DSI Assignments, LLC, Solely as Assignee for the Benefit of Creditors of Pearl Automation, Inc.
Filing
59
Judge F. Dennis Saylor, IV: ORDER entered. MEMORANDUM AND ORDER Plaintiff's motion to dismiss the counterclaim is DENIED.(FDS, law1)
UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
__________________________________________
)
DSI ASSIGNMENTS, LLC, as assignee for the )
benefit of creditors of Pearl Automation, Inc.,
)
)
Plaintiff,
)
)
v.
)
)
AMERICAN ROAD PRODUCTS, INC.,
)
INSTALLERNET, INC., and ANTHONY
)
FRANGIOSA,
)
)
Defendants.
)
__________________________________________)
Civil Action No.
17-11963-FDS
MEMORANDUM AND ORDER ON PLAINTIFF’S
MOTION TO DISMISS COUNTERCLAIMS
SAYLOR, J.
This cases arises out of the alleged breach of a purchase order contract. Plaintiff DSI
Assignments, LLC, is the assignee of the creditors of Pearl Automation, Inc. As assignee, DSI
Assignments owns all of Pearl’s assets and intellectual property. Among those assets were
patents related to Pearl’s automotive rearview camera and alert system, known collectively as
“RearVision,” and various trademarks known as the “PEARL Marks.”
In the spring of 2017, Pearl was engaged in negotiations with defendants American Road
Products, Inc. (“ARP”), InstallerNet, Inc., and Anthony Frangiosa, ARP’s President, for the
purchase of all RearVision inventory. Pearl and ARP signed a purchase order on June 23, 2017.
That same day, Pearl discontinued its operations, and executed a general assignment of its assets
in favor of DSI Assignments.
However, various disputes arose concerning the performance of the purchase order,
culminating in this litigation. In the amended complaint, DSI Assignments alleges that
defendants failed to pay for Pearl’s inventory and that they infringed on Pearl’s trademarks.
Defendants have filed a counterclaim, alleging that Pearl breached the purchase order contract by
failing to provide the complete source code for RearVision.
DSI Assignments has moved to dismiss the counterclaim for failure to state a claim. For
the following reasons, the motion will be denied.
I.
Background
A.
Factual Background
The facts are set forth as described in the counterclaim and certain documents provided
by the parties, to the extent they were “sufficiently referred to in the [counterclaim].” Watterson
v. Page, 987 F.2d 1, 3 (1st Cir. 1993). 1
American Road Products, Inc., is a Massachusetts-based manufacturer and distributor of
automotive aftermarket products. (Counterclaim ¶ 6). It manufactures, and owns patents
relating to, backup-camera license-plate products. (Id.). Installernet, Inc. is alleged to be the
alter ego of ARP. (Am. Compl. ¶ 11(c)). 2
Pearl Automation, Inc., was a Delaware corporation with a principal place of business in
California. (Counterclaim ¶ 7). It ceased active operations in June 2017. (Id.). Prior to June
2017, Pearl developed, marketed, and manufactured “RearVision,” a solar-powered aftermarket
automotive backup camera and alert system. (Id. ¶ 8). Drivers whose cars lack pre-installed
backup cameras can attach RearVision to their rear license plate and view the camera through a
1
On a motion to dismiss, a court may properly take into account certain types of documents outside the
counterclaim without converting the motion into one for summary judgment: (1) documents of undisputed
authenticity; (2) documents that are official public records; (3) documents that are central to the claims; and (4)
documents that are sufficiently referred to in the counterclaim. See Watterson, 987 F.2d at 3.
2
The amended complaint alleges that Installernet and ARP President Frangiosa “exercise[ed] complete
control and dominance” over ARP such that they are all legally indistinguishable entities. (Am. Compl. ¶ 11(d)).
2
smartphone mounted on the dashboard. (Id.).
RearVision has four main components: (1) a license plate frame with built-in video
cameras; (2) an onboard diagnostic port “dongle”; (3) a magnetic phone mount; and (4) a
software application. (Id. ¶ 9). The dongle is a hardware component that plugs into the car’s
onboard diagnostic port, connecting the camera to a smartphone. (Id.). The magnetic phone
mount secures the smartphone on the dashboard. (Id.). The software application is necessary for
the smartphone to interface with the video camera. (Id.).
By spring 2017, Pearl faced significant financial problems. (Id. ¶ 10). Therefore, it
sought to sell its remaining RearVision inventory to ARP. (Id.). The individuals negotiating the
purchase were Anthony Frangiosa, ARP’s President; Karen Carte, Pearl’s Vice President of
Finance; and Brian Sander, Pearl’s co-founder and Chief Operating Officer. (Id. ¶ 11).
During negotiations, the parties discussed ARP taking over Pearl’s support and
maintenance responsibilities for RearVision, including Pearl’s website. (Id. ¶ 10). Pearl agreed
to update RearVision’s software so that it could function without Pearl’s future involvement.
(Id. ¶ 11). In addition, Pearl agreed to provide the RearVision source code so that ARP could
continue to support the RearVision inventory. (Id. ¶ 12).
In early June 2017, ARP started servicing RearVision products and assumed
responsibility for processing any returns. (Id. ¶ 13). By mid-June, Frangiosa and Carte were
close to finalizing the purchase agreement. (Id. ¶ 14). However, Carte stated that she would
need approval from COO Sander and Comerica Bank, one of Pearl’s creditors. (Id.).
On June 23, 2017, ARP and Pearl signed a purchase order. (Id. ¶ 15). Under the
contract’s terms, ARP agreed to buy Pearl’s RearVision inventory, including both new and
returned goods, for $323,420. (Counterclaim Ex. A). In addition, Pearl granted ARP access to
3
“all necessary operations and technology required to support the sales, maintenance[,] and
service of [Rearvision],” along with RearVision’s source code. (Id.). Pearl further granted ARP
a royalty-free, worldwide license for all of Pearl’s “intellectual property necessary to sell,
support[,] and maintain [RearVision].” Finally, the purchase order also gave ARP a “right of
first refusal . . . to match any legitimate offer to purchase some or all of assets related to
[RearVision].” (Id.).
However, on the date the purchase order was executed, the RearVision inventory was in
the possession of one of Pearl’s creditors, Ingram Micro Mobility. (Counterclaim ¶ 17). Ingram
had asserted a lien on that inventory. (Id.). Also on that date, Pearl executed a general
assignment, transferring ownership of all its assets to DSI Assignments. (Pl. Ex. B). The
assignment was accepted by DSI Assignments on July 7, 2017. (Id.).
The assignment stated that DSI Assignments “shall have all powers necessary to marshal
and liquidate the estate including but not limited to . . . [the power to] collect any and all
accounts receivable and obligations owing to [Pearl]” and “[the power to] settle any and all
claims against or in favor of Assignor, with the full power to compromise, or, in the Assignee’s
sole discretion, to sue or be sued, and to prosecute or defend any claim or claims of any nature
whatsoever existing in favor of assignor.” (Id. ¶¶ 5(a), 5(f)). The assignment further provided
that “neither the Assignee nor any of its employees, officers, agents or representatives will
assume any personal liability or responsibility for any of its acts as Assignee herein, but its
obligation shall be limited to the performance of the terms and conditions of the general
assignment in good faith and in the exercise of its best business judgment.” (Id. ¶ 7). Finally, as
relevant here, the assignment stated that “the Assignee shall succeed to all of the rights and
privileges of the Assignor . . . in respect to any potential or actual claims, cases, controversies, or
4
causes of action and shall be deemed to be a representative of the Assignor with respect to all
such potential or actual claims, cases, controversies, or causes of action.” (Id. ¶ 9).
On June 30, 2017, American Road Products wired $70,974.87 to Ingram to secure the
RearVision inventory. (Counterclaim ¶ 17). Around that date, Pearl delivered some, but not all,
of the source code necessary for RearVision’s continued operation. (Id. ¶ 18).
On July 5, 2017, a Pearl employee, Tyler Mincey, sent an e-mail to ARP requesting
additional time to “bundle the Car Adapter Firmware and the Android app.” (Id. ¶ 18). Neither
Pearl nor DSI has delivered the remaining source code since that date. (Id. ¶ 20). Without the
complete source code, more smartphones are becoming incompatible with RearVision, making it
significantly more difficult for ARP to sell its inventory. Customers have been leaving
overwhelmingly negative reviews of RearVision on Amazon.com. (Id. ¶ 21). A majority of
RearVision inventory remains unsold. (Id. ¶ 22).
The RearVision inventory was delivered to ARP in Massachusetts sometime in July
2017. (Id. ¶ 19). ARP received a few more new RearVision products than the purchase order
called for, but significantly fewer returned goods. (Id.). Because Pearl had gone out of business,
ARP contacted DSI Assignments, which refused to accept a return of the inventory. (Id.).
On May 29, 2018, ARP received a message from Amazon.com, its most important sales
platform. The message stated that Nite Ize, Inc., had filed a complaint alleging that the
RearVision magnetic mount infringed on two of its patents. (Id. ¶ 23). Amazon has since delisted the individually-sold magnetic mounts from its website. (Id.).
B.
Procedural Background
DSI Assignments brought this suit on October 11, 2017. An amended complaint was
filed on January 5, 2018. The amended complaint asserts 11 counts against defendants ARP,
5
Frangiosa, and Installernet, Inc.
Defendants moved to dismiss three counts in the amended complaint: (1) Count 8, a
claim for violation of the Massachusetts consumer protection statute, Mass. Gen. Laws ch. 93A;
(2) Count 10, a claim for quantum meruit; and (3) Count 11, a claim for fraud. Although the
Court cautioned that the claims were “hanging by a thread,” it denied the motion. (Feb. 22, 2018
Hearing Tr. at 20).
Defendants filed an answer on March 5, 2018. An amended answer was then filed on
June 22, 2018, which included a counterclaim asserting four claims against DSI Assignments.
Count 1 asserts a claim for breach of contract for Pearl’s failure to provide the full source code
for RearVision and for failing to provide ARP with the right of first refusal; Count 2 asserts a
claim for breach of the warranty against infringement; Count 3 asserts a claim for violation of
Mass. Gen. Laws ch. 93A; and Count 4 seeks indemnification for any damages Nite Ize may
obtain against defendants for patent infringement.
DSI Assignments has moved to dismiss the counterclaim, alleging that it cannot be held
liable as an assignee for Pearl’s contractual obligations.
II.
Legal Standard
On a motion to dismiss, the court “must assume the truth of all well-plead[ed] facts and
give . . . [counterclaimant] the benefit of all reasonable inferences therefrom.” Ruiz v. Bally
Total Fitness Holding Corp., 496 F.3d 1, 5 (1st Cir. 2007) (citing Rogan v. Menino, 175 F.3d 75,
77 (1st Cir. 1999)). To survive a motion to dismiss, the [counterclaim] must state a claim that is
plausible on its face. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). In other words, the
“[f]actual allegations must be enough to raise a right to relief above the speculative level, . . . on
the assumption that all the allegations in the [counterclaim] are true (even if doubtful in fact).”
6
Id. at 555 (citations omitted). “The plausibility standard is not akin to a ‘probability
requirement,’ but it asks for more than a sheer possibility that a [counterdefendant] has acted
unlawfully.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 556).
Dismissal is appropriate if the [counterclaim] fails to set forth “factual allegations, either direct
or inferential, respecting each material element necessary to sustain recovery under some
actionable legal theory.” Gagliardi v. Sullivan, 513 F.3d 301, 305 (1st Cir. 2008) (quoting
Centro Medico del Turabo, Inc. v. Feliciano de Melecio, 406 F.3d 1, 6 (1st Cir. 2005)).
III.
Analysis
The present dispute concerns only whether the assignment shields DSI Assignments from
the counterclaim. The parties agree that DSI Assignments played no role in negotiating or
executing the purchase order, and that California law governs the interpretation of the
assignment.
As a general matter, under California law, an assignee is not personally liable for the
underlying contractual obligations of the assignor to a third party. See Sherwood Partners, Inc.
v. EOP-Marina Bus. Ctr., LLC, 153 Cal. App. 4th 977, 983 (2007). An assignee has “a duty to
marshal and protect the assets” of the assignor, “which may include filing and defending
lawsuits.” Id. “To impose underlying contractual liabilities upon an assignee for the benefit of
creditors because the assignee initiated litigation to protect an assignor’s assets, would create a
disincentive for such assignees to seek to protect an assignor’s assets for the benefit of creditors.”
Id.; see also Recorded Picture Co. v. Nelson Entm’t, Inc., 53 Cal. App. 4th 350, 362 (1997). 3
3
DSI Assignments principally relies on Sherwood Partners. However, that case is inapposite. In
Sherwood Partners, the California Court of Appeals held that the assignee could not be personally held liable for
attorney’s fees and costs pursuant to the underlying contract. 153 Cal. App. 4th at 983-84. By contrast, defendants
here are asserting claims against DSI Assignments solely in its capacity as assignee. (Counterclaim ¶¶ 30, 35, 42,
46.
7
However, an assignee “stands in the shoes of the assignor, acquiring all of its rights and
liabilities.” Aerofund Fin., Inc. v. Elliott, 2001 WL 312422, at *1 (9th Cir. Mar. 30, 2001)
(quoting Prof’l Collection Consultants v. Hanada, 53 Cal. App. 4th 1016, 1018-19 (1997)).
Therefore, while an assignee is not personally liable for the assignor’ liabilities, a creditor may
sue the assignee to recover from the assigned assets. Indeed, as another court in this district has
noted, “[i]t would be incongruous for [a] Court to entertain [an assignee’s] claims against
defendants . . . but not vice-versa.” Brandt v. Advanced Cell Tech., Inc., 349 F. Supp. 2d 54, 58
(D. Mass. 2003). Otherwise, an assignor could escape liability for any wrongdoing simply by
assigning its assets to another entity.
In any event, the language of the assignment supports this conclusion. The preamble
stated that the assignment was “for the benefit of creditors.” (Pl. Ex. B at 1). Paragraph 5(f)
stated that DSI Assignments would have all powers necessary “[t]o settle any and all claims
against or in favor of [Pearl], with the full power to compromise, or, in [DSI Assignments’s] sole
discretion, to sue or be sued, and to prosecute or defend any claim or claims of any nature
whatsoever existing in favor of [Pearl].” (Id. ¶ 5(f)). Therefore, the assignment envisioned that
DSI Assignments would defend or settle all valid claims creditors have against Pearl, with any
payments to come out of the assigned assets. Taking all well-pleaded allegations in the
counterclaim as true, defendants clearly qualify as potential creditors.
IV.
Conclusion
For the foregoing reasons, the motion to dismiss is DENIED.
So Ordered.
/s/ F. Dennis Saylor
F. Dennis Saylor IV
United States District Judge
Dated: August 15, 2018
8
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?