Timmer v. Woodland Holdings Corp. et al

Filing 14

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

Timmer v. Woodland Holdings Corp. et al

Doc. 14

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

N E D TIMMER, P la in tif f , F ile No. 1:10-CV-793 v. H O N . ROBERT HOLMES BELL W O O D L A N D HOLDINGS CORP., et al., D e f e n d a n ts. / OPINION T h is matter comes before the Court on Defendants' motion to dismiss Plaintiff Ned T im m e r's complaint pursuant to Fed. R. Civ. P. 12(b)(6). (Dkt. No. 6.) For the reasons that f o llo w , Defendants' motion will be granted in part and denied in part. I. O n July 30, 2010, Timmer filed a claim and delivery action against Defendants 1 in the O tta w a County Circuit Court. Defendants removed the action to this Court on the basis of d iv e rsity jurisdiction. Defendants then filed the instant motion to dismiss, claiming that T im m e r has failed to state a claim on which relief can be granted. To survive a motion to dismiss under Rule 12(b)(6), "the complaint must contain

D e f e n d a n ts are Woodland Holdings Corp., Woodland Wireless Solutions, Ltd., S S q u a re d , LLC, West Michigan Co-Location Services, LLC, and T2 TV, LLC. Defendant IU In v e s tm e n ts , LLC, was dismissed on stipulation of the parties. (Dkt. No. 13.)

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either direct or inferential allegations respecting all material elements to sustain a recovery u n d e r some viable legal theory." In re Travel Agent Comm'n Antitrust Litig., 583 F.3d 896, 9 0 3 (6th Cir. 2009) (quoting Eidson v. State of Tenn. Dep't of Children's Servs., 510 F.3d 6 3 1 , 634 (6th Cir. 2007)). In reviewing the motion, the Court must "construe the complaint in the light most favorable to the plaintiff, accept its allegations as true, and draw all re a s o n a b le inferences in favor of the plaintiff," but "need not accept as true legal conclusions o r unwarranted factual inferences." Hunter v. Sec'y of U.S. Army, 565 F.3d 986, 992 (6th C ir. 2009) (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 e n 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 exhibit 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)). II. T im m e r alleges in his complaint that Woodland Holdings has defaulted under the S e c u re d Debenture as follows:

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A. Section 6 (a)(x): Suffering or causing an event that is a "material adverse e f f e c t" by terminating several experienced and knowledgeable employees and u n d e rta k in g to move the switching equipment that is the heart of Defendant S S q u a re d 's business operations. B . Section 6 (a)(iii): Failing to timely perform under the Transaction D o c u m e n t known as the Earn-Out by failing to make payment of $540,000.00 b y April 1, 2010. C . Section 6 (a)(iii): Failing to timely perform under the Transaction D o c u m e n t known as the Unit Purchase Agreement by failing to close on the p u rc h a s e of T2 Communications, LLC and Phone Services and More, LLC. D . Section 6 (a)(x): Suffering or causing an event that is a "material adverse e f f e c t" by failing to timely pay the IU debt as agreed. (D k t. No. 1, Ex. 1C, Compl. ¶ 25) A . Employees and Switching Equipment D e f e n d a n ts contend that Timmer's allegations that Woodland Holdings terminated s e v e ra l experienced and knowledgeable employees, and that it was undertaking to move the s w itc h in g equipment fails to state a claim for default under § 6(a)(x) of the Secured D e b e n tu re . Section 6(a)(x) of the Secured Debenture defines an "Event of Default" to include "an e v e n t occurs that has, or could reasonably be expected to have, a Material Adverse Effect." (Compl. Ex. 1, Sec. Deb. § 6(a)(x).) "Material Adverse Effect" is defined as an effect that results in or causes, or could reasonably be expected to result in o r cause, a material adverse effect on (a) the legality, validity or enforceability o f any Transaction Document, (b) the results of operations, assets, business or c o n d itio n (financial or otherwise) of the Issuers [CornerWorld Corporation and W o o d la n d Holdings Corp.] and the Subsidiaries, taken as a whole, . . . or (c) a n y Issuer's ability to perform in any material respect on a timely basis its o b lig a tio n s under any Transaction Document. 3

(Compl. Ex. 1, Sec. Deb. ¶ 1). Defendants contend that Timmer has failed to present any "factual matter," let alone " s u f f ic ie n t factual matter," explaining how either moving equipment or terminating certain e m p lo ye e s has materially adversely affected the "legality, validity or enforceability of any T ra n s a c tio n Document" or has materially adversely affected Woodland Holdings' " o p e ra t i o n s , assets, business or condition . . . taken as a whole." Defendants contend that T im m e r's allegations do not "permit the court to infer more than the mere possibility of m isc o n d u c t," and fail to show that Timmer "is entitled to relief." (Dkt. No. 7, Defs.' Br. 10 (q u o tin g Ashcroft v. Iqbal, 129 S. Ct. 1937, 1950 (2009)). The factual allegations in the complaint are far from detailed. Nevertheless,

c o n s tru in g the complaint in the light most favorable to Timmer, the Court can reasonably in f e r that the termination of "experienced and knowledgeable employees" and the moving o f switching equipment "that is the heart of Defendant S Squared's business operations" are e v e n t s that have, or could reasonably be expected to have, a "material adverse effect" as d e f in e d in the Secured Debenture. The allegations in ¶ 25(A), are sufficient state a claim for re lie f under § 6(a)(x) of the Secured Debenture that is plausible on its face. Defendants' m o tio n to dismiss ¶ 25(A) will accordingly be denied.2 A lth o u g h the Court denied Timmer's objections to the Special Master's report and T im m e r's request for preliminary injunctive relief based on similar arguments in the c o m p a n io n case, and expressed doubt that Timmer could prevail on these arguments at trial, th e Court also advised that these preliminary findings would not be binding at a trial on the m e rits . (CornerWorld v. Timmer, No. 1:09-CV-1124 (W.D. Mich. Nov. 6, 2010) (Dkt. No. 1 0 6 , Op. 8).) 4
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B. Earn Out Agreement T im m e r alleges that Woodland Holdings has failed to timely perform under the Earn O u t agreement (Compl. Ex. 5) by failing to make payment of $540,000 by April 1, 2010. (Compl. ¶ 25(B)). This allegation concerns a dispute between the parties "in connection with o r arising out of" the Earn Out Agreement. (Compl. Ex. 5, ¶ 15.) As this Court found in the companion case, because the Earn Out Agreement s p e c if ic a lly provides for arbitration of disputes that arise under that agreement, unless and u n til a dispute under the Earn Out Agreement has been arbitrated, it is not ripe for c o n s id e ra tio n as an event of default. (CornerWorld, No. 1:09-CV-1124 (Dkt. No. 123, 1 1 /1 6 /2 0 1 0 Op. 13.)) Defendants' motion to dismiss ¶ 25(B) will accordingly be granted. C. Unit Purchase Agreement T im m e r alleges that Woodland Holdings has defaulted under § 6(a)(iii) of the Secured D e b e n tu re by failing to timely perform under the Unit Purchase Agreement by failing to c lo s e on the purchase of T2 Communications, LLC and Phone Services and More, LLC. (Compl. ¶ 25(C).) D e f e n d a n ts contend that Timmer has failed to state a claim for default under § 6(a)(iii) a s a matter of law because § 6(a)(iii) only applies where there has been "a default or event o f default" under a Transaction document, and the Unit Purchase Agreement does not define a "default or event of default" under its provisions.

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Section 6(a)(iii), defines an "event of default" as follows: A default or event of default (subject to any grace or cure period provided in th e applicable agreement, document or instrument) shall occur under (A) any o f the Transaction Documents or (B) any other material agreement, lease, d o c u m e n t or instrument to which any Issuer or any Subsidiary is obligated (and n o t covered by clause (vi) below) . . . . (Compl. Ex. 1, § 6(a)(iii).) Section 6(a)(iii) is only one of ten defined events of default. Section 6(a)(ii) defines an "event of default" as follows: any issuer shall fail to observe or perform any other covenant or agreement c o n ta in e d in this Debenture or any other Transaction Document to which it is a party which failure is not cured, if possible to cure, within thirty (30) Trading D a ys after notice of such failure sent by the Holder . . . . (Compl. Ex. 1, § 6(a)(ii). While § 6(a)(iii) focuses on defaults, § 6(a)(ii) focuses on breaches o f covenants or agreements. By its terms, the Secured Debenture is governed by New York law. (Compl. Ex. 1, Sec. Deb. § 7(d).) When interpreting a contract under New York law, "[e]ffect and meaning m u s t be given to every term of the contract . . ., and reasonable effort must be made to h a rm o n iz e all of its terms . . . Moreover, the contract must be interpreted so as to give effect to , not nullify, its general or primary purpose." In re El-Roh Realty Corp., 902 N.Y.S.2d 7 2 7 , 729 (N.Y. App. Div. 2010) (quoting Vill. of Hamburg v. Am. Ref-Fuel Co. of Niagara, 7 2 7 N.Y.S.2d 843, 846-47 (N.Y. App. Div. 2001)); see also Herzfeld v. Herzfeld, 857 N .Y .S .2 d 170, 171 (N.Y. App. Div. 2008) ("[T]he court should arrive at a construction which w ill give fair meaning to all of the language employed by the parties to reach a practical in te rp re ta tio n of the expressions of the parties so that their reasonable expectations will be r e a liz e d ." ) . 6

Based upon the governing New York law, § 6(a)(iii) should not be read in isolation. When § 6(a)(iii) is read in conjunction with § 6(a)(ii), it is clear that § 6(a)(iii) should not be c o n s tru e d to cover breaches covenants or agreements that are not defined as defaults, because s u c h a construction would render § 6(a)(ii) completely nugatory; it would be unnecessary to ever invoke § 6(a)(ii) with its corresponding notice and cure requirement because the f a ilu re to perform any covenant in any agreement would be a default or event of default u n d e r section 6(a)(iii), regardless of whether the agreement at issue defined the conditions o f such a default. Timmer contends that the failure to go forward with the second closing is a breach of th e Unit Purchase Agreement; that the Unit Purchase Agreement is a Transaction Document; a n d that a default under a Transaction Document is a default under § 6(a)(iii) of the Secured D e b e n tu re . (Dkt. No. 9, Pl.'s Br. 16.)3

T im m e r contends that Woodland Holdings' failure to timely close is a default under n o t only the Secured Debenture, but also under the Purchase Note and security agreements. A default under a Transaction Document is a default under the Secured Debenture. (Dkt. No. 9 , Pl.'s Br. 16.) As noted above, the breach of a covenant under the Unit Purchase A g re e m e n t is not a default under that agreement. Moreover, contrary to Timmer's assertions, th e breach of a covenant under the Unit Purchase Agreement is not a default under either the P u rc h a s e Note or the Security Agreement. (See Compl. Ex. 2, Purch. Money Note ¶ 9, d e f in in g an event of default as "the occurrence of any Event of Default under the Secured D e b e n tu re issued by Maker and other parties to Payee on the same date hereof;" Compl. Ex. 3 , 4 Security Agrm't ¶ 8, defining an event of default as "[t]he occurrence of any one or more E v e n ts of Default by any Obligor under the Debenture or the Seller Note shall constitute an e v e n t of default . . . under this Agreement." ).

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It appears that Timmer's argument improperly equates the terms "breach" and " d e f a u lt." The Unit Purchase Agreement is an agreement for the sale and purchase of T2 C o m m u n ic a tio n s , LLC and Phone Services and More, LLC. (Compl. Ex. 6, p. 1.) The Unit P u rc h a s e Agreement contains various representations, warranties, agreements, and c o v e n a n ts , including the agreement that Seller and Buyer will use "commercially reasonable e f f o rts " to do all things necessary "to consummate and make effective the transaction as p ro m p tly as practicable." (Compl. Ex. 6, ¶ 5.4.) However, nowhere in the Unit Purchase A g re e m e n t is there a definition of what would constitute a default under the Agreement. Although the Unit Purchase Agreement requires the parties to use commercially reasonable e f f o r ts to close, it does not define the failure to do so as a default or an event of default. Timmer's argument with respect to ¶ 25(C) improperly equates the terms "breach" and " d e f a u lt." Timmer has alleged a breach of the Unit Purchase Agreement. However, he has n o t alleged a default of the Unit Purchase Agreement or a default under § 6(a)(iii) of the S e c u re d Debenture.4 Accordingly, Timmer's allegations regarding Woodland Holdings' f a ilu re to perform under the Unit Purchase Agreement fails to allege a default under§ 6(a)(iii) o f the Secured Debenture. Defendants' motion to dismiss ¶ 25(C) will accordingly be g ra n te d . D. Extension of IU Debt

A lth o u g h Timmer's allegation of a breach of covenants could conceivably be the b a s is of a default under § 6(a)(ii), Timmer has not asserted a default under § 6(a)(ii), nor has h e alleged notice and cure, which are prerequisites to a default under § 6(a)(ii). 8

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Timmer alleges that Woodland Holdings violated § 6 (a)(x) of the Secured Debenture " b y failing to timely pay the IU debt as agreed." (Compl. ¶ 25(D).) Defendants contend that Woodland Holdings' renegotiation of its debt with IU In v e s tm e n t is not a material adverse effect default under § 6(a)(x) as a matter of law because th e Secured Debenture expressly permits Woodland Holdings to "extend," or "refinance" the d e b t with IU Investments. Section 5 of the Secured Debenture sets forth certain covenants agreed to by W o o d la n d Holdings. Among the covenants listed in section 5 is the following: As long as any portion of this Debenture remains outstanding, each Issuer a g re e s , that unless otherwise consented to by Holder, as follows: a ) it shall not enter into, create incur, assume, guarantee or suffer to exist any in d e b te d n e s s for borrowed money of any kind, including but not limited to, a g u a ra n te e , unless in any such case, the obligations of such Issuer with respect th e re to are subordinated to the obligations of such Issuer hereunder on terms s a tis f a c to ry to the Holder except: ... ii. in d e b te d n e s s existing on the date hereof; ... v. th e incurrence of indebtedness by the Issuers and their S u b s id ia rie s that serves to extend, replace, refund, re f in a n c e , renew or defease the promissory note issued b y Cornerworld on the date hereof to IU Investments, L L C in the amount of $1,900,000 th e incurrence of indebtedness by the Issuers and their S u b s id ia rie s that service [sic] to extend, replace, refund, re f in a n c e , renew or defease any of the indebtedness in c la u s e (ii) 9

v i.

(Compl. Ex. 1, Sec. Deb. § 5 (a).) Timmer points out that the relevant exceptions concerning extensions of indebtedness in section 5 apply only upon the "incurrence of indebtedness." Timmer contends that this is im p o r ta n t because newly incurred debt that serves to refinance the IU Note would be s u b o rd in a te d to Timmer's security interest, while restructuring or extending existing debt w o u ld maintain IU's secured position over Timmer's secured position. According to T im m e r, Defendants extended the existing IU debt without incurring new debt, which v io la te s a covenant in under the Secured Debenture, and is an event of default. The Court is satisfied that Timmer's allegations in ¶ 25(D) regarding the extension o f the IU Note is sufficient to state a plausible claim of default. Defendants' motion to d is m is s ¶ 25(D) will accordingly be denied. E. Acquired Companies T im m e r's claims against the remaining Defendants, Defendant S Squared, T2 TV, and W e s t Michigan Co-Location (the "Acquired Companies"), is based on his contention that the A c q u ire d Companies have defaulted under the terms and conditions of the security a g re e m e n ts between them and Plaintiff "as a result of Woodland Holding's default under the S e c u re d Debenture." (Compl. ¶ 24.) Defendants move for dismissal of the claims against the Acquired Companies on the b a s is that the claims have not yet accrued. Defendants contend that because the issue of

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whether an event of default has occurred under the Secured Debenture has yet to be d e te rm in e d , there is as yet no breach under the Pledge and Security Agreement, and T im m e r's claim against the Acquired Companies is premature as a matter of law. Timmer has not responded directly to this argument. However, Timmer has alleged th a t Woodland Holdings has defaulted. Accordingly, regardless of whether or not the Court a g re e s that there is a default, the claims against the Acquired Companies have arguably a c c ru e d . Defendants' motion to dismiss the acquired companies will accordingly be denied. III. F o r the reasons stated herein, Defendants' motion to dismiss will be granted in part a n d denied in part. The motion will be granted as to ¶ 25(B) alleging default based upon the E a rn Out Agreement, and ¶ 25(C) alleging default based upon the Unit Purchase Agreement. The motion will be denied as to ¶ 25(A) alleging default based upon employees and s w itc h in g equipment, and ¶ 25(D) alleging default based upon extension of the IU debt, and a s to the acquired companies. An order consistent with this opinion will be entered.

Dated: December 15, 2010

/s/ Robert Holmes Bell ROBERT HOLMES BELL UNITED STATES DISTRICT JUDGE

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