirmative defense, Defendant alleges that, “[i]n the event LifeSci is entitled to a stock fee, any determination of the number of Revelation shares it is to receive must be based on the implied per share value of such shares at the time the de-SPAC merger closed.” (Def.'s Am. Ans. at 8.) In opposition to summary judgment, Defendant states that “LifeSci claims $2,625,000 for Revelation's failure to deliver Revelation shares pursuant to the [Amendment to] Agreement,” but that “LifeSci has not shown the value of the Stock Fee shares at the time delivery was due, which is the measure of its damages.” (Def.'s 11/10/23 Opp. Mem. at 22.) On the other hand, in its summary judgment motion, Plaintiff contends that “calculation of the ‘stock fee' is to be performed in accordance with Section 2(b) of the Amendment to Agreement ....” (Pl.'s 10/13/23 Mem. at 18; see also Pl.'s 11/29/23 Reply at 5-6.) The Court agrees with Plaintiff.
Contrary to Defendant's assertion, the Court need not determine “the number of Revelation shares [LifeSci] is to receive” (see Def.'s Am. Ans. at 8) or “the value of the Stock Fee shares” (see Def.'s 11/10/23 Opp. Mem. at 22) because, under the Amendment to Agreement the value of the Stock Fee shares upon issuance had to be equal to two and one half percent (2.5%) of the Total Consideration, as defined. (See Pl.'s 56.1 ¶ 21; Def.'s 56.1 Resp. ¶ 21.) On January 6, 2022, CFO Zygmont indisputably calculated the “M&A Equity Fee” due to Plaintiff to be in the amount of $2,625,000.00, using the foregoing calculation. (See Pl.'s 56.1 ¶ 36; Def.'s 56.1 Resp. ¶ 36.) Thus, Plaintiff is entitled to damages in the amount of $2,625,000.00, based upon Defendant's breach in failing to deliver equity to Plaintiff.
The fact that Plaintiff was to receive restricted shares in Revelation with a market value that may have been lower than the trading value of Revelation's common stock (see Def.'s 11/10/23 Opp. Mem. at 24) is of no moment. Under the relevant agreement, Plaintiff was not receiving a certain number of shares of stock. Rather, as set forth above, by the express terms of the Amendment to Agreement, Plaintiff was to receive “equity interests” with a specific “value upon issuance,” which value later was determined in a precise dollar amount. It is this dollar amount to which Plaintiff is entitled.
II. Defendant's Motion To Amend Should Be Denied
A. Legal Standards
District courts “ha[ve] broad discretion in determining whether to grant leave to amend.” Gurary v. Winehouse, 235 F.3d 793, 801 (2d Cir. 2000). “[L]eave to amend should be freely granted when ‘justice so requires.'” Pangburn v. Culbertson, 200 F.3d 65, 70 (2d Cir. 1999) (quoting Fed.R.Civ.P. 15(a)); Rachman Bag Co. v. Liberty Mut. Ins. Co., 46 F.3d 230, 234 (2d Cir. 1995) (“The Supreme Court has emphasized that amendment should normally be permitted, and has stated that refusal to grant leave without justification is ‘inconsistent with the spirit of the Federal Rules.'” (quoting Foman v. Davis, 371 U.S. 178, 182 (1962))). “Where a scheduling order has been entered, [however,] the lenient standard under Rule 15(a) . . . must be balanced against the requirement under Rule 16(b) that the Court's scheduling order ‘shall not be modified except upon a showing of good cause.'” Grochowski v. Phoenix Constr., 318 F.3d 80, 86 (2d Cir. 2003); see also Fed.R.Civ.P. 16(b)(4) (“A schedule may be modified only for good cause and with the judge's consent.”). “‘[A] district court does not abuse its discretion in denying leave to amend the pleadings after the deadline set in the scheduling order where the moving party has failed to establish good cause.'” Perfect Pearl Co. v. Majestic Pearl & Stone, Inc., 889 F.Supp.2d 453, 457 (S.D.N.Y. 2012) (quoting Parker v. Columbia Pictures Indus., 204 F.3d 326, 340 (2d Cir. 2000)).
In determining whether a movant has satisfied the “good cause” standard under Rule 16(b), “the primary consideration is whether the moving party can demonstrate diligence.” Kassner v. 2nd Avenue Delicatessen Inc., 496 F.3d 229, 244 (2d Cir. 2007); Holmes v. Grubman, 568 F.3d 329, 335 (2d Cir. 2009) (“Whether good causes exists turns on the ‘diligence of the moving party.'” (citations omitted)). “A party has not acted diligently where the proposed amendment to the pleading is based on information ‘that the party knew, or should have known,' in advance of the deadline sought to be extended.” Kontarines v. Mortg. Elec. Registration Sys., Inc., No. 15-CV-02206 (ARR), 2016 WL 3821310, at *3 (E.D.N.Y. July 12, 2016) (quoting Perfect Pearl Co., 889 F.Supp.2d at 457).
“If good cause supports modifying the court-ordered deadline to amend, the moving party must still comply with Fed.R.Civ.P. 15.” Eberle v. Town of Southampton, 985 F.Supp.2d 344, 346 (E.D.N.Y. 2013). Although Rule 15(a) provides that leave to amend generally should be “freely give[n] . . . when justice so requires,” a court may properly deny leave to amend in cases of “‘undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of the allowance of the amendment, futility of amendment, etc.'” Ruotolo v. City of New York, 514 F.3d 184, 191 (2d Cir. 2008) (quoting Foman, 371 U.S. at 182).
“‘Where it appears that granting leave to amend [would be futile or] is unlikely to be productive[,] . . . it is not an abuse of discretion to deny leave to amend.'” See Lucente v. Int'l Bus. Machines Corp., 310 F.3d 243, 258 (2d Cir. 2002) (quoting Ruffolo v. Oppenheimer & Co., 987 F.2d 129, 131 (2d Cir. 1993)); Murdaugh v. City of New York, No. 10-CV-07218 (HB), 2011 WL 1991450, at *2 (S.D.N.Y. May 19, 2011) (“Although . . . leave to amend complaints should be ‘freely given,' leave to amend need not be granted where the proposed amendment is futile.” (citations omitted)).
B. Analysis
Defendant already has amended its answer once, i.e., to assert a defense based upon the faithless servant doctrine. (See Def.'s Am. Ans. at 8.) Defendant now seeks to amend its answer for a second time, this time to assert a counterclaim for breach of fiduciary duty. (See Def.'s Proposed Second Am. Ans., ECF No. 55-1, at 9-13.) Defendant's counterclaim is based upon the same facts upon which Defendant bases its defenses based upon the faithless servant doctrine and the breach of the covenant of good faith and fair dealing, i.e., the July 2021 email from Dobkin containing the disputed statement regarding $20 million in backstop financing. (See id.)
The Court recommends that Defendant's motion to amend be denied on two independent grounds. First, Defendant has not acted diligently because the proposed amendment to Defendant's Amended Answer is based on information that Defendant knew at the time it filed its Amended Answer in April 2023, when the deadline for amended pleadings expired. See Kontarines, 2016 WL 3821310, at *3.
Second, it would be futile for Defendant to amend its Amended Answer to assert a breach of fiduciary duty counterclaim. There is a “close relationship and overlap between [a] breach of fiduciary duty claim and the faithless servant doctrine.” Yukos Cap. S.A.R.L. v. Feldman, 977 F.3d 216, 242 (2d Cir. 2020). “To state a cause of action to recover damages for breach of fiduciary duty, a [counterclaim-]plaintiff must allege: (1) the existence of a fiduciary relationship, (2) misconduct by the [counterclaim-]defendant, and (3) damages directly caused by the [counterclaim-]defendant's misconduct.” Id. at 241 (citation and internal quotation marks omitted). Even assuming, notwithstanding the contractual disclaimer, that LifeSci owed a fiduciary duty to Petra, Revelation has not plausibly alleged any actionable misconduct by LifeSci. (See Discussion Section I.B.2.a.ii., supra.)
CONCLUSION
For the foregoing reasons, I respectfully recommend that Plaintiff's motion for summary judgment be GRANTED that Defendant's motion to amend be DENIED. Specifically, I recommend that Plaintiff be granted judgment against Defendant in the following amounts:
(1) On Plaintiff's First Cause of Action, for breach of the BCMA, Plaintiff shall be awarded the sum of $1,528,411.71 for the Deferred Underwriting Fee, plus pre-judgment interest at a rate of 1.5% per month from January 25, 2022, and
Under the terms of the Deferral Letter, Plaintiff is entitled to interest at 1.5% per month from the date of Defendant's default for the Deferred Underwriting Fee and M&A Cash Fee. (See Pl.'s 56.1 ¶ 49; Def.'s 56.1 Resp. ¶ 49; see also Deferral Ltr. at PDF p. 4.) January 25, 2022 is the date of the equity financing that qualified as “any debt or equity financing of the post-business combination company” under the Deferral Letter (see Pl.'s 56.1 ¶ 45; Def.'s 56.1 Resp. ¶ 45), and thus is the date of default.
(2) On Plaintiff's Second Cause of Action, for breach of the Amendment to Agreement, Plaintiff shall be awarded:
a. the sum of $1,050,000.00 for the M&A Cash Fee, plus pre-judgment interest at a rate of 1.5% per month from January 25, 2022, and
b. the sum of $2,625,000.00 for the value of the equity not delivered to Plaintiff(i.e, the M&A Equity Fee), plus pre-judgment interest at the New York statutory rate of 9% per annum (see CPLR 5001, 5004) from January 18, 2022.
The equity was to be issued within five trading days after the consummation of the merger transaction. (See Pl.'s 56.1 ¶ 48; Def.'s 56.1 Resp. ¶ 48.) January 18, 2022 is five trading days after the January 10, 2022 closing date.
Pursuant to the BCMA, Plaintiff also is entitled to recover reasonable attorneys' fees and expenses. (See BCMA ¶ 13). Plaintiff may seek to recover such fees and expenses pursuant to Rule 54(d) of the Federal Rules of Civil Procedure.
NOTICE OF PROCEDURE FOR FILING OBJECTIONS TO THIS REPORT AND RECOMMENDATION
The parties shall have fourteen (14) days (including weekends and holidays) from service of this Report and Recommendation to file written objections pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure. A party may respond to another party's objections within fourteen days after being served with a copy. Fed.R.Civ.P. 72(b)(2). Such objections, and any response to objections, shall be filed with the Clerk of the Court. See 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 72(b). Any requests for an extension of time for filing objections must be addressed to Judge Clarke.
THE FAILURE TO OBJECT WITHIN FOURTEEN (14) DAYS WILL RESULT IN A WAIVER OF OBJECTIONS AND WILL PRECLUDE APPELLATE REVIEW. See 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 6(a), 6(d), 72(b); Thomas v. Arn, 474 U.S. 140 (1985).