Cornerworld Corporation v. Timmer et al

Filing 12

OPINION; signed by Judge Robert Holmes Bell (Judge Robert Holmes Bell, sdb)

UNITED STATES DISTRICT COURT F O R THE WESTERN DISTRICT OF MICHIGAN S O U T H E R N DIVISION

C O R N E R W O R L D CORPORATION, P l a in tif f , F ile No. 1:09-CV-1124 v. H O N . ROBERT HOLMES BELL N E D TIMMER, et al., D e f e n d a n ts and N E D TIMMER, et al., P l a i n t if f s , v. C O R N E R W O R L D CORPORATION, et al., D e f e n d a n ts . / OPINION T h is matter comes before the Court on cross-motions for a preliminary injunction filed in two related cases. For the reasons that follow, the Court will grant the motion for p re lim in a ry injunction in CornerWorld Corp. v. Timmer, File No. 1:09-CV-1124, and deny th e motion for preliminary injunction in Timmer v. CornerWorld Corp., File No. 1:09-CV1131. F ile No. 1:09-CV-1131

I. T h e cross-motions for preliminary injunction relate to who should manage the o p era tio n s of certain businesses pending a trial on the merits. The Court held an evidentiary h e a rin g on the cross-motions for preliminary injunction on December 21, 2009, at which time th e Court received documentary evidence presented by the parties and listened to the te stim o n y of Scott Beck ("Beck") and Ned Timmer ("Timmer). This opinion sets forth the re a so n s for the Court's rulings on the preliminary injunctions requested. C o rn e rW o rld Corporation ("CornerWorld") is a publicly-traded marketing and te c h n o l o g y services company incorporated in Nevada, with offices in Dallas, Texas. C o rn e rW o rld provides mobile telephone, television, and internet services. Scott Beck (" B e c k " ) is the CEO of CornerWorld. Timmer is a Florida resident who used to reside in Holland, Michigan. Prior to F e b ruary 23, 2009, Timmer owned West Michigan Co-Location Services, LLC, T2 TV, LLC, S Squared LLC (d/b/a Ranger Wireless"), and Woodland Wireless Solutions, Ltd. (c o lle c tiv e ly, the "Subsidiary Companies"). The Subsidiary Companies were involved in the te le c o m m u n ic a tio n s business and operated out of Holland, Michigan. On February 23, 2009, Timmer sold his interests in the Subsidiary Companies to C o rn e rW o rld 's newly-formed and wholly-owned subsidiary, Woodland Holdings Corp. (" W o o d la n d Holdings"). The purchase price was $12.2 million, which included $1.9 million in cash, a secured debenture for $3.1 million, a purchase money note for $4.2 million, an

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e a r n - o u t agreement, and a stock purchase agreement. Timmer was also granted a security in te re s t in the stock and membership interests of CornerWorld and its subsidiaries. Following the February 23, 2009, transaction, CornerWorld became the owner of W o o d la n d Holdings and the four Subsidiary Companies. Beck continued to serve as CEO o f CornerWorld, and became the CEO of the Subsidiary Companies. Timmer became the C O O of Woodland Holdings and a director on the Board of CornerWorld and Woodland H o ld in g s . Timmer managed the Holland offices of the Subsidiary Companies. On June 16, 2009, Timmer sent CornerWorld a notice of default. The main default c la im e d in the letter was the failure to pay interest on the Note and Debenture. The letter also g a v e notice of the following additional breaches of covenants that, if not cured within 30 d a ys , would constitute defaults: (1) engaging in material new businesses (rural telephone c o m p a n y, Tiny Dial short code clearinghouse) through Enversa without Timmer's consent o r Board approval, (2) failing to employ a CFO or COO satisfactory to Timmer, (3) failing to add an independent director satisfactory to Timmer, (4) failing to provide Timmer internet a c ce ss to bank accounts for review purposes, (5) removing cash and diverting business from W o o d land Wireless, (6) transferring cash to CornerWorld without a budget or Timmer's ap p rov al, and (7) increasing Beck's compensation without Timmer's consent or Board a p p ro v a l. Timmer also raised a general objection to CornerWorld's failure to follow normal

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b u s in e ss practices, such as adopting a budget, adopting a business plan, and passing re s o lu tio n s . (CW Ex. 5, 06/16/2009 letter from Cunningham Dalman PC to Beck.)1 C o rn e rW o rld immediately paid Timmer all of the money to which Timmer was e n title d . In addition, the June 16, 2009, letter was also placed on the agenda for the f o llo w in g Board of Directors meeting on August 3, 2009. (CW Ex. 25.) At the August 3 B o a rd of Directors meeting Beck read through the budget. (Ex. 16, Minutes at 10-11, 0 8 /0 3 /2 0 0 9 Minutes.) Although there is no reference in the minutes to a motion to approve th e budget, the minutes of the August 27, 2009, Board meeting reference the adoption of the b u d g e t at the August 3 meeting. (Id. at 12, 08/27/2009 Minutes.) B o th Timmer and Beck attended weekly management meetings and monthly Board o f Directors meetings, either in person or by telephone. There is no evidence that Timmer m a d e any suggestions at any of the Board meetings or management meetings after August 3 , that there were any outstanding defaults. A key asset CornerWorld obtained in the purchase was a 611 roaming-service patent o w n e d by S Squared (the "611 patent"). CornerWorld valued this asset at $10 million based o n its capacity to generate revenue through contracts with major cellular telephone carriers s u c h as Verizon/Alltel and Sprint, and on CornerWorld's understanding that S Squared had th e exclusive right to use the patent. Beck testified that on December 7, 2009, he learned for

CornerWorld's exhibits will be designated "CW Ex. ___," and Timmer's exhibits will b e designated "Timmer Ex. ___." Where both parties have the provided the same d o c u m e n ts , the Court will cite only the CornerWorld exhibit number. 4

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t h e first time that Timmer had failed to disclose to CornerWorld the existence of seven l i c e n s e s for the 611 patent despite the fact that the Stock Purchase Agreement required T im m er to disclose "all licenses" involving the intellectual property of the Subsidiary C o m p a n ie s and all material contracts to which the Subsidiary Companies were parties. (CW E x . 3, Stock Purchase Agrm't §§ 3.17(b), 3.25(g), Ex. 4, Schedules at 15, 18.) Timmer a c k n o w led g e d that he became aware of three outstanding licenses by virtue of his in v o lv e m e n t in S Squared v. Cingular, No. 1:04-CV-647 (W.D. Mich.). However, in T im m e r' s opinion, the outstanding licenses were not material. On December 10, 2009, Timmer unilaterally determined that CornerWorld had not c u re d the defaults and exercised his rights as a secured creditor holding all of the outstanding s to c k of Woodland Holdings and the Subsidiary Companies to vote the stock and the m e m b e r s h ip interest to install himself as director and manager of Woodland Holdings and th e Subsidiary Companies. (CW Ex. 6, 12/11/2009 Letter from Cunningham Dalman PC to B e c k .) He also moved all of the money from the Woodland Holdings account at Comerica B an k to an account at Paragon Bank to which CornerWorld did not have access. Timmer, th ro u g h his attorneys, advised in a letter dated December 11, 2009, that the defaults outlined in the June 2009 letter continued, including, but not limited to, (1) CornerWorld's continued diversion of funds from Woodland Holdings and the Subsidiary companies without Timmer's a p p ro v a l; (2) CornerWorld's failure to obtain a control agreement with Comerica Bank; and (3 ) the startup of the Tiny Dial business as part of Enversa. (Id.)

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O n December 14, 2009, CornerWorld filed an action against Timmer and others 2 alleg ing breach of contract, breach of fiduciary duty, and conversion. CornerWorld's c o m p la in t seeks damages and an injunction requiring Timmer to return the assets over which T im m e r had exerted control, prohibiting Timmer from interfering with the business o p era tio n s of Woodland Holdings and its subsidiaries, and declaring null and void Timmer's c o rp o ra te actions of December 10, 2009, that were designed to gain corporate control over W o o d la n d Holdings and its subsidiaries. CornerWorld v. Timmer, File No. 1:09-CV-1124. O n December 15, 2009, Timmer, Woodland Holdings, and the Subsidiary Companies f ile d an action against CornerWorld and Beck, seeking a declaration that a default exists and s e e k in g an injunction prohibiting Defendants from interfering with the bank accounts and b u s in e s s operations of the companies. Timmer v. CornerWorld, File No. 1:09-CV-1131. The d e f a u lts alleged are the failure to obtain a control agreement with Comerica Bank, the tra n sf e r of funds among affiliates without Timmer's approval, and Enversa's undertaking of th e new Tiny Dial business venture without Timmer's approval. Id., Dkt. No. 1, Compl. at ¶ 25. II. "A preliminary injunction is an extraordinary remedy which should be granted only if the movant carries his or her burden of proving that the circumstances clearly demand it." O ve rstreet v. Lexington-Fayette Urban County Gov't, 305 F.3d 566, 573 (6th Cir. 2002)

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The other defendants in this action are Jolee Timmer, Fiona Wicks, and Peter Lazor. 6

(c itin g Leary v. Daeschner, 228 F.3d 729, 739 (6th Cir. 2000)). In determining whether to g ra n t a preliminary injunction, the Court considers the following: (1) the plaintiff's likelihood of success on the merits; (2) whether the plaintiff m a y suffer irreparable harm absent the injunction; (3) whether granting the in ju n c tio n will cause substantial harm to others; and (4) the impact of an in ju n c tio n upon the public interest. D e ja Vu of Nashville, Inc. v. Metro. Gov't of Nashville & Davidson County, 274 F.3d 377, 4 0 0 (6th Cir. 2001). These four considerations are "factors to be balanced, not prerequisites th a t must be met." Mich. Bell Tel. Co. v. Engler, 257 F.3d 587, 592 (6th Cir. 2001). A . Likelihood of Success on the Merits: The likelihood of either party's success on the merits centers around the issue of w h e th e r Timmer properly exercised his rights under the relevant agreements in response to ev en ts of default. The Court will consider the three events of default raised in both Timmer's c o m p la in t and the December 11, 2009, letter. 1. Control Agreement T h e Collateral Perfection Agreement requires CornerWorld to enter into a Control A g re e m e n t for each bank account in which Timmer has a security interest within 30 days o f the February 23, 2009, Agreement. (CW Ex. 11, ¶ 2.) To date, CornerWorld has not o b ta in e d a Control Agreement with Comerica Bank. CornerWorld contends that the failure to perform any covenant or agreement in the D e b e n tu r e or any other Transaction Document other than the payment of principal or interest 7

d o e s not constitute an event of default unless it is not cured within thirty trading days after n o tic e of such failure. (CW Ex. 8, Secured Debenture § 6(a)(i), (ii).) CornerWorld contends th a t its failure to obtain a control agreement is not an event of default because it was not lis te d in the June 16, 2009, letter, and CornerWorld has not been given notice and an o p p o rtu n ity to cure. The Secured Debenture also defines an event of default to mean a default under any o f the Transaction Documents, without regard to notice and an opportunity to cure. (Id. at § 6(a)(iii).) The Collateral Perfection Agreement is a Transaction Document that placed an a f f i rm a tiv e obligation on CornerWorld to obtain a control agreement within 30 days. T im m e r was not required to give CornerWorld notice of its failure to meet this obligation u n d er the Transaction Documents. The Court is accordingly satisfied that CornerWorld's f a ilu re to obtain a control agreement was an event of default. Nevertheless, the Court finds that the default was not material. A Control Agreement "constitutes an authenticated record th a t the bank at which Debtors have a deposit account will comply with instructions o rig in a te d by Secured Party directing disposition of the funds in the deposit account without f u rth e r consent by the Debtors." (CW Ex. 11, Collateral Perfection Agreement ¶ 2.) Timmer a c k n o w le d g e d that CornerWorld gave him access to its bank account at Comerica, and T im m e r's action in transferring the money from that account to an account at Paragon Bank in d ica tes that he was able to accomplish what the Control Agreement was designed to enable h im to do. Accordingly, while the lack of a Control Agreement is an event of default, it was

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n o t a material default. 2. Transfer of Funds Among Affiliates without Timmer's Approval T im m e r alleges that CornerWorld is in default because it has continued to transfer f u n d s among the affiliates without Timmer's approval. Specifically, Timmer testified that h e objects to the transfer of funds from Woodland Wireless to CornerWorld without his c o n s e n t. Section 5 of the Secured Debenture provides: (m ) other than as set forth on a budget agreed upon by Woodland and Holder, it shall not, and it shall cause each Subsidiary not to, transfer cash to any A f f ilia te, without Holder's prior written consent. (C W Ex. 8, Secured Debenture § 5(m).) B e c k testified that a budget was adopted at the August 3 board meeting and that all p a ym e n ts have been within that budget. The budget provides for CornerWorld to have $ 9 1 ,0 0 0 per month in operating expenses. (CW Ex. 17, p. 4.) Beck further testified that of 8 2 % of the $2.6 million, or almost $2. 2 million, that was transferred since the acquisition w a s for the benefit of Timmer. (CW Ex. 19.) Those transfers included payments directly to T im m e r, and payments to IU, the company that loaned the $1.9 million CornerWorld used to pay Timmer. Timmer testified that he did not object to the transfer of the funds that were tra n sf e rre d for his benefit. He testified that he was concerned about the remaining $480,000 th a t was transferred to CornerWorld for CornerWorld's operations.

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U n d e r the Secured Debenture, if the payments were made pursuant to a budget agreed u p o n by Woodland and Timmer, Timmer's prior written consent was not required. Timmer's o b je c tio n s to the transfers accordingly assume the lack of an agreed-upon budget. CornerWorld does not have a corporate resolution or a minute entry indicating that a vote was taken to adopt the budget. However, Beck believed the budget had been adopted, a n d the minutes reflect that the budget was discussed, and that McCrea, the CFO, understood th a t the budget had been adopted. Moreover, it appears that business was conducted on the a ss u m p tio n that the budget had been adopted. Timmer testified to his understanding that C o rne rW o r ld did not generate revenue and that it would have to depend on the Subsidiary C o m p an ies and Enversa for operating expenses. Timmer agreed that the Subsidiary

C o m p a n ie s generated far more revenue than Enversa and that they would have to fund C o rn e rW o rld . Timmer did not present any evidence to suggest that the $91,000.00 reflected in the budget for CornerWorld's operating expenses was unreasonable or that the average of $ 4 8 ,0 0 0 per month actually transferred to CornerWorld for its operating expenses was u n re a s o n a b le . There is no evidence that Timmer objected to the lack of a budget at any time a f ter August 3. His silence against the background of the other evidence suggests that a b u d g e t was adopted, and that CornerWorld's transfer of funds without Timmer's approval w a s not an event of default.

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3 . Enversa's Tiny Dial Business Evidence was produced that Enversa purchased a patent for the right to route short c o d e s , and that it is involved in starting up a new company called Tiny Dial. Enversa is a s u b s id ia ry of CornerWorld, and is the sales and marketing arm of the company. Tiny Dial is in start-up mode and is not yet operational. Timmer contends that Enversa's Tiny Dial business violates the following covenant in the Secured Debenture: "it shall not engage in any material business other than the business it is e n g a g ed in at the Original Issue Date or any activities directly related thereto. (C W Ex. 8, Secured Debenture § 5(e).) The term "it" as used in § 5(e) refers to each "Issuer." (Id. at § 5.) "Issuers" are d e f in e d as Woodland Holdings and CornerWorld. (Id. at p. 1.) CornerWorld contends that th e term "Issuer" does not cover CornerWorld or Woodland Holding's affiliates or s u b s id ia rie s , and does not apply to Enversa's activities. The Secured Debenture expressly refers to affiliates or subsidiaries when their c o n d u c t is at issue. (See, e.g., id. at § 5(f) ("it shall not, nor shall it permit any Subsidiary to . . . ."); and id. at § 5(m) ("it shall not, and it shall cause each Subsidiary not to . . . .") A c c o rd in g ly, because Tiny Dial is the business of a subsidiary of CornerWorld, and not the b u s in e s s of CornerWorld itself, it does not appear to be subject to this covenant. Timmer essentially conceded during his testimony that he does not have the right to c o n tro l Enversa's activities. He indicated that his real concern was that Enversa had used or 11

w o u ld be using Woodland Wireless's employees to accomplish the technical aspects of its b u s in e s s , to the detriment of Woodland Wireless. Based upon the evidence presented to date, it appears to the Court that CornerWorld h a s a far stronger likelihood of success on the merits of its action than does Timmer. Timmer h a s not shown a material breach of the Agreements that would justify his resort to the drastic a n d draconian measures he took to protect his interests. B. Irreparable Harm B o th parties contend that they will be irreparably harmed if a preliminary injunction is not issued in their favor. Both Timmer and CornerWorld will potentially be harmed if W o o d lan d Holdings does not survive. The parties have differing opinions as to how best to in su re its survival. CornerWorld is concerned that if it is not in control of the companies, it w ill not be able to meet its bills and negotiate contracts. Timmer is concerned that

C o rne rW o r ld is not operating in the best interests of Woodland Holdings and the Subsidiary C o m p a n ie s . C. Harm to Others and Public Interest These lawsuits primarily concern a private issue, but because CornerWorld is publicly h e ld , they do raise issues that go beyond the immediate parties. Moreover, the Court finds th a t the public has an interest in insuring that the strong self-help remedies for secured parties a re not used unless they are truly justified and essential. Timmer's concern with the manner in which the Subsidiary Companies' resources are

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u s e d is representative of his failure to relinquish control over his companies after their sale. It appears to the Court that the Buy/Sell Agreements are drafted on the assumption that the C E O (Beck) and the COO (Timmer) will be able to work together. However, the evidence th a t is emerging reflects that there are substantial disagreements between Beck and Timmer a s to how the businesses are to be run in the future. There is a collision over management styles, and that collision has undoubtedly become insurmountable in light of Timmer's u n ila te ra l and drastic actions in this case. It appears to the Court that where, as here, the b u ye r and seller have shown an inability to work together, it is the buyer management v ie w p o in t must prevail. The Court finds that it is necessary to separate Timmer from the day-to-day m a n a g e m e n t of the Subsidiary Companies, while at the same time allowing him to remain o n the Board of Directors. The Court will accordingly enter a preliminary injunction as follows: 1 . The actions taken by Timmer on December 10, 2009, to gain corporate control over W o o d la n d Holdings and the Subsidiary Companies are deemed null and void. 2. Timmer and Fiona Wicks and all those persons and entities in active concert or p a rtic ip a tio n with them shall return to CornerWorld all collateral and/or property belonging to CornerWorld over which they have asserted dominion and control, including, but not lim ite d to, the funds contained in CornerWorld's Comerica bank accounts and all other funds re c e iv e d by them since December 10, 2009.

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3 . CornerWorld and Beck and all those persons and entities in active concert or p a rticip a tio n with them shall undo all actions they have taken since December 10, 2009, to a s s e rt dominion and control over entities still owned by Timmer. (See Timmer Ex. 13, at 6.) 4 . CornerWorld shall immediately set up bank accounts in Holland Michigan with p r o p e r Control Agreements. 5 . Timmer shall be removed from active management of the Holland employees, but sh a ll be retained on the Board of Directors of CornerWorld as provided in the Buy/Sell A g r e e m e n t s. S e c u rity is not required because Timmer is adequately protected by his secured in te re s ts in Woodland Holdings and the Subsidiary Companies. Finally, the Court understands that resolution of this complicated and dynamic b u sin e ss relationship will be difficult. The Court believes that it may be appropriate to a p p o in t a special master. Accordingly, the Court invites the parties, pursuant to Rule 53(b) o f the Federal Rules of Civil Procedure, to be heard on the issue of a master and to suggest c a n d id a te s for appointment. Briefs on the issue of the appointment of a master and/or names o f candidates for appointment shall be filed within 30 days. A n order consistent with this opinion will be entered.

Date:

December 22, 2009

/s/ Robert Holmes Bell ROBERT HOLMES BELL U N IT E D STATES DISTRICT JUDGE

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