Opinion
No. 652373/2015.
02-03-2016
CALIFORNIA CAPITAL EQUITY, LLC, Plaintiff, v. IJKG, LLC, and Vivek Garipalli, Defendants, and IJKG, LLC, Counterclaimant, California Capital Equity, LLC, Counterclaim Defendant, and IJKG, LLC, Third–Party Plaintiff. Abraxis Bioscience, LLC and Patrick Soon–Shiong, Third–Party Defendants.
Richard I. Werder, Jr. of Quinn Emanuel Urquhart & Sullivan, LLP, for Plaintiff & Third–Party Deft. Anthony P. La Rocco of K & L Gates LLP, for Defendant IJKG. Louis A. Modugno of McElroy, Deutsch, Mulvaney, & Carpenter, LLP, for Defendant Garipalli.
Richard I. Werder, Jr. of Quinn Emanuel Urquhart & Sullivan, LLP, for Plaintiff & Third–Party Deft.
Anthony P. La Rocco of K & L Gates LLP, for Defendant IJKG.
Louis A. Modugno of McElroy, Deutsch, Mulvaney, & Carpenter, LLP, for Defendant Garipalli.
CHARLES E. RAMOS, J.
This is an action brought by California Capital Equity, LLC (CalCap) against IJKG, LLC (IJKG) and Vivek Garipalli (Garipalli) (collectively, the defendants) arising out of the defendants' alleged improper non-tax distribution payments to its members without making the requisite interest payments to CalCap under a convertible note agreement.
CalCap brings claims of breach of contract, fraud, and breaches of fiduciary duty. IJKG asserts three counterclaims against CalCap for tortious interference with contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment. IJKG also asserts a third-party claim for breach of contract against third-party defendants Abraxis Bioscience, LLC (Abraxis).
Motion sequence numbers 002, 003, 004, 007 and 008 are consolidated herein . In motion sequence number 002, CalCap moves to strike certain allegations in the counterclaims. In motion sequence numbers 003 and 004 defendants move to dismiss CalCap's breach of fiduciary duty and fraud claims under CPLR §§ 3211(a)(1) and (7). In motion sequence number 007, CalCap moves to dismiss IJKG LLC's counterclaims. In motion sequence number 008, third-party defendant Abraxis moves to dismiss the third-party complaint.
Motion sequence numbers 005 and 006 have been withdrawn. In those motions third-party defendant Dr. Patrick Soon–Shiong moved to dismiss third-party plaintiff IJKG's complaint and for sanctions, and to correct third-party plaintiff IJKG's pleadings. IJKG discontinued its third-party action against Dr. Soon–Shiong only, and motion sequence numbers 005 and 006 were withdrawn by Dr. Soon–Shiong.
The facts set forth herein are presumed to be true, for purposes of disposition.
CarePoint Health Bayonne Medical Center (CarePoint) is a healthcare facility located in New Jersey. In 2007, CarePoint filed for bankruptcy. As part of its reorganization, IJKG, a private company whose line of business includes holding and owning securities of companies, and Garipalli, a member of IJKG's Board of Managers with a controlling ownership interest, purchased CarePoint. As a result of the acquisition, IJKG incurred CarePoint's significant monetary liabilities.
To address these obligations, IJKG approached a potential investor Abraxis, whose chairman and CEO is Dr. Soon–Shiong. Abraxis extended a significant loan to IJKG. In May of 2008, Abraxis and IJKG entered into a Convertible Notes Purchase Agreement (the Note Agreement) whereby Arbaxis loaned IJKG $5,000,000 in exchange for a Convertible Note (the Note). Simultaneously, IJKG and its Members entered into the Amended Operating Agreement (AOA), allowing the Note Holder to take all actions necessary to enforce its terms.
Approximately three years later, Dr. Soon–Shiong and CalCap, another entity owned and controlled by Dr. Soon–Shiong, purchased the Note.
Under the Note Agreement, CalCap, as the new note holder, is entitled to annual interest of 9% on the $5,000,000 loan made to IJKG. In addition, CalCap has the right to convert the loan into a 49.01% ownership interest in IJKG, and the right to receive 49.01% of any distributions made by IJKG that are not “Tax Distributions,” as defined in the Note Agreement. Since the parties entered into the Note Agreement, IJKG has been making interest payments to CalCap.
CalCap alleges in its Complaint that IJKG breached the Note Agreement, committed fraud and breached their fiduciary duties by repeatedly making distributions that were not Tax Distributions and failing to pay CalCap, as the Note Holder, the amount owed under the Note Agreement.
In turn, IJKG asserts counterclaims for tortious interference with contract, breach of implied covenant of good faith and fair dealings, and unjust enrichment. In the third-party complaint, IJKG alleges that Abraxis breached the Note Agreement by failing to provide IJKG with a right of first offer to acquire the Note prior to the transfer of the Note to CalCap. IJKG argues that CalCap is liable because it facilitated Abraxis's breach through its purchase of the Note with knowledge that Abraxis had not provided IJKG with a right of first offer to acquire the Note prior to the transfer. On this basis, Abraxis's transfer of the Note to CalCap was purpotedly invalid and a ity and thus, CalCap was not entitled to receive any of the interest payments from IJKG.
IJKG also alleges that CalCap failed to object to IJKG's calculation of its Tax Distributions and Additional Interest payments at the times when such payments were made, and when IJKG provided CalCap with contemporaneous information relating to such calculations.
Discussion
A. Striking Pleadings
CalCap moves to strike paragraphs 6, and 44–60 in the counterclaims which are allegedly false, irrelevant, and inflammatory. CalCap also moves to strike exhibits A and B, which are complaints of previously filed actions against Dr. Soon–Shiong.
A motion to strike may only be granted as to “any scandalous or prejudicial matter unnecessarily inserted in a pleading” (CPLR § 3024[b] ). In reviewing a motion pursuant to CPLR § 3024(b) the inquiry is whether the purportedly scandalous or prejudicial allegations are relevant to a cause of action (Soumayah v. Minnelli, 41 A.D.3d 390, 839 N.Y.S.2d 79 [1st Dept 2007] ). The allegations sought to be struck out must have no possible bearing on the subject matter of the litigation (Riesenberger v. Sullivan, 1 A.D.2d 1050, 1051, 152 N.Y.S.2d 785 [1st Dept 1956] ).
The allegations at issue detail the manner in which CalCap and Dr. Soon Shiong were using the interest payments IJKG made to NANT Health, LLC (NANT), another company owned by Dr. Soon Shiong, to inflate the value of NANT prior to an IPO. Dr. Soon allegedly stood to profit greatly from the IPO.
IJKG argues that the challenged allegations are relevant it's counterclaims because they set forth facts relevant to CalCap's motive in delaying its objections to the Tax Distributions (IJKG's Memorandum of Law in Opposition to Motion to Correct Pleadings, p5, ¶¶ 2–3). Furthermore, the allegations shed light on CalCap and Dr. Soon Shiong's lack of justification for preventing IJKG from exercising its right of first offer to acquire the Note (id. ). IJKG argues that the cash flow to NANT would have stopped if IJKG had been allowed to exercise its right of first offer.
Nonetheless, IJKG acknowledges that the attached complaints (Exhibits A and B) of separate lawsuits involve NANT, a non-party to this action, and Dr. Soon–Shiong. The rehashed allegations of the attached complaints in ¶¶ 54–59 and accompanying exhibits are not relevant to this lawsuit because they only serve to show an alleged similar scheme not related to this action (See Chowaiki & Co. Fine Art Ltd. v. Lacher, 115 A.D.3d 600 [2014] [References to other matters and a tax levy are irrelevant to plaintiffs' claims] ).
As such ¶¶ 54–59 and exhibits A and B to the counterclaims are stricken.
B. Counterclaims
Statute of Limitations
CalCap argues that IJKG's first and third counterclaims for tortious interference with contract and unjust enrichment fail and should be dismissed because they were not commenced within three years of Abraxis's alleged breach.
In New York, a three-year statute of limitations period applies to tortious interference with contract claims (Kenneth D. Laub & Co. v. Bear Stearns Cos., Inc., 55 AD3d 455 [1st Dept 1999] ). CalCap alleges that IJKG's tortious interference claim accrued in April 2011 at the time that CalCap alleged “improperly facilitated Abraxis's breach of the right of first offer in the Note Agreement”. IJKG waited until July 2015 to bring its tortious interference with contract claim against CalCap, which expired in April 2014.
IJKG admits that its first counterclaim for tortious interference with contract is time-barred under the three-year statute of limitations. However, IJKG argues that under CPLR 203(d) it is permitted to assert the counterclaim in response to an opposing party's claim, even though that counterclaim would otherwise be time-barred if standing alone.
Under CPLR 203(d), counterclaims that are time-barred may be asserted for equitable recoupment purposes only if they “arise out of the same transaction or series of transactions that form the basis of, and [are] sufficiently related to, the causes of action alleged in the plaintiff's complaint” (182 Franklin St. Holding Corp. v. Franklin Pierrepont Assoc., 217 A.D.2d 508, 630 N.Y.S.2d 64 [1st Dept 1995] ).
CalCap's claims arise from its purchase of the Note and from IJKG's alleged improper distributions in violation of its rights under the Note. IJKG's counterclaims for tortious interference and unjust enrichment are based on the wrongful transfer of the Note, accompanied by CalCap's alleged intentional and improper facilitation of a breach of the Loan Agreement (giving IJKG a right of first offer to acquire the Note). In addition, IJKG alleges that CalCap is an improper holder of the Note and was never entitled to receive any of the interest payments from IJKG. Because IJKG seeks to enforce rights under the same Note agreement that CalCap seeks to enforce, and because there are allegations that CalCap purposely delayed objecting to the improper distributions, the claims are “sufficiently related” and defendants are entitled to rely on CPLR 203(d) (id. ).
Under New York law, there is no identified statute of limitations period within which to bring a claim for unjust enrichment, but where the unjust enrichment and breach of contract claims are based upon the same facts and plead in the alternative, a six year statute of limitation applies to the unjust enrichment claim (See Maya NY, LLC v. Hagler, 106 A.D.3d 583, 585, 965 N.Y.S.2d 475 [1st Dept 2013] ). Here, the unjust enrichment counterclaim is plead in the alternative to the breach of implied covenant of good faith and fair dealing as to the Note Agreement. Furthermore, both counterclaims are based upon the same alleged facts, in that the Note Agreement was breached for failing to provide IJKG with a right of first offer, and that the transfer of the Note to CalCap was invalid. Therefore, the counterclaims are not barred by the applicable statute of limitations.
Right of First Offer under Note Agreement
CalCap and Abraxis argue that IJKG's counterclaims for tortious interference and unjust enrichment, and IJKG's breach of contract claim against Abraxis in its third party complaint, should be dismissed because they are flatly contradicted by the plain language of the Note Agreement. Specifically, IJKG allegedly did not have the right of first offer to purchase the Note in connection with the sale of the Note to CalCap by Abraxis.
Section 14.1 of the Note Agreement states:
“Drag Along Rights. The Purchaser and the Holders shall have the right to exercise, and all Holders shall be subject to, the drag-along rights set forth in Section 7.04 of the Amended Operating Agreement and the Company shall ensure that the holders of Equity Interests in the Company comply with the provisions of such Section 7.04, provided the exercise of such drag-along rights shall be subject to the express terms and conditions of the Amended Operating Agreement, including, if then applicable, the rights of first offer set forth in Section 7.03 of the Amended Operating Agreement ” (Affirmation of Deborah Brown, Exhibit 1)(emphasis added).
Section 7.03 (a) of the AOA, is entitled “Right of First Offer on Transfer of Drag Along Securities,” and it states:
“If any holder(s) of Drag–Along Securities (“Selling Holder ”) desires to Transfer all or any part of its Drag–Along Securities (including Notes that constitute Drag–Along Securities) (“Offered Securities ”) to any Person other than an Affiliate of the Selling Holder, the Selling Holder shall serve upon the Company written notice of such intention to Transfer the Offered Securities (a “Proposed Sale Notice ”). Within 20 days of its receipt of a Proposed Sale Notice, the Company shall, by written notice (a “Proposed Sale Response ”) to the Selling Holder, make an election to: (i) waive the rights of first offer contemplated hereby, in which case the Selling Holder may Transfer the Offered Securities as provided in Section 7.03(b); (ii) commence a negotiation with such Selling Holder with respect to the Transfer of the Offered Securities, in which case, the Proposed Sale Response shall include a detailed offer, including price, to purchase the Offered Securities in cash (without contingency for financing or otherwise) at closing, and the Company and the Selling Holder will proceed as further described in Section 7.03(c); or (iii) make an appraised offer for the Offered Securities ...” (id. at Exhibit 2).
Section 7.03 states in substance that if Abraxis, the selling holder of the Note, wishes to transfer the Note, it must serve upon IJKG, the Company, a written proposed sale notice, and that upon its receipt of the notice, IJKG must by written response to the Abraxis, state its intention to waive the rights of first offer, commence negotiation with Abraxis to purchase the Note giving a detailed offer, or make an appraised offer for Note (id. ).
CalCap and Abraxis argue that IJKG did not have the right of first offer since Abraxis did not exercise its drag-along rights under Section 14.1 of the Note Agreement and that the sale of the Note to CalCap by Abraxis was not subject to the rights of first offer set forth in Section 7.03 of the AOA (CalCap's Memorandum of Law in Support of its Motion to Dismiss the Counterclaims, p8).
The plain language of the Note Agreement and the AOA demonstrates that IJKG had a mandatory right of first offer before the transfer of the Note to CalCap. First, the Note Agreement, the Note and the AOA are interrelated and should be read together as they arise out of the same transaction, the Note Agreement specifically relates to the AOA under Section 14.1 which cites 7.03, and the documents were negotiated and signed simultaneously (See PETRA CRE 2007–1 CDO, Ltd. v. Morgans Group LLC, 84 A.D.3d 614, 923 N.Y.S.2d 487, 488 [1st Dept 2011] [Agreements executed at substantially the same time and related to the same subject matter are regarded as contemporaneous writings and must be read together as one] ). Second, under the AOA's Section 7.03, the term drag-along securities is specifically defined to include the Note (See Affirmation of Deborah Brown at Exhibit 2). Third, Section 7.03 states that the Company must be given written notice of an intent to transfer the Note so that it has a right of first offer (id. ). Neither CalCap nor Abraxis allege that they provided written notice to IJKG before the transfer of the Note. Fourth, it would not make sense under the Note Agreement for the Note Holder to exercise its drag-along rights before IJKG is presented with the right of first offer.
Thus, the motions to dimiss IJKG's counterclaims for tortious interference and unjust enrichment and IJKG's third party claim against Abraxis are denied.
C. Fraud and Breach of Fiduciary Duty
In motion sequence numbers 003 and 004, defendants move to dismiss CalCap's breach of fiduciary duty and fraud claims under CPLR § 3211(a)(1) based on documentary evidence and CPLR § 3211(a)(7) for failure to state a cause of action.
On a CPLR 3211(a)(7) motion, the court should construe the pleadings in a liberal fashion by accepting the facts alleged in the complaint and interpreting them in a light most favorable to the plaintiff (Leon v. Martinez, 84 N.Y.2d 83, 87 [1994] ). Where a cause of action is based upon misrepresentation, fraud, mistake, breach of trust or undue influence, the circumstances constituting the wrong shall be stated in particularity or detail (CPLR 3016[b] ).
Fraud
In pleading a claim for fraud, a party must allege: 1) a false representation or omission of a material fact; 2) knowledge of the misrepresentation with an intent to deceive to induce reliance; 3) justifiable reliance upon the misrepresentation or omission and resulting damages (Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559 [2009] ).
Defendants argue that the claim for fraud should be dismissed because it is duplicative of the breach of contract claim.
A fraud cause of action is duplicative of a breach-of-contract cause of action if it is based on the same facts that underlie the contract cause of action, is not collateral to the contract, and does not seek damages that would not be recoverable under a contract measure of damages (Financial Structures Ltd. v. UBS AG, 77 A.D.3d 417, 909 N.Y.S.2d 45 [1st Dept 2010] ). “The plaintiff must allege a breach of duty which is collateral or extraneous to the contract between the parties” (Krantz v. Chateau Stores of Canada Ltd., 256 A.D.2d 186, 683 N.Y.S.2d 24 [1st Dept 1998] ).
The fraud claim is premised on CalCap's request from defendants for information pertaining to tax distributions, beyond that which IJKG had previously provided to CalCap pursuant to the Note Agreement. Defendants allegedly misrepresented through statements and omissions the true nature of the tax distributions and attempted to mislead and deceive CalCap by providing it with the BDO report in order to transfer funds to IJKG's Members without paying the Note Holder the Additional Interest (Complaint ¶¶ 74, 80). CalCap alleges that defendants owed it a duty of full and complete disclosure because they were uniquely aware of how IJKG calculated the tax distribution amounts and CalCap did not have reasonable access to the same information that defendants possessed (id. at ¶ 78, 683 N.Y.S.2d 24 ).
The alleged misrepresentations and omissions of fact regarding IJKG's distributions to its Members include Garipalli's statement that “everything that we've done is appropriate and compliant,” statements contained in the BDO Report, and defendants' omissions regarding the facts that (i) IJKG distributed funds to its Members that were not related to taxes imposed upon its Members for each calendar year, (ii) IJKG used book income instead of taxable income to calculate Tax Distribution Amounts, and (iii) IJKG treated certain transactions for tax purposes differently from how it treated the same transactions in calculating the Tax Distribution Amounts (Complaint at ¶ 77).
CalCap fails to plead facts of fraud extraneuous to its breach of contract claim. With respect to its breach of contract claim, defendants allegedly labeled certain distributions as “tax distributions” when the criteria for tax distributions were not met and thus failed to make additional interest payments on these. Under the fraud claim, the alleged misrepresentations and omissions by defendants were used to mislead CalCap as to how defendants were actually calculating certain tax distributions so that defendants did not have to make additional interest payments to the Note Holder under the Note Agreement.
These two causes of action are substantially similar because they both are premised on the Note Agreement, specifically the payment of additional interest for non-tax distributions to members (See Krantz, 256 A.D.2d at 187, 683 N.Y.S.2d 24 [court found a fraud cause of action failed where “the breach of duty alleged by him, namely, the false statement of defendant's net profits, was not collateral or extraneous to the contract] ). Moreover, CalCap has not claimed any special damages proximately caused by the fraud claim that are not recoverable under the contract measure of damages. This is further evidence that the causes of action are duplicative (id. ).
CalCap relies on the First Department case of Freedman v. Pearlman, 271 A.D.2d 301, 706 N.Y.S.2d 405 (1st Dept 2000), in arguing that the fraud cause of action is extraneous to the breach of contract claim. In Freedman, the court held an employee adequately stated a cause of action for fraud against its employer that was sufficiently independent from his cause of action for breach of contract, based on his allegation that employer deliberately concealed the amount of income received from acquired business so that the one-third share that the employee was allegedly entitled to by contract was undercounted (id. ).
Freedman is distinguishable because in that case, the parties were in an employer-employee relationship and because the plaintiff relied on defendant's promise of taking an interest in the acquired corporation by taking steps to restructure the corporation and accepting cash compensation, far less than the market value of his services. Here, the parties were in a lender-borrower relationship, the allegations that CalCap relied on defendants statements occured after the alleged fraud or breach of contract had already taken place, and there are no allegations that CalCap was damaged beyond the alleged breach of contract.
Furthermore, defendant's alleged omissions do not constitute fraud unless there is a fiduciary or other heightened relationship between the parties (SNS Bank, N.V. v. Citibank, N.A., 7 A.D.3d 352, 777 N.Y.S.2d 62 [1st Dept 2004] ). CalCap fails to adequately allege a fiduciary relationship between the parties since the Note Agreement does not specify that a fiduciary relationship exists and because “an arm's length borrower-lender relationship is not of a confidential or fiduciary nature” (River Glen Associates, Ltd. v. Merrill Lynch Credit Corp., 295 A.D.2d 274, 743 N.Y.S.2d 870 [1st Dept 2002] ).
CalCap alleges that a fiduciary relationship was established between the parties: (i) as a result of their day-to-day involvement in running IJKG, defendants have superior knowledge regarding IJKG's operation, financials and distributions and that as a result, defendants owed a fiduciary duty to CalCap, much as a general partner owes a fiduciary duty to a limited partner (Complaint, ¶ 7), and (ii) from CalCap's right to convert the Note into a 49.01% ownership interest of IJKG. CalCap alleges that these duties were breached beginning in April 2010, when defendants made fraudulent material omissions to CalCap by failing to disclose that IJKG had made tax distributions to its members that bore no relationship to the amount of taxes actually imposed on its members.
The Note Agreement governed disclosure duties by IJKG to CalCap including turning over future reports, monthly statements, quarterly statements, annual unaudited and audited statements and giving CalCap access to IJKG's books, records (including Tax records), offices and properties of IJKG's officers, accountants and legal advisors (See Note Agreement at Section 6 and 7.4). CalCap fails to specifically allege how the facts regarding improper distributions by IJKG were matters peculiarly within IJKG's knowledge, and how CalCap did not have the means by the exercise of ordinary intelligence to ascertain these facts (See HSH Nordbank AG v. UBS AG, et al., 95 A.D.3d 185, 941 N.Y.S.2d 59 [1st Dept 2012] ). The disclosure and access provisions under the Note Agreement show that CalCap had reasonable means to ascertain the alleged facts that were omitted. CalCap, as a sophisticated investor, had a duty to exercise ordinary diligence and conduct an independent appraisal of the risk they assumed (id. ). The risk that CalCap assumed in purchasing the Note was that the tax distribution amounts would not be accurate and thus it should have conducted its own independent inquiry to ascertain these facts which it fails to allege. Furthermore, the Note Agreement's provisions regarding disclosure and access to books and records show that IJKG was not in unique position of superior knowledge with respect to IJKG's operations, financials and distributions and thus could not have led to the establishment of a duty to disclose outside of the Note Agreement.
CalCap's right to convert the Note into a 49.01% ownership interest of IJKG allowing it to have an equity interest in IJKG does not lead to a fiduciary relationship since CalCap has not exercised this right.
Breach of Fiduciary Duty
To plead a claim for breach of fiduciary duty a party must allege: 1) the existence of a fiduciary relationship between the parties; 2) misconduct by the defendant; and 3) damages directly caused by the defendant's conduct (Burry v. Madison Park Owner LLC, 84 A.D.3d 699, 924 N.Y.S.2d 77, 78 [1st Dept 2011] ).
As stated above, CalCap has failed to sufficiently allege a fiduciary relationship. Thus, CalCap's claims for fraud and breach of fiduciary duty are dismissed.
Accordingly, it is
ORDERED that plaintiff's motion to strike certain allegations in the counterclaims (Sequence No. 002) is granted in part specifically with respect to ¶¶ 54–59 and exhibits A and B of the counterclaims.
ORDERED that defendants' motions to dismiss (Sequence No. 003 and 004) is granted as to the causes of action for fraud and breach of fiduciary duty.
ORDERED that plaintiff's motions to dismiss the counterclaims(Sequence No. 007) is denied.
ORDERED that third party defendant's motion to dismiss the third-party complaint (Sequence No. 008) is denied.
ORDERED that defendants and third party defendants must answer the complaint within 20 days of entry of this order with notice of entry.