Cornerworld Corporation v. Timmer et al

Filing 123

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

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Cornerworld Corporation v. Timmer et al Do c. 123 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, D e f e n d a n t. / OPINION T h is matter is before the Court on Plaintiff CornerWorld Corporation's motion to d ism iss Defendant Ned Timmer's counterclaim for declaratory and injunctive relief. (Dkt. N o . 44.) CornerWorld seeks partial summary judgment as to paragraph 22(a) of Timmer's c o u n ter c laim and dismissal of the remaining allegations of the counterclaim for failure to s ta te a claim. I. T im m e r's counterclaim seeks declaratory and injunctive relief based on eight alleged d e f a u lts under the transaction documents. (Dkt. No. 41, Countercl. ¶¶ 22, 25.) T h e defaults alleged in paragraph 22 are the original defaults that were before the C o u rt on the parties' cross-motions for a preliminary injunction: a. Plaintiff caused funds to be transferred among affiliates without T im m e r's consent for each transfer and without Timmer's consent to a budget for such transfers; Ned Timmer is advised that Plaintiff will continue to cause transfers to b e made among Plaintiff's affiliates without Timmer's consent for each tr a n s f e r and without Timmer's consent to a budget for such transfers; Defendant, through its subsidiary, Enversa, undertook new business v e n tu re s called Tiny Dial and MAP Telecom that, upon information a n d belief, involved agreements between Plaintiff and its subsidiaries w ith o u t Timmer's approval. Plaintiff failed to comply with the Collateral Perfection agreements u n til ordered to do so by this Court. b. c. d. (C o u n te rc l. ¶ 22.) I n paragraph 25, Timmer alleges four new defaults: a. Failing to perform its payment obligations under the transaction d o cu m en ts, including but not limited to failing to make payments to IU In v e stm e n t as required under the transaction documents for December ­ March, 2010. Failing to provide financial information requested by Ned Timmer as a director and creditor. Failure of Plaintiff's subsidiary, Woodland Holdings, to close on the p u rc h a se of Phone Services and More and T2 Communications p u rsu a n t to Unit Purchase Agreement. Plaintiff has failed to account properly for various expenses under the E a rn Out Agreement which will cause inaccurate calculations of Ned T im m e r 's earn out payments. b. c. d. (C o u n te rc l. ¶ 25.) 2 II. C o rn e rW o rld seeks summary judgment on Timmer's allegation in ¶ 22(a) that C o rn e rW o rld caused funds to be transferred without his consent or approval of a budget. Summary judgment should be granted in favor of a moving party "if the pleadings, th e discovery and disclosure materials on file, and any affidavits show that there is no g e n u in e issue as to any material fact and that the movant is entitled to judgment as a matter o f law. Fed. R. Civ. P. 56(c)(2). In evaluating a motion for summary judgment the Court m u s t look beyond the pleadings and assess the proof to determine whether there is a genuine n e e d for trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). In considering a motion for summary judgment, the court must construe the evidence a n d draw all reasonable inferences in favor of the nonmoving party. Minges Creek, L.L.C. v . Royal Ins. Co. of Am., 442 F.3d 953, 955-56 (6th Cir. 2006) (citing Matsushita, 475 U.S. a t 587). Nevertheless, the mere existence of a scintilla of evidence in support of D e f e n d a n t's position is not sufficient to create a genuine issue of material fact. Anderson v. L ib e rty Lobby, Inc., 477 U.S. 242, 252 (1986). The proper inquiry is whether the evidence is such that a reasonable jury could return a verdict for Defendant on his counterclaim. Id.; s e e generally Street v. J.C. Bradford & Co., 886 F.2d 1472, 1476-80 (6th Cir. 1989). C o rn e rW o rld contends that it is entitled to summary judgment on Timmer's a lle g a tio n s in ¶ 22(a) because they are contradicted by Timmer's own testimony. Section 5(m) of the Secured Debenture permits transfers of funds pursuant to a budget 3 ap p rov ed by Timmer.1 (Dkt. No. 41, Countercl. Ex. 2, Sec. Deb. § 5(m).) At the preliminary in ju n c tio n hearing, this Court received evidence concerning the CornerWorld budget. Scott B e c k testified that Timmer approved the budget at the August 3, 2009, board meeting. (Dkt. N o . 24, Prelim. Inj. Tr. 41, 49.) The minutes of the August 3 meeting merely indicate that th e budget was discussed, but the minutes from the following meeting on August 27, 2009, re f le c t that the budget was approved at the August 3 meeting. (Prelim. Inj. Ex. 16.) Timmer p a rtic ip a te d in these Board meetings, and did not object to the minutes or to the lack of a b u d g et. (Prelim. Inj. Tr. 95.) Timmer testified that he did not object to transfers that were m a d e to pay interest and principal on the IU note or to the monthly interest paid directly to h im , (Id. at 92-93), and that he understood that transfers would have to be made to C o r n e r W o r ld for its operating expenses (Id. at 100-101). This Court found that "[Timmer's] s ile n c e against the background of the other evidence suggested that a budget was adopted, a n d that CornerWorld's transfer of funds without Timmer's approval was not an event of d ef au lt." (Dkt. No. 12, 12/22/2009 Op. 10.) Now, in his affidavit in opposition to summary judgment, Timmer asserts that "[i]n A u g u s t 2009, a Cornerworld budget was discussed during Board Meetings, but I never c o n se n ted to a Budget. The Budget that was discussed did not provide for transfers." (Dkt. N o . 58, Ex. 9, Timmer Aff. ¶ 10.) "[O]ther than as set forth on a budget agreed upon by Woodland and Holder [ T im m e r], it shall not, and it shall cause each Subsidiary not to, transfer cash to any Affiliate, w ith o u t Holder's prior written consent." (Sec. Debenture § 5(m). 4 1 CornerWorld contends that Timmer cannot file an affidavit that directly contradicts h is sworn testimony regarding the budget. See Lanier v. Bryant, 332 F.3d 999, 1004 (6th Cir. 2 0 0 3 ) ("When a motion for summary judgment has been filed, a party cannot create a factual is s u e by filing an affidavit which contradicts earlier testimony." ). Upon review, it appears to the Court that while Timmer's affidavit goes against the w e ig h t of the evidence presented at the preliminary injunction hearing, it does not directly c o n tra d ic t his testimony. Moreover, "findings of fact and conclusions of law made by a d is tr ic t court in granting a preliminary injunction are not binding at a trial on the merits." S m ith Wholesale Co., Inc. v. R.J. Reynolds Tobacco Co., 477 F.3d 854, 873 (6th Cir. 2007) (q u o tin g United States v. Edward Rose & Sons, 384 F.3d 258, 261 (6th Cir. 2004)). The C o u rt is satisfied that there is a question of fact as to whether Timmer approved the budget a t the August 3, 2009, meeting. In addition, Timmer contends that there is an issue of fact a s to whether transfers were made that were not provided for in the budget. In support of this c o n te n tio n , Timmer has provided the affidavit of Peter Lazor, who states that the financial s ta te m e n ts of CornerWorld reflect transfers that exceed the budget. (Dkt. No. 58, Ex. 12, L a z o r Aff. ¶ 5.) Timmer contends that he needs further discovery to investigate the actual a m o u n ts of the transfers, and to determine whether they were made without his consent. In its reply brief, CornerWorld argues that Timmer cannot avoid summary judgment b a se d on an asserted need for discovery because he has not filed a Rule 56(f) affidavit. 5 C o rne rW o r ld also contends that Peter Lazor's affidavit is not accurate, as reflected in Lazor's d e p o s itio n testimony. R u le 56(f) provides that "[i]f a party opposing the motion shows by affidavit that, for s p e c i f ie d reasons, it cannot present facts essential to justify its opposition," the court may d e n y the motion. Fed. R. Civ. P. 56(f). Although Timmer has not filed anything labeled as a Rule 56(f) affidavit, his own affidavit states that he has not been permitted to audit C o rn e rW o rld 's financial records, and he has shown, through Lazor's affidavit, that he has a basis for believing that further discovery will yield specific information that he needs in o rde r to defend against CornerWorld's motion for summary judgment. Whether Lazor's a f f i d a v it is accurate or not is a question of fact.2 Accordingly, the Court is satisfied that T im m er has met the requirements of Rule 56(f) as to the issue of whether transfers were m a d e outside of the budget that were not approved by Timmer. The Court will accordingly d e n y CornerWorld's motion for summary judgment as to ¶ 22(a). III. C o rne rW o rld contends that the remaining allegations of default in Timmer's c o u n ter c laim are subject to dismissal pursuant to Rule 12(b)(6) for failure to state a claim u p o n which relief can be granted. " [ T ]o survive a motion to dismiss, the complaint must contain either direct or in f e re n tia l allegations respecting all material elements to sustain a recovery under some 2 Lazor's deposition testimony is not attached to CornerWorld's reply. 6 v ia b le legal theory." In re Travel Agent Comm'n Antitrust Litig., 583 F.3d 896, 903 (6th Cir. 2 0 0 9 ) (quoting Eidson v. State of Tenn. Dep't of Children's Servs., 510 F.3d 631, 634 (6th C ir. 2007)). In reviewing the motion, the Court must "construe the complaint in the light m o st favorable to the plaintiff, accept its allegations as true, and draw all reasonable in f e re n c es in favor of the plaintiff," but "need not accept as true legal conclusions or u n w a rra n te d factual inferences." Hunter v. Sec'y of U.S. Army, 565 F.3d 986, 992 (6th Cir. 2 0 0 9 ) (quoting Jones v. City of Cincinnati, 521 F.3d 555, 559 (6th Cir. 2008)). The c o m p la in t's factual allegations must be enough to "raise a right to relief above the s p e c u la tiv e level," and "state a claim to relief that is plausible on its face." In re Travel A g en t Comm'n, 583 F.3d at 903 (quoting Bell Atl. v. Twombly, 550 U.S. 544, 570 (2007)). In reviewing a motion under Rule 12(b)(6) the Court may consider any document that is an e x h ib it to a pleading, Fed. R. Civ. P. 10(c), and any document that is referred to in the p le a d in g and is central to the pleader's claim. Weiner v. Klais and Co., Inc., 108 F.3d 86, 89 (6 th Cir. 1997) (quoting Venture Assocs. Corp. v. Zenith Data Sys. Corp., 987 F.2d 429, 431 (7 th Cir. 1993)). A. Future Transfers ¶ 22(b) C o rn e rW o r ld contends that ¶ 22(b) is subject to dismissal because it alleges a n tic ip a te d future defaults that have not yet occurred. In addition, CornerWorld contends th a t the required notice of default has not been given. Timmer has not responded to C o rn e rW o rld 's argument regarding ¶ 22(b). 7 " [ A ] claim is not ripe for adjudication if it rests upon contingent future events that m a y not occur as anticipated, or indeed may not occur at all." Winget v. JP Morgan Chase B a n k N.S., 537 F.3d 565, 581-82 (6th Cir. 2008) (quoting Cooley v. Granholm, 291 F.3d 880, 8 8 3 -84 (6th Cir. 2002)). Because Timmer's allegation in ¶ 22(b) rests upon contingent future e v e n ts , it is not ripe for adjudication. Paragraph 22(b) will accordingly be dismissed. B. New Business Ventures, ¶ 22(c) CornerWorld contends that Timmer's allegation regarding new business ventures is s u b je c t to dismissal because the covenant at issue does not apply to Enversa. Section 5(e) of the Secured Debenture provides that "each Issuer" agrees that "it shall n o t engage in any material business other than the business it engaged in at the Original Issue D a te or any activities directly related thereto." (Sec. Deb., p. 1, & § 5(e) p. 6.) Under the S e c u re d Debenture, the "Issuers" are CornerWorld and Woodland Holdings Corp. (Sec. D e b . p. 1). CornerWorld contends that because Enversa is not an Issuer, Timmer's claim in ¶ 22(c) does not state a claim on which relief may be granted. Timmer's claim in ¶ 22(c) is not only that Enversa has entered into new business v e n tu re s, but that its new ventures "involved agreements between Plaintiff and its s u b s id ia rie s without Timmer's approval." (Countercl. ¶ 22(c).) Timmer contends that E n v e rs a has partnered with Woodland in the Tiny Dial venture. The Court is satisfied that T i m m e r ' s allegations are sufficient to state a claim of default under § 5(e) of the Secured D e b e n tu re . Accordingly, CornerWorld's motion to dismiss ¶ 22(c) will be denied. 8 C . Collateral Perfection Agreement, ¶22(d) C o rn e rW o rld contends that it is entitled to dismissal of the alleged default concerning th e collateral perfection agreement because Timmer has conceded in his amended co u n terclaim ¶ 22(d) n.1 that CornerWorld "has provided a Control Agreement." 3 In r e sp o n s e , Timmer contends that the Control Agreements are still not in place because C o rn e rW o rld continues to use accounts at Comerica without control agreements. Timmer presents a moving target with regard to the Control Agreement. His current c o n te n tio n s regarding the use of corporate accounts without control agreements is not c o v e re d by the allegations in his counterclaim. Furthermore, the allegations appear to be w ith o u t merit. The parties entered into two security agreements. Under one security a g re e m e n t, Timmer was granted a security interest in the deposit accounts of S Squared, LLC , West Michigan Co­Location Services, LLC, and T2 TV, LLC. (Countercl. Ex. 3, Security A g rm 't ¶ 1(a); Ex. A-3, ¶ 6; Ex. A-4, ¶ 6; Ex. A-5, ¶ 6.) Under the other security agreement, T im m e r was granted a security interest in the deposit accounts of CornerWorld Inc., and E n v e rs a Companies LLC. (Dkt. No. 8, Ex. 3, Security Agrm't ¶ 1(a); Ex. A-2, ¶ 6; Ex. A-3, ¶ 6.) This security agreement clearly distinguishes between CornerWorld Corporation and C o r n e r W o rld Inc.. (Id.) The only security interest Timmer was granted in the personal Note 1 states in full that "Plaintiff has provided a Control Agreement but has yet to p ro v id e evidence that the accounts under the Control Agreements have been created and c re a ted in a manner such that Ned Timmer has access to view the accounts." (Countercl. ¶ 22(d) n.1.) 3 9 p ro p e rty of CornerWorld Corporation was in stock certificates. (Id. at Ex. A-1, ¶¶ 1, 2.) N e ith e r of the security agreements grants Timmer a security interest in the deposit accounts o f CornerWorld Corporation. Timmer's complaint that CornerWorld continues to maintain its Comerica accounts is particularly nonsensical in light of the fact that the Secured D e b e n tu re requires CornerWorld to "maintain all bank accounts at Comerica Bank." (Sec. D e b . § 5(q).) B e c au s e Timmer has conceded that Plaintiff has provided a Control Agreement, and b e c a u se the documents do not support the existence of a security interest in the deposit a c co u n ts of CornerWorld Corporation, Timmer has failed to state a claim on which relief can b e granted in ¶ 22(d). Paragraph 22(d) will accordingly be dismissed. D. Notice re New Defaults, ¶¶ 25(a)-(c) C o rn e rW o rld asserts that it is entitled to dismissal of the defaults alleged in p a ra g ra p h s 25(a)-(c) because Timmer has not given notice and an opportunity to cure. T im m e r does not challenge CornerWorld's assertion that he failed to give notice of th e se alleged defaults. Instead, he contends that these paragraphs allege events of default t h a t are not subject to a 30-day notice provision, either because they represent defaults of tr a n s a c tio n documents, under § 6(a)(iii), or because they fall within the "material adverse e v e n t" default under § 6(a)(x) of the Debenture. 10 U n d e r § 6(a)(iii), it is an event of default if there is a default or event of default under a n y of the transaction documents. By its own terms, an event of default under this provision is not subject to the 30-day notice provision. Contrary to Timmer's assertions, his claims in paragraphs 25(a), (b), and (c) allege, a t best, violations of covenants in the agreements, rather than a default under those a g re e m e n ts . For example, Timmer has asserted that CornerWorld's failure to provide re q u e ste d financial information is a violation of § 5(h) and § 5(q) of the Secured Debenture. S e c tio n 5 of the Secured Debenture is clearly labeled "Covenants." Violations of covenants in agreements are covered by § 6(a)(ii), and are subject to a 30-day notice requirement. To in te rp re t a covenant violation as a default would make § 6(a)(ii)'s notice provision m e a n in g le ss , because any violation of a covenant could be recast as a default, for which no n o t ic e is required. Contracts must be interpreted as a whole to avoid rendering any p ro v is io n s meaningless. Madison Hudson Assocs. LLC v. Neumann, 44 A.D. 3d 473, 480; 8 4 3 N.Y.S.2d 589 (2007). In the alternative, Timmer contends that the allegations in paragraphs 25(a)-(c) c o n s titu te material adverse event defaults. "Event of Default" is defined in the Secured Debenture to include "any event that has, o r could reasonably be expected to have, a Material Adverse Effect." (Sec. Deb. § 6(a)(x).) A n event that has a "Material Adverse Effect" is not subject to a 30-day notice requirement. (Id .) "Material Adverse Effect" is defined to include "(c) any Issuer's ability to perform in 11 a n y material respect on a timely basis its obligations under any Transaction Document." 4 (Id. at § 1.) Timmer contends that a "material adverse effect" is defined to include an event that re su lts in Plaintiff not performing its timely obligations under the transaction documents, e v e n though there may not be a declared default. Timmer misconstrues the definition of " M a te r ia l Adverse Effect." The definition focuses on the Issuer's ability to perform, not on its failure to perform. Timmer's assertion that CornerWorld failed to perform its payment o b lig atio n s, that CornerWorld failed to provide financial information requested by Timmer, a n d that Woodland Holdings failed to close on two purchases are not allegations that C o r n e r W o r ld or Woodland Holdings was unable to perform its obligations on a timely basis. 4 The full definition reads as follows: " M a ter ial Adverse Effect" means an effect that results in or causes, or could re a so n a b ly be expected to result in or cause, a material adverse effect on (a) th e legality, validity or enforceability of any Transaction Document, (b) the re su lts of operations, assets, business or condition (financial or otherwise) of th e Issuers and the Subsidiaries, taken as a whole, other than any such effect th a t results or arises from or relates to (i) changes in general economic or m a rk e t conditions or prevailing interest rates, (ii) changes, circumstances or e f f e c ts generally affecting the business or industry in which such party o p e ra tes that do not have a disproportionate adverse impact on such entity, (iii) c h a n g e s in applicable accounting principles or rules, or (iv) changes in g e n e ra lly applicable laws, regulations or interpretations, with respect to each o f (i) through (iv) above, to the extent that such changes, circumstances or e f f e c ts do not have a disproportionate adverse impact on the Issuers and the S u b s id ia rie s, taken as a whole or (c) any Issuer's ability to perform in any m a te ria l respect on a timely basis its obligations under any Transaction D o c u m e n t. 12 Accordingly, Timmer has failed to state a claim on which relief can be granted in paragraphs 2 5 (a )-(c ). Paragraphs 25(a)-(c) will accordingly be dismissed. E . Earn Out Agreement, ¶ 25(d) C o rn e rW o rld asserts that because disputes under the Earn Out Agreement are subject to arbitration, Timmer's claim of default based on the Earn Out Agreement must be d ism issed . Even though Timmer agrees that disputes under the Earn Out Agreement are s u b j e c t to arbitration, he opposes dismissal of the Earn Out Agreement allegation because h e contends that CornerWorld's failure to pay under the Earn Out Agreement is also an event o f default under § 6(a)(iii) of the Debenture, or, is a "material adverse event" default under § 6(a)(x). The Earn Out Agreement specifically provides for arbitration of disputes that arise u n d e r that agreement. Based upon the specificity of the arbitration remedy provided under the Earn Out Agreement, the Court concludes that unless and until a dispute under the Earn O u t Agreement has been arbitrated, it is not ripe for consideration as an event of default. Accordingly, the Court will dismiss ¶ 25(d). A n order consistent with this opinion will be entered. Dated: November 16, 2010 /s/ Robert Holmes Bell ROBERT HOLMES BELL UNITED STATES DISTRICT JUDGE

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