WHITE WINSTON SELECT ASSET FUNDS, LLC v. INTERCLOUD SYSTEMS, INC.

Filing 66

OPINION filed. Signed by Judge Brian R. Martinotti on 10/3/2017. (mmh)

NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
____________________________________
:
WHITE WINSTON SELECT ASSET
:
FUNDS, LLC,
:
:
Civil Action No. 13-7825-BRM-DEA
Plaintiff,
:
:
v.
:
:
INTERCLOUD SYSTEM, INC.,
:
:
OPINION
Defendant.
:
____________________________________:
MARTINOTTI, DISTRICT JUDGE
Before this Court are: (1) Defendant Intercloud Systems, Inc.’s (“Defendant”) Motion for
Summary Judgment (ECF Nos. 38-39); Plaintiff White Winston Select Asset Funds, LLC’s
(“Plaintiff”) Motion for Summary Judgment (ECF No. 42); and (3) Plaintiff’s Motion for Writ of
Attachment (ECF No. 45). All motions are opposed. (See ECF Nos. 49, 55, 56.) Pursuant to Federal
Rule of Civil Procedure 78(a), the Court heard oral argument on September 6, 2017. (ECF No.
63.) For the reasons set forth below, Plaintiff’s Motion for Summary Judgment (ECF No. 42) is
GRANTED and Defendant’s Motion for Summary Judgment (ECF Nos. 38-39) is DENIED.
Plaintiff’s Motion for Writ of Attachment is DENIED AS MOOT.
I.

BACKGROUND
A. Facts Relating to Summary Judgment Motion
Defendant is a publicly traded corporation that, via its subsidiaries, provides

telecommunications and cloud computing services. (Pl.’s Resp. to Statement of Facts (ECF No.
56-1) ¶ 1.) It is a corporation organized and existing under the laws of Delaware with its principal
place of business in New Jersey. (Def.’s Resp. to Statement of Facts (ECF No. 54) ¶ 2.) Plaintiff
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is a firm engaged in debt and equity investing into private company and small-cap public
companies. (ECF No. 56-1 ¶ 10.) It is a limited liability company organized and existing under the
laws of Utah with its principal place of business also in Utah. (ECF No. 54 ¶ 1.)
On September 17, 2012, MidMarket Capital Partners, LLC (“MidMarket”), executed a loan
and security agreement with Defendant providing approximately $13 million in financing (the
“MidMarket Loan”). (ECF No. 56-1 ¶ 3.) The MidMarket Loan prohibited Defendant from
incurring certain types of additional debt unless MidMarket approved them. (Id. ¶ 6.) Specifically,
the MidMarket Loan states Defendant agrees not to “create, incur, assume, guaranty, or otherwise
become or remain directly or indirectly liable on a fixed or contingent basis, with respect to any
[i]ndebtedness” with the exception of certain categories identified in the MidMarket Loan. (ECF
No. 41-3 at 45.) 1 With MidMarket’s knowledge, Defendant continued to seek additional sources
of funding from late 2012 to early 2014. (ECF No. 56-1 ¶ 7.)
In the spring of 2013, Plaintiff entered into negotiations with Defendant to provide
Defendant with up to $5,000,000 in secured financing. (ECF No. 54 ¶ 3.) Defendant sought the
proposed financing in order to redeem outstanding shares of its preferred stock, as well as for
working capital. (Id. ¶ 5.) The principal terms and conditions of the proposed financing were
reduced to a term sheet (the “Term Sheet”) executed on July 24, 2013. (Id. ¶ 6.) The parties agreed
the Term Sheet would be governed by the laws of the State of New York without regard to any
conflict of law principles. (Id. ¶ 7.) Under the Term Sheet, the proposed financing was to take the
form of a senior secured convertible debenture (the “Debenture”), to be issued by Defendant at the
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The parties agree Defendant granted MidMarket a “perfected [l]ien of first priority ranking
(subject only to the Permitted Encumbrances) in and to all right, title and interest of [Defendant]
in any and all assets and all property of [Defendant], all whether now owned or hereafter created,
arising or acquired and wherever located” in the MidMarket Loan. (ECF No. 54 ¶ 12.)

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time of closing with a term of one year and in the original principal face amount of up to
$5,000,000. (Id. ¶ 8.) The Debenture was to be secured as follows:

(Term Sheet (ECF No. 42-14) at 6.) The parties agree entering into an intercreditor agreement (the
“Intercreditor Agreement”) with MidMarkert was a condition precedent to closing the proposed
financing pursuant to the Term Sheet. (ECF No. 54 ¶ 13.) In light of this obligation, before
Defendant executed the Term Sheet, Plaintiff entered into discussions with MidMarket regarding
the contemplated Intercreditor Agreement in June 2013. (Id. ¶ 14.) During their conversation,
Plaintiff informed MidMarket it sought: (1) a secondary lien on Defendant’s assets; (2) the right
to cure any monetary default on behalf of Defendant; and (3) the unilateral right to purchase
MidMarket’s position at par in the event of Defendant’s default. (ECF No. 56-1 ¶¶ 24-26.)
Defendant alleges that during this discussion MidMarket objected to several terms proposed by
Plaintiff, and the discussion terminated without resolution of those disputes. (ECF No. 54 ¶ 14.)
Defendant contends it was not present for those discussions. (Id.)
The Term Sheet also included a break-up fee provision (the “Break-Up fee provision”) to
ensure Plaintiff would receive the benefit of its bargain if it was prepared to make the proposed
financing available to Defendant, but Defendant closed on financing with another lender instead.
(See id. ¶¶ 17-20.) It is undisputed Defendant was involved in discussions with several other
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potential lenders or investors at the time the parties were negotiating the Term Sheet and that
Plaintiff was aware of those discussions. (Id. ¶ 19.) As executed, the Break-Up fee provision,
Section 17(d) of the Term Sheet, required:

(ECF No. 42-14 at 9.)
On August 6, 2013, Plaintiff requested to examine a term sheet related to Defendant’s
proposed financing with PNC Bank, N.A. (“PNC Bank”), another lender Defendant entered into
discussions with regarding a potential revolving credit agreement. (ECF No. 56-1 ¶¶ 8, 30.) After
receiving the PNC Bank term sheet, Plaintiff “did not comment on it or otherwise express . . .
[Defendant’s] proposed financing with PNC [Bank] . . . endangered the [Plaintiff’s] Financing
and/or breached the Term Sheet.” (Id. ¶ 32.) Plaintiff alleges it was aware Defendant
was involved in discussions with several other potential lenders or
investors at the time the parties were negotiating the Term Sheet.
This awareness underscored the need for a break-up fee provision in
the Term Sheet. [Plaintiff] did not comment on, or otherwise express
to [Defendant] that the proposed financing with PNC [Bank] would
breach the Term Sheet and the break-up fee provision were selfevident.
(Id.)
Notably, Section 18 of the Term Sheet also provides Defendant “shall be required to pay
all of [Plaintiff’s] reasonable costs, fees, and expenses (including, but not limited to all travel and
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other expenses incurred by [Plaintiff] pursuant to the due diligence . . . paid or incurred in
conjunction with the consideration of the Financing.” (ECF No. 42-14 at 9.) In addition, it states
Defendant agrees to pay all legal fees and expenses for services provided in connection with this
transaction or the collection of amounts due to Plaintiff pursuant to the Term Sheet. (Id.)
On August 9, 2013, Plaintiff circulated a draft of the closing agenda concerning the parties’
proposed financing to Defendant. (ECF No. 56-1 ¶ 33.) Plaintiff alleges it conducted due diligence
for the proposed financing during the summer and fall of 2013, worked in good faith to close the
proposed financing, and prepared necessary documentation—incurring costs and expenses in the
interim. (ECF No. 54 ¶¶ 33, 34, 46). While Defendant does not dispute Plaintiff participated in the
due diligence process, it disputes that Plaintiff completed its due diligence and completed drafting
documents in anticipation of the closing. (Id. ¶ 33.)
On September 20, 2013, Defendant closed on the revolving credit and security agreement
with PNC Bank (the “PNC Agreement”), which provided Defendant with a revolving credit
facility of up to $10,000,000. (Id. ¶ 36.) Concurrent with Defendant signing the PNC Agreement,
Defendant and MidMarket also amended the MidMarket Loan to allow PNC Bank to obtain a first
priority security interest in Defendant’s assets. (Id. ¶ 37.) PNC Bank’s revolving credit facility was
secured by substantially all of Defendant’s assets and the assets of Defendant’s subsidiaries. (Id. ¶
38.) As a result, on October 11, 2013, Defendant informed Plaintiff, that, at best, it would “be
taking a third position as to all collateral behind MidMarket and PNC [Bank].” (Id. ¶¶ 39-40.)
Accordingly, Plaintiff argues the PNC Agreement rendered it impossible for the proposed
financing to close under the terms and conditions set forth in the Term Sheet, because it could not
entered into the Intercreditor Agreement with MidMarket. (Id. ¶¶ 39-40.)

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On October 7, 2013, Plaintiff circulated another “closing agenda detailing the status of the
various items required for the proposed financing.” (ECF No. 56-1 ¶ 39 and Closing Agenda Email
Exchange (ECF No. 41-14) at 2.) On October 13, 2014, Plaintiff emailed Defendant attempting to
collect on the Break-Up fee of the Term Sheet, but willing to negotiate on the terms set forth in
the Term Sheet. (Pl. Email Regarding Break-Up Fee (ECF No. 41-19).) Specifically, the email
stated, “I tried to work-up something that addresses the break-up fee to date in an equitable way
and covers our management time and energy getting the deal done in light of what has transpired
to date.” (Id.) However, in emails exchanged later the same day, Plaintiff stated, “we are happy to
continue to work on the matter if you like. If you don’t want to continue the process, I understand—
we have no plans to enforce the break-up fee given the situation.” (Pl. Email (ECF No. 41-20).)
Defendant did not pay a Break-Up fee, but instead the parties continued to communicate
toward the proposed financing. On October 14, 2013, Plaintiff sent a draft Intercreditor Agreement
to MidMarket for review. (ECF No. 56-1 ¶ 41.) Plaintiff’s draft Intercreditor Agreement provided
for the same requirements as MidMarket and Plaintiff discussed in their earlier discussions: (1) a
secondary lien on Defendant’s assets; (2) the right to cure any monetary default on behalf of
Defendant; and (3) the unilateral right to purchase MidMarket’s position at par in the event of
Defendant’s default. (Id. ¶ 42.) MidMarket did not propose any modifications to the proposed
Intercreditor Agreement, but only stated that the second priority line called for in the Intercreditor
Agreement was a complete “non-starter” as a result of the PNC Agreement. (Id. ¶ 50 and
Intercreditor Email (ECF No. 41-21) at 3.) Therefore, MidMarket and Plaintiff could not come to
terms on the Intercreditor Agreement. (ECF No. 56-1 ¶¶ 47-50.) On November 15, 2013, Plaintiff
wrote to Defendant demanding it pay the $500,000 Break-Up fee. (ECF No. 54 ¶ 43.) By letter
dated November 25, 2013, Defendant refused to pay the Break-Up fee. (Id. ¶ 44.)

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Subsequently, in December 2013, Defendant completed the sale of convertible debentures
in the principal face of $11.625 million with a maturity date of June 13, 2015. (Id. ¶ 45.)
B. Facts Relating to Writ of Attachment
Defendant has incurred losses and carried substantial debt for years. (See ECF No. 45-1 at
4-5 and ECF No. 49 at 4.) For instance, Defendant’s 2012 SEC Form 10-K disclosed losses from
operations of $2.8 million and $21.2 million in indebtedness. (2012 Form 10-K (ECF No. 50-2) at
19-20.) Defendants Form 10-K for the year ending on December 31, 2016, demonstrates
Defendant “incurred losses from operations of $18.6 million and $25.9 million” in 2015 and 2016,
respectively. (2016 Form 10-K (ECF No. 45-4) at 8.) The 2016 Form 10-K also stated Defendant
believed its “cash balances . . . will not be sufficient to fund out anticipated level of operations for
at least the next 12 months.” (Id. at 49.)
On February 28, 2017, Defendant alleges its wholly owned subsidiary, ADEX Corporation
(“ADEX”), sold its “High Wire Networks” division for $4 million plus a working capital
adjustment. (See Asset Purchase Agreement (ECF No. 45-6).) Defendant contends ADEX and
Defendant are separate entities. (See Decl. of Daniel Sullivan (ECF No. 50) ¶¶ 17-21.) ADEX was
founded in 1993 and allegedly operated independently prior to Defendant acquiring it in 2012. (Id.
¶ 17.) ADEX’s management team is separate from that of Defendant. (Id. ¶ 18.) ADEX has its
own employees and offices separate and apart from those of Defendant. (Id.) ADEX has its own
contracts with vendors and customers, to which Defendant is not a party. (Id. ¶ 19.) ADEX has its
own tax identification number, different than Defendant’s tax identification number. (Id. ¶ 20.)
ADEX has its own bank account at PNC Bank. (Id. ¶ 21.) Defendant does not have direct access
to this bank account, and any transfer of funds between ADEX and Defendant must be effectuated
via a formal process. (Id.)

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Defendant used the proceeds of the ADEX sale to eliminate $3,625,000 of their secured
convertible debt. (Form 8-K (ECF No. 45-5) at 3.) The working capital is allegedly due to be paid
to ADEX in August 2017, and will constitute $900,000, less adjustments for unrecorded liabilities,
costs incurred after the closing date, etc. (ECF No. 45-5 at 3.) The adjustments, including money
already collected by ADEX, allegedly leave the working capital now at less than $500,000. (ECF
No. 50 ¶ 5 n.1.) Defendant alleges the working capital adjustment is likewise already dedicated
toward payroll expenses of ADEX, and for reduction of ADEX and Defendant’s remaining senior
secured debt. (Id. ¶ 25.)
Plaintiff has a different understanding as to the sale. Plaintiff is under the impression
Defendant sold ADEX, its subsidiary, to HWN, Inc., not that ADEX sold High Wire Networks.
(ECF No. 45-1 at 5.)
The Asset Purchase Agreement actually states:
THIS ASSET PURCHASE AGREEMENT . . . is dated of
February 28, 2017, and is made effective as of February 1, 2017,
and is made and entered into by and among HWN, INC., a Delaware
corporation (the “Purchaser”), ADEX Corp., a New York
corporation (“ADEX”), INTERCLOUD SYSTEMS, INC., a
Delaware corporation (“InterCloud,” and together with ADEX, the
“Seller”).
(ECF No. 45-6.)
Defendant has also allegedly acquired additional property: (1) an unsecured one-year
convertible promissory note in the aggregate principal amount of $2,000,000, plus a working
capital of $1,500,000 (the “Mantra Agreement”); and (2) $1,400,000 million in cash plus a
working capital adjustment (the “Redapt Agreement”). (ECF No. 51 at 9.) Defendant is alleged to
receive the working capital adjustment under the Redapt Agreement on approximately October 12,
2017, and the Mantra Agreement on November 25, 2017. (Pl.’s Letter (ECF No. 61).)

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C. Procedural History
Plaintiff filed its Complaint on December 24, 2013, asserting claims of breach of contract,
breach of the duty of good faith and fair dealing, and promissory estoppel and seeking (i) the
$500,000 Break-Up fee and (2) reimbursement of expenses and attorneys’ fees. (See Compl. (ECF
No. 1).) On February 21, 2014, Defendant moved to dismiss Plaintiff’s Complaint for failure to
state a claim. (Def.’s Mot. to Dismiss (ECF No. 9).) On August 19, 2014, Judge Wolfson granted
Defendant’s motion to dismiss in its entirety, finding the Term Sheet evidenced “a clear intent not
to be bound” and was thus not a binding agreement under New York Law. (Mot. to Dismiss
Opinion (ECF No. 14) at 12.) On August 4, 2015, the Third Circuit reversed the District Court’s
dismissal, finding
a plausible reading of the break-up fee clause, which [Plaintiff]
allegedly told [Defendant] “was an essential provision of the Term
Sheet,” was to protect [Plaintiff] from the risk that [Defendant]
would secure a more favorable deal after [Plaintiff] had already
expended resources on the Financing. Thus, given the language of
the Term Sheet, we decline to read the Term Sheet in a manner that
“would operate to leave [a] provision of the contract . . . without
force and effect.”
White Winston Select Asset Funds, LLC v. Intercloud Sys., Inc., 619 F. App’x 157, 162 (3d Cir.
2015) (internal citations omitted). Accordingly, the Third Circuit found it was premature to dismiss
the breach of contract claim. (Id. at 163.) As a result, Plaintiff’s breach of contract and promissory
estoppel claims were reinstated and the matter was remanded for further proceedings. (Id.) On
April 7, 2017, both parties filed Motions for Summary Judgment. (ECF Nos. 38, 39, and 42.) Both
motions are opposed. (ECF Nos. 55 and 56.) On September 8, 2017, the Court requested further
briefing on the summary judgment motions to be filed by September 12. As such, on September
12, 2017, the parties filed briefs in support of their motions for summary judgment. (ECF Nos. 6465.)
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On April 21, 2017, Plaintiff also filed a Motion for Writ of Attachment seeking to attach
one of Defendant’s Asset Purchase Agreement’s “working capital adjustment.” (ECF No. 45-1.)
Defendant opposes the Motion for Writ of Attachment. (ECF No. 49.)
II.

LEGAL STANDARDS
A. Summary Judgment
Summary judgment is appropriate “if the pleadings, depositions, answers to

interrogatories, and admissions on file, together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter
of law.” Fed. R. Civ. P. 56(c). A factual dispute is genuine only if there is “a sufficient evidentiary
basis on which a reasonable jury could find for the non-moving party,” and it is material only if it
has the ability to “affect the outcome of the suit under governing law.” Kaucher v. Cty. of Bucks,
455 F.3d 418, 423 (3d Cir. 2006); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248
(1986). Disputes over irrelevant or unnecessary facts will not preclude a grant of summary
judgment. Anderson, 477 U.S. at 248. “In considering a motion for summary judgment, a district
court may not make credibility determinations or engage in any weighing of the evidence; instead,
the non-moving party’s evidence ‘is to be believed and all justifiable inferences are to be drawn in
his favor.’” Marino v. Indus. Crating Co., 358 F.3d 241, 247 (3d Cir. 2004) (quoting Anderson,
477 U.S. at 255)); see also Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587,
(1986); Curley v. Klem, 298 F.3d 271, 276-77 (3d Cir. 2002).
The party moving for summary judgment has the initial burden of showing the basis for its
motion. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). “If the moving party will bear the
burden of persuasion at trial, that party must support its motion with credible evidence . . . that
would entitle it to a directed verdict if not controverted at trial.” Id. at 331. On the other hand, if

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the burden of persuasion at trial would be on the nonmoving party, the party moving for summary
judgment may satisfy Rule 56’s burden of production by either (1) “submit[ting] affirmative
evidence that negates an essential element of the nonmoving party’s claim” or (2) demonstrating
“that the nonmoving party’s evidence is insufficient to establish an essential element of the
nonmoving party’s claim.” Id. Once the movant adequately supports its motion pursuant to Rule
56(c), the burden shifts to the nonmoving party to “go beyond the pleadings and by her own
affidavits, or by the depositions, answers to interrogatories, and admissions on file, designate
specific facts showing that there is a genuine issue for trial.” Id. at 324; see also Matsushita, 475
U.S. at 586; Ridgewood Bd. of Ed. v. Stokley, 172 F.3d 238, 252 (3d Cir. 1999). In deciding the
merits of a party’s motion for summary judgment, the court’s role is not to evaluate the evidence
and decide the truth of the matter, but to determine whether there is a genuine issue for trial.
Anderson, 477 U.S. at 249. Credibility determinations are the province of the factfinder. Big Apple
BMW, Inc. v. BMW of N. Am., Inc., 974 F.2d 1358, 1363 (3d Cir. 1992).
There can be “no genuine issue as to any material fact,” however, if a party fails “to make
a showing sufficient to establish the existence of an element essential to that party’s case, and on
which that party will bear the burden of proof at trial.” Celotex, 477 U.S. at 322-23. “[A] complete
failure of proof concerning an essential element of the nonmoving party’s case necessarily renders
all other facts immaterial.” Id. at 323; Katz v. Aetna Cas. & Sur. Co., 972 F.2d 53, 55 (3d Cir.
1992).

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B. Writ of Attachment
Federal Rule of Civil Procedure 64(a) provides:
[a]t the commencement of and throughout an action, every remedy
is available that, under the law of the state where the court if located,
provides for seizing a person or property to secure satisfaction of the
potential judgment. But a federal statue governs to the extent it
applies.
Pursuant to Federal Rule of Civil Procedure 64, a federal court must apply the laws of the
state in which it sits in determining whether an attachment of property is appropriate. Granny
Goose Foods v. Bhd. of Teamsters, Local No. 70, 415 U.S. 423, 436, n.10 (1974); see also
Marsellis-Warner Corp. v. Rabens, 51 F. Supp. 2d 508, 536 (D.N.J. 1999) (“State law governs an
application for a writ of attachment.”); see also McQueeny v. J.W. Fergusson & Sons, Inc., 527 F.
Supp. 728, 731 (D.N.J. 1981) (“The federal rules of procedure spell out no details for the writ.
They merely provide that State law is to be applied.”); Prozel & Steigman, Inc. v. Int’l Fruit
Distrib., 171 F. Supp. 196, 199 (D.N.J. 1959) (stating that attachment remedies removed from state
court are governed by state law).
New Jersey Court Rule 4:60–5(a) permits a writ of attachment to be issued based on a
finding that:
(1) there is a probability that final judgment will be rendered in favor
of the plaintiff; (2) there are statutory grounds for issuance of the
writ; and (3) there is a real or personal property of the defendant at
a specific location within this State which is subject to the
attachment.
See Preferred Real Estate Invs., LLC v. Lucent Techs., Inc., No. 07-05374, 2008 WL 2414968, at
*1 (D.N.J. June 11, 2008) (citing Empresas Lourdes, S.A. v. Kupperman, No. 06-5014, 2007 WL
2814660, at *3 (D.N.J. Sept. 25, 2007). Attachment is “an extraordinary process.” Corbit v. Corbit,
13 A. 178 (N.J. 1888). Thus, “jurisdiction to issue it must be shown by the party suing o[n] such

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writ,” id., and the “rules regarding attachment must be strictly construed,” Wolfson v. Bonello, 637
A.2d 173, 181 (N.J. Super. Ct. App. Div. 1994).
III.

DECISION
A. Summary Judgment
a. Breach of Contract
Defendant argues Plaintiff failed to satisfy multiple conditions precedent to triggering the

Break-Up fee provision, such as (1) not executing the Intercreditor Agreement with MidMarket
and (2) not being “prepared to close” since it did not complete its due diligence process. (ECF No.
39 at 17-23.) Regarding the latter argument, Defendant contends the language in the Term Sheet
stating “the Investor is prepared to close the Financing under substantially the same terms and
conditions as set forth herein” required Plaintiff to have completed its due diligence in order to be
entitled to the Break-Up fee. (Id. at 21-22.) Defendant further argues it did not breach the Term
Sheet by failing to close the proposed financing due to arranging financing with PNC Bank. (Id.
at 23.) However, Defendant does not dispute the Term Sheet was a valid contract. (See ECF No.
39.)
Plaintiff argues it is entitled to the Break-Up fee because: (1) it was “prepared to close”
under substantially the same terms and conditions set forth in the Term Sheet; (2) Plaintiff either
satisfied all conditions precedent to the Break-Up fee provision or those conditions precedent were
excused because Defendant prevented Plaintiff from satisfying them; and (3) Defendant breached
the Term Sheet by closing with PNC Bank. (See ECF No. 42-2 and ECF No. 56). Specifically, as
to the “prepared to close” argument, Plaintiff argues it was “prepared to close” the proposed
financing agreement because the term “prepared” should be defined as “willing to do something”
and not as completing all due diligence and finalizing all closing documents. (ECF No. 56 at 15.)

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With respect to the conditions precedent argument, Plaintiff argues that by amending the
MidMarket Loan and granting PNC Bank a senior security interest in Defendant’s assets,
Defendant rendered it impossible for Plaintiff to comply with the Term Sheet by obtaining an
Intercreditor Agreement because Section 12(a) of the term sheet stated “[t]he Debenture shall be
secured as follows . . . [a] UCC-1 (junior only to the existing credit facility payable to MidMarket
Capital) security interest in all tangible and intangible property now owned by the Company . . .
.” (ECF No. 42-14 at 6.) Lastly, Plaintiff argues it is entitled to the Break-Up fee because
Defendant’s financing with PNC Bank was due to the fact that Defendant arranged financing
through another source in violation of the Term Sheet. (ECF No. 42-2 at 22-23 and ECF No. 56 at
26-27.)
The “essential elements” of a breach of contract claim “are the existence of a contract, the
plaintiff’s performance pursuant to the contract, the defendant’s breach of his or her contractual
obligations, and damages resulting from the breach.” 5 Neckles Builders, Inc. v. Turner, 117
A.D.3d 923, 924 (N.Y. App. Div. 2014); see Hahn v. OnBoard, LLC, No. 09-3639, 2011 WL
4737058, at *7 (D.N.J. Oct. 5, 2011) (“To prove breach of a contract under New York law, the
party asserting the claim must establish: (1) the existence of a contract; (2) performance of the
contract by the party asserting a breach; (3) failure to perform by the party allegedly in breach; and
(4) resulting damages from the breach.”) (citations omitted).
“[A] contract is to be construed in accordance with the parties’ intent, which is generally
discerned from the four corners of the document itself.” IDT Corp. v. Tyco Grp., 918 N.E.2d 913,
916 (N.Y. 2009) (alteration in original) (quoting MHR Capital Partners LP v. Presstek, Inc., 912
N.E.2d 43, 47 (N.Y. 2009)). A court “must” construe the contract “to accord a meaning and
purpose to each of its parts,” Graphic Scanning Corp. v. Citibank, N.A., 116 A.D.2d 22, 25 (N.Y.

14

App. Div. 1986), and “should not adopt an interpretation which will operate to leave a provision
of a contract without force and effect.” Laba v. Carey, 277 N.E.2d 641, 644 (N.Y. 1971) (ellipsis
omitted).
“Ascertaining whether the language of a contract is clear or ambiguous is a question of law
to be decided by the court.” Lucente v. Int’l Bus. Machines Corp., 310 F.3d 243, 257 (2d Cir. 2002)
(citation omitted). A contract is ambiguous if it is “capable of more than one meaning when viewed
objectively by a reasonably intelligent person who has examined the context of the entire
integrated agreement.” Sayers v. Rochester Tel. Corp. Supplemental Mgmt. Pension Plan, 7 F.3d
1091, 1095 (2d Cir. 1993) (citation omitted). No ambiguity exists, however, “when contract
language has a definite and precise meaning, unattended by danger of misconception . . . and
concerning which there is no reasonable basis for a difference of opinion.” Id. (citation omitted).
Where a contract is unambiguous, the Court may interpret its meaning as a matter of law.
Photopaint Techs., LLC v. Smartlens Corp., 335 F.3d 152, 160 (2d Cir. 2003). New York courts
interpret contracts “so as to give effect to the intention of the parties as expressed in the
unequivocal language employed.” Breed v. Ins. Co. of N. Am., 385 N.E.2d 1280, 1282 (N.Y. 1978).
A court should not interpret a contract in a manner that would be “absurd, commercially
unreasonable, or contrary to the reasonable expectations of the parties.” In re Lipper Holdings,
LLC, 1 A.D.3d 170, 171 (N.Y. App. Div. 2003) (citations omitted). A contract should be
interpreted to give meaning to all of its terms. See Mionis v. Bank Julius Baer & Co., 301 A.D.2d
104, 109 (N.Y. App. Div. 2002) (“Courts are obliged to interpret a contract so as to give meaning
to all of its terms. The reason is clear. Since a contract is a voluntary undertaking, it should be
interpreted to give effect to the parties’ reasonable expectations.”) (citations omitted).

15

“It is well settled that, where a contract is ambiguous, its interpretation remains the
exclusive function of the court unless determination of the intent of the parties depends on the
credibility of extrinsic evidence or on a choice among reasonable inferences to be drawn from
extrinsic evidence.” P&B Capital Grp., LLC v. RAB Performance Recoveries, LLC, 128 A.D.3d
1534, 1535 (N.Y. App. Div.), reargument denied, 132 A.D.3d 1329 (N.Y. App. Div. 2015).
“It is well-settled that no action for breach of contract lies where the party seeking to
enforce the contract has failed to perform a specified condition precedent.” Navilia v. Windsor
Wolf Rd. Props. Co., 249 A.D.2d 658, 659 (N.Y. App. Div. 1998) (citing Grin v. 345 E. 56th St.
Owners, 212 A.D.2d 504 (N.Y. App. Div. 1995)); accord Hahn, 2011 WL 4737058, at *7.
Moreover, under New York Law, the “prevention doctrine” bars a defendant who has prevented a
condition precedent from occurring from relying on the failure of that condition to justify nonperformance of its own contractual obligation. Thor Props., LLC v. Chetrit Grp. LLC, 91 A.D. 3d
476, 477 (N.Y. App. Div. 2012); see also ADC Orange, Inc. v. Coyote Acres, Inc., 857 N.E.2d
513, 517 (N.Y. 2006) (“[A] party to a contract cannot rely on the failure of another to perform a
condition precedent where he has frustrated or prevented the occurrence of the condition.” (quoting
Kooleraire Serv. & Installation Corp. v. Bd. of Ed. of City of N.Y., 268 N.E.2d 782, 784 (N.Y.
1971))). “The doctrine is purely one of waiver; active conduct of the conditional promisor,
preventing or hindering the fulfillment of the condition, eliminates it and makes the promise
absolute.” Cross & Cross Props., Ltd. v. Everett, 886 F.2d 497, 502 (2d Cir. 1989) (citation
omitted); Amies v. Wesnofske, 174 N.E. 436, 438 (N.Y. 1931). In essence, under the prevention
doctrine, the condition precedent to the defendant’s obligation is excused and the defendant’s
conditional promise becomes absolute. See Royal Park Invs. SA/NV v. HSBC Bank USA, Nat’l
Ass’n, 109 F. Supp. 3d 587, 605 (S.D.N.Y. 2015).

16

1. Whether Plaintiff Satisfied all Conditions Precedent
It is well-settled under New York law “that no action for breach of contract lies where the
party seeking to enforce the contract has failed to perform a specified condition precedent.”
Navilia, 249 A.D.2d at 659. Therefore, the Court must first determine whether or not Plaintiff
satisfied its conditions precedent. Defendant argues Plaintiff failed to satisfy two conditions
precedent to triggering the Break-Up fee provision: (1) executing the Intercreditor Agreement with
MidMarket and (2) being “prepared to close” since it did not complete its due diligence process.
(ECF No. 39 at 17-23.) Plaintiff does not dispute that either of these were conditions precedent to
the Break-Up fee. (See ECF No. 42-2.) The Court will address both in turn.
i.

The Intercreditor Agreement

Section 12 of the Term Sheet relates directly to the Intercreditor Agreement condition
precedent and provides:
Collateral for the Debenture. The Debenture shall be secured as
follows:
a. A UCC-1 (junior only to the existing credit facility payable
to MidMarket Capital) security interest in all tangible and
intangible property now owned by the Company or to be
acquired in the future . . . .
b. As a condition precedent to the Financing, the Investor shall
have entered into a [sic] intercreditor agreement (the
“Intercreditor Agreement”) with MidMarket Capital on terms
and conditions acceptable to the Investor and Mid-Mark in
their respective discretion.
(ECF No. 42-14 at 6.) As such, this Section articulates: (1) Plaintiff can only take a security interest
junior to MidMarket and (2) Plaintiff and MidMarket must enter into an agreed upon Intercreditor
Agreement.

17

On September 20, 2013, Defendant closed on the revolving credit and security agreement
with PNC Bank which allowed PNC Bank to obtain a first priority security interest in Defendant’s
assets. (ECF No. 54 ¶¶ 36-37.) PNC Bank’s revolving credit facility was secured by substantially
all of Defendant’s assets and the assets of Defendant’s subsidiaries. (Id. ¶ 38.) As a result, on
October 11, 2013, Defendant informed Plaintiff, that, at best, it would “be taking a third position
as to all collateral behind MidMarket and PNC [Bank].” (Id. ¶¶ 39-40.) Therefore, Defendant
rendered it impossible for Plaintiff to be “junior only to the existing credit facility payable to
MidMarket” per the Term Sheet. (ECF No. 42-14 at 6.) In turn, Defendant further rendered it
impossible for Plaintiff and MidMarket to ever come to an agreement that would be consistent
with the Term Sheet and to enter into an Intercreditor Agreement due to the PNC Bank financing.
Defendant’s argument that “any application of the prevention doctrine must be ‘consistent
with the intent of the parties to the agreement,” is not persuasive. (ECF No. 55 at 9 (citing Thor
Properties, LLC, 91 A.D.3d at 477)). It further argues the evidence demonstrates Defendant
entering into the credit agreement with PNC Bank was not the “but-for” cause of Plaintiff and
MidMarket’s failure to come to terms. (Id.) Instead, Defendant claims Plaintiff’s failure to satisfy
Section 12(b) flowed directly from Plaintiff ignoring MidMarket’s objections before the Term
Sheet was signed and Plaintiff’s rigid inflexibility to negotiate with MidMarket on any terms. (Id.)
Essentially, Defendant argues Plaintiff bore sole responsibility for its inability to successfully
negotiate an Intercreditor Agreement with MidMarket. Defendant also argues Plaintiff was aware
(1) Defendant was negotiating with other lenders and (2) that Plaintiff was aware from the
beginning that it would have to come to an agreement with MidMarket. (Id. at 10.)
MidMarket and Plaintiff could not come to an agreement during their June 2013
discussions prior to Defendant signing the Term Sheet. However, once Defendant entered into the

18

PNC Agreement, it became impossible for Plaintiff and MidMarket to enter into an Intercreditor
Agreement consistent with the Term Sheet, which stated Plaintiff would be junior only to
MidMarket. 2 If Defendant did not enter into the PNC Agreement, Plaintiff and MidMarket could
have continued to discuss the Intercreditor Agreement prior to the termination date of November
15, 2013. The Court cannot speculate as to whether the parties would ever come to an agreement
prior to the termination date. However, on October 14, 2013, Plaintiff sent a draft Intercreditor
Agreement to MidMarket for review. (ECF No. 56-1 ¶ 41.) Plaintiff’s draft Intercreditor
Agreement provided for the same requirements as MidMarket and Plaintiff discussed in their
earlier discussions: (1) a secondary lien on Defendant’s assets; (2) the right to cure any monetary
default on behalf of Defendant; and (3) the unilateral right to purchase MidMarket’s position at
par in the event of Defendant’s default. (Id. ¶ 42.) MidMarket did not propose any modifications
to the proposed Intercreditor Agreement, but only stated that the second priority line called for in
the Term Sheet was a complete “non-starter” as a result of their interest and the PNC Agreement.
(ECF No. 41-21 at 3.) The fact that MidMarket stated the Intercreditor Agreement was a “nonstarter” because Defendant entered into that agreement with PNC Bank indicates the parties may
have been able to work out an agreement had Defendant not entered into an agreement with PNC
Bank. The Court notes Plaintiff’s draft Intercreditor Agreement provided for the same demands as

2

Plaintiff entered into discussions with MidMarket regarding the contemplated Intercreditor
Agreement in June 2013, before Defendant executed the Term Sheet. (ECF No. 42- 1 ¶ 14.) During
their conversation, Plaintiff informed MidMarket that they sought: (1) a secondary lien on
Defendant’s assets; (2) the right to cure any monetary default on behalf of Defendant; and (3) the
unilateral right to purchase MidMarket’s position at par in the event of Defendant’s default. (ECF
No. 56-1 ¶¶ 24-26.) Defendant alleges that during this discussion MidMarket objected to several
terms proposed by Plaintiff, and the discussion terminated without resolution of those disputes.
(Id.)

19

those Plaintiff asked for earlier and were never resolved. Nonetheless, the Court finds Defendant
prevented Plaintiff from even engaging in further negotiations with MidMarket. Accordingly,
under the prevention doctrine, the Intercreditor Agreement condition precedent to the defendant’s
obligation was excused. See Royal Park Invs. SA/NV, 109 F. Supp. 3d at 605.
ii.

“Prepared to Close”

Defendant contends the “prepared to close the Financing under substantially the same
terms and conditions as set forth” language in the Term Sheet required Plaintiff to have completed
its due diligence in order to be entitled to the Break-Up fee. (ECF No. 39 at 21-22.) Plaintiff argues
it was “prepared to close” the proposed financing agreement because the term “prepared” means
“willing to do something” and not completing all due diligence and finalizing all closing
documents. (ECF No. 56 at 15.)
As articulated above, “[a]scertaining whether the language of a contract is clear or
ambiguous is a question of law to be decided by the court.” Lucente, 310 F.3d at 257 (citation
omitted). When a contract is unambiguous, the Court may interpret its meaning as a matter of law.
See Photopaint Techs., LLC, 335 F.3d at 160. “[W]here a contract is ambiguous, its interpretation
remains the exclusive function of the court unless determination of the intent of the parties depends
on the credibility of extrinsic evidence or on a choice among reasonable inferences to be drawn
from extrinsic evidence.” P&B Capital Grp., LLC, 128 A.D.3d at 1535.
The Break-Up Fee provision states, in relevant part:
“If, within forty-five (45) days from the Termination Date (as
defined below), the Investor is prepared to close the Financing
under substantially the same terms and conditions as set forth
herein, but the Company fails to close with Investor due to the fact
that the company has arranged any financing through another source
then the Company shall pay the Investor a break-up fee . . . .

20

(ECF No. 42-14 at 9.) The Court finds this provision unambiguously means Plaintiff was entitled
to the Break-Up fee if it was willing to and engaged in some due diligence to close on substantially
the same terms and conditions as set forth in the Term Sheet, but not that it must have completed
all due diligence.
Defendant’s interpretation defies logic. Under its interpretation, if Defendant closed with
and secured senior financing with another lender the day after it executed the Term Sheet,
rendering it impossible for Plaintiff to obtain the second-priority security interest required by the
Term Sheet, Plaintiff would not be entitled to the Break-Up fee because, at the time payment of
the fee was triggered, it had not yet finalized all closing documents. Such interpretation would
encourage parties to needlessly incur expenses, rather than mitigate their damages. It makes no
sense to penalize Plaintiff for avoiding additional due diligence expenses after Defendant closed
with PNC Bank. It is undisputed Plaintiff stood willing to proceed with the proposed financing on
substantially the same terms articulated in the Term Sheet at the time Defendant closed with PNC
Bank and performed some due diligence to close on those terms. (See ECF No. 54 ¶ 33
(demonstrating that Defendant “does not dispute that [Plaintiff] participated in the due diligence
process during the summer and fall of 2013”).) Defendant cannot now evade its contractual
obligation by arguing Plaintiff did not complete its due diligence, when the Term Sheet could not
ultimately be effectuated as a result of Defendant’s own actions.
Defendant’s interpretation of “prepared to close” also eliminates the purpose behind the
Break-Up fee. Plaintiff told Defendant the Break-Up fee was an essential provision of the Term
Sheet, to protect Plaintiff from the risk that Defendant would secure a more favorable deal after
Plaintiff had already expended resources on the Financing. (See ECF No. 54 ¶¶ 20-21.)

21

Even under Defendant’s interpretation of “prepared to close,” the Court finds Defendant
rendered it impossible for Plaintiff to close the proposed financing on substantially the same terms
and conditions as set forth in the Term Sheet. As articulated above, Defendant rendered it
impossible for Plaintiff to be “junior only to the existing credit facility payable to MidMarket” as
per the Term Sheet. (ECF No. 42-14 at 6.) Because that condition precedent was rendered
impossible, there was no way or reason for Plaintiff to complete its due diligence when the closing
could never be performed according to the Term Sheet. Accordingly, the Court finds Plaintiff was
“prepared to close” or in the alternative that Defendant’s closing with PNC Bank prevented
Plaintiff from performing its conditions precedent and thus those conditions were excused.
2. Whether the Break-Up Fee Provision was Triggered
Because the Court finds Plaintiff either satisfied or was excused from satisfying all
conditions precedent, it must determine whether or not the Break-Up fee provision was triggered.
Section 17(d) provides that in order for Plaintiff to be entitled to the $500,000 Break-Up fee
provision, Defendant must have failed to close with Plaintiff “due to” the fact that it “arranged []
financing through another source” and closed with another source “within” forty-five days from
the Termination Date. (ECF No. 42-14 at 9.)
Defendant argues the Break-Up fee provision was not triggered because Defendant did not
fail to close with Plaintiff “due to” arranging financing through PNC Bank and because
Defendant’s financing with PNC Bank was not “within” forty-five days from the Termination Date
as required by the Term Sheet. (ECF No. 39 at 23- 25; ECF No. 55 at 16; and ECF No. 64.)
Specifically, Defendant acknowledges the Term Sheet called for Defendant to pay the Break-Up
fee if it failed to close with Plaintiff “due to the fact that [Defendant] has arranged any financing
through another source.” (ECF No. 39 at 23.) “The plain language of the Break-Up [f]ee also

22

makes clear that there must be a causal nexus between [Defendant] receiving alternative financing,
and [Defendant] walking away from the [Plaintiff] deal.” (Id. at 23-24.) However, Defendant
argues its closing with PNC Bank “did not replace or otherwise render superfluous the [Plaintiff’s]
[f]inancing.” (Id. at 24.) In addition, Defendant argues its financing with PNC Bank did not occur
“within” forty-five days from the Termination Date because “‘within forty-five (45) days form the
Termination Date’ indicates a 45-day period running from November 15, 2013 to December 30,
201[3]” and it closed with PNC Bank on September 20, 2013. (ECF No. 64 at 1-3.)
Plaintiff argues the Break-Up fee provision was triggered because Defendant failed to close
with Plaintiff “due to” its financing with PNC Bank prior to the Termination Date. (ECF No. 422 at 22-25.) Specifically, Plaintiff argues Defendant’s financing from PNC Bank “made it
impossible for the parties to close on substantially the same terms and conditions as those set forth
in the Term Sheet.” (ECF No. 42-2 at 22.) Furthermore, Plaintiff argues the financing with PNC
Bank occurred “within” forty-five days from the Termination Date because “within” means
“before the end of.” (ECF No. 58 at 13 and ECF No. 65 at 3.)
Because the Court previously found Defendant rendered it impossible for Plaintiff and
MidMarket to ever come to an agreement that would be consistent with the Term Sheet “due to”
its financing with PNC Bank, it accordingly finds Defendant failed to close with Plaintiff “due to
the fact that [Defendant] ha[d] arranged [] financing” with PNC Bank. (ECF no. 42-14 at 9.)
The Court also finds Defendant closed with PNC Bank “within” forty-five days from the
Termination Date. Section 17(d) of the Term Sheet provides Defendant shall pay Plaintiff the
Break-up fee if “within forty-five (45) days form the Termination Date,” Plaintiff is prepared to
close, but Defendant fails to close with Plaintiff due to the fact that it has arranged financing
through another source and closed with another lender “within such 45 days.” (ECF No. 42-14 at

23

9.) The Court agrees with Plaintiff and finds “within” forty-five days unambiguously means before
the end of, creating an expiration date for the Break-Up fee provision, not an exclusivity period
between November 15 and December 30, 2013. Plaintiff’s interpretation of the word is consistent
with the Term Sheet, the parties’ intentions, and is commercially reasonable.
Plaintiff’s interpretation of “within” is consistent with Section 22 of the Term Sheet, while
Defendant’s interpretation disregards that Section. Section 22 provides the obligation to pay the
Break-Up fee “shall survive the Termination Date.” (ECF No. 42-14 at 10.) Indeed, it confirms
the Break-Up fee had to exist prior to the Termination Date and could not solely exist between
November 15, 2013 and December 30, 2013. Because a contract should be interpreted to give
meaning to all of its terms, Mionis, 301 A.D.2d at 109, and Plaintiff’s interpretation gives meaning
to all terms while Defendant’s interpretation is inconsistent with the Term Sheet as a whole, the
Court finds “within” means before the end of. See Olszewski v. Cannon Point Ass’n, 148 A.D.3d
1306, 1309 (N.Y. App. Div. 2017) (stating “a reading of the contract should not render any portion
[thereof] meaningless, and the contract must be interpreted so as to give effect to, not nullify, its
general or primary purpose.” (citations omitted)).
Even if the Court found the Term Sheet was ambiguous subject to either Plaintiff or
Defendant’s interpretation, its interpretation remains the exclusive function of the Court unless
determination of the intent of the parties depends on the credibility of extrinsic evidence or on a
choice among reasonable inferences to be drawn from extrinsic evidence.” P&B Capital Grp.,
LLC, 128 A.D.3d at 1535. It is undisputed the essential provision of the Term Sheet was to protect
Plaintiff from the risk that Defendant would secure a more favorable deal after Plaintiff had already
expended resources on the financing. (See ECF No. 54 ¶¶ 20-21.) Defendant’s interpretation would
eviscerate that purpose because it would have allowed Defendant to close with another investor

24

with impunity up to the Termination Date, when it would be expected that Plaintiff had already
competed its due diligence.
In addition, the parties’ correspondence during the negotiation of the Term Sheet reveals
that Plaintiff’s interpretation is consistent with the parties understanding of the term “within.” In a
June 18, 2013 email, Defendant, in an attempt to limit the Break-Up fee time period, proposed a
carve-out for Defendant’s contemplated stock offering, suggesting that “if prior to the date you
are prepared to close we are advised by the SEC that they are prepared to declare our offering
effective, we should have the right to decline your funds without penalty.” (ECF No. 42-20
(emphasis added).) Defendant’s email demonstrates it understood the Break-Up fee to exist prior
to the Termination Date. Lastly, while not dispositive, Defendant never raised the timing argument
as a defense in response to Plaintiff’s demand for the Break-Up fee prior to this litigation. (See
ECF No. 42-29.)
Therefore, the Court finds “within” means “before the end of.” Because the parties agree
Defendant closed with PNC Bank on September 20, 2013, prior to December 30, 2013, the BreakUp fee provision was triggered. Accordingly, the Court GRANTS Plaintiff’s Motion and finds the
Break-Up fee provision was triggered.
b. Liquidated Damage vs. Penalty
Defendant argues that “[e]ven if the Court were to find that the Break-Up Fee provision of
Section 17(d) was triggered, the $500,000 amount represents an unenforceable penalty under New
York law.” (ECF No. 39 at 25.) Specifically, it argues that Plaintiff’s maximum return, had the
financing went through, would have been $600,000. (Id. at 28.) Therefore, the Break-Up fee of
$500,000 represents 83% of Plaintiff’s expected gain, which is “grossly disproportionate” to
Plaintiff’s actual damages as a result of a breach. (Id.) Plaintiff argues the Break-Up fee provision

25

is enforceable because it is a liquidated damages provision, not a penalty. (ECF No. 56 at 30-35.)
Specifically, Plaintiff argues Defendant has failed to offer evidence demonstrating that the
$500,000 Break-Up fee is plainly disproportionate to the $600,000 gain Plaintiff would have
reaped from the proposed financing. (Id. at 34.) It further argues the Break-Up fee was negotiated
between two commercially sophisticated parties represented by counsel as part of an arms-length
transaction and thus should be found enforceable. (Id. at 34-35.)
“Whether a contractual provision represents an enforceable liquidation of damages or an
unenforceable penalty is a question of law, giving due consideration to the nature of the contract
and the circumstances. Bates Advert. USA, Inc. v. 498 Seventh, LLC, 850 N.E.2d 1137, 1139 (N.Y.
2006). In Truck Rent–A–Center, the New York Supreme Court characterized liquidated damages
as “[i]n effect, . . . an estimate, made by the parties at the time they enter into their agreement, of
the extent of the injury that would be sustained as a result of breach of the agreement.” 361 N.E.2d
1015, 1018 (N.Y. 1977) (emphasis added). The New York Supreme Court called the distinction
between liquidated damages and a penalty “well established”:
A contractual provision fixing damages in the event of breach will
be sustained if the amount liquidated bears a reasonable proportion
to the probable loss and the amount of actual loss is incapable or
difficult of precise estimation. If, however, the amount fixed is
plainly or grossly disproportionate to the probable loss, the
provision calls for a penalty and will not be enforced.
Id. at 1018 (emphasis added) (citations omitted).
“The party challenging the liquidated damages provision bears the burden of proving that
the provision constitutes a penalty.” Wechsler v. Hunt Health Sys., Ltd., 330 F. Supp. 2d 383, 413
(S.D.N.Y. 2004). In order to challenge a liquidated damages provision, the party “must
demonstrate either that damages flowing from a prospective early termination were readily
ascertainable at the time [the parties] entered into their [contract], or that the [liquidated damages
26

are] conspicuously disproportionate to these foreseeable losses.” JMD Holding Corp. v. Cong. Fin.
Corp., 828 N.E.2d 604, 609 (N.Y. 2005). “Parties to a contract have the right . . . to specify within
a contract the damages to be paid in the event of a breach, so long as such a clause is neither
unconscionable nor contrary to public policy.” L & L Wings, Inc. v. Marco-Destin Inc., 756 F.
Supp. 2d 359, 363 (S.D.N.Y. 2010) (quoting Rattigan v. Commodore Int’l Ltd., 739 F. Supp. 167,
169 (S.D.N.Y.1990)). “The reasonableness of the liquidated damages and the certainty of actual
damages must be measured as of the time the parties entered the contract, not as of the time of the
breach.” Id. “When evaluating a liquidated damages provision, a court must also give due
consideration to ‘whether the parties were sophisticated and represented by counsel, the contract
was negotiated at arms-length between parties of equal bargaining power, and . . . that [the
provision] was freely contracted to.’” Id. at 364 (quoting The Edward Andrews Grp., Inc. v.
Addressing Servs. Co., Inc., No. 04-6731, 2005 WL 3215190, at *6 n.3 (S.D.N.Y. Nov. 30, 2005)).
Further, as the Third Circuit articulated previously in this case, “[a] court applying New York law
should find a provision unenforceable as a penalty only in ‘rare cases,’ Fifty States Mgmt. Corp.
v. Pioneer Auto Parks, Inc., 389 N.E.2d 113, 116 (1979), and ‘[t]he burden is on the party seeking
to avoid liquidated damages . . . to show that the stated liquidated damages are, in fact, a penalty,’
JMD Holding Corp., [828 N.E.2d at 609.]” White Winston Select Asset Funds, LLC, 619 F. App’x
at 162-63. “Absent some element of fraud, exploitive overreaching or unconscionable conduct on
the part of the [parties], there is no warrant, either in law or equity, for a court to refuse enforcement
of the agreement of the parties.” Fifty States Mgmt. Corp., 389 N.E.2d at 116.
Lastly, “[w]here the court has sustained a liquidated damages clause the measure of
damages for a breach will be the sum in the clause, no more, no less. If the clause is rejected as
being a penalty, the recovery is limited to actual damages proven.” Brecher v. Laikin, 430 F. Supp.

27

103, 106 (S.D.N.Y. 1977) (citations omitted); see also 3 E.A. Farnsworth, Contracts § 12.18, at
304 (3d ed. 2004) (noting that, where a liquidated damages provision is an unenforceable penalty,
“the rest of the agreement stands, and the injured party is remitted to the conventional damage
remedy for breach of that agreement, just as if the provision had not been included”).
Therefore, Defendant must demonstrate either that damages flowing from not closing on
the financing were readily ascertainable at the time the parties entered into the Term Sheet, or that
the Break-Up fee provisions is conspicuously disproportionate to these foreseeable losses. JMD
Holding Corp., 828 N.E.2d at 609. The Break-Up fee provision was required to compensate
Plaintiff for “allocation of time, expectation of partner’s time working on a transaction, opportunity
costs associated with a transaction . . . [and] complexity of the transaction.” (ECF No. 44-6 at
18:16-21:1.) Defendant argues the Prepaid Expense Fee provision compensated Plaintiff for
allocation of time, expectation of partner’s time, opportunity costs, and complexity of the
transaction. (See ECF No. 39 at 29 and ECF No. 57 at 10.) The Court disagrees.
When Plaintiff and Defendant entered into the Term Sheet, they could not readily forecast
these expenses as evidenced by multiple provisions of the Term Sheet. The Term Sheet provides:
18. Expenses. The Financing will be made without cost to Investor.
The Company shall be required to pay all of Investor’s reasonable
costs, fees, and expenses (including, but not limited to all travel and
other expenses incurred by Investor pursuant to the due diligence
(including data subscription), audit, negotiation, appraisal,
documentation or closing, and costs, fees and expenses of any
inspectors or consultants engaged by Investor) paid or incurred in
conjunction with the consideration of the Financing. In addition, the
Company also agrees to pay all legal fees and expenses of Investor’s
attorneys for services provided to Investor in connection with this
transaction or the collection of amounts due to Investor pursuant to
the Term Sheet or any other agreement by and between Investor and
the Company. The legal fees of Investor’s attorney shall be
calculated on a time-spent basis, based upon the standard hourly
rates of Investor’s attorney generally charged to clients of that firm
on similar matters. In the event that the transaction outlined
28

hereunder is not closed, then the Company shall fully reimburse
Investor for any and all legal or other expenses incurred by it
pursuant to the due diligence, audit, negotiation, appraisal, and
documentation of the proposed transaction.
The Investor agrees to notify the Company at any time such costs
and expenses exceed Twenty Five Thousand and No/100ths and to
provide the Company with detailed invoices reflecting such costs
and expenses incurred under this Paragraph 17.
19. Prepaid Expense Fee. Upon its acceptance, the Company shall
tender to Investor, the sum of Twenty-Five Thousand Dollars
($25,000.00) to represent your prepayment of the Investor’s
anticipated due diligence and legal expenses (the “Prepaid Expense
Fee”). The Prepaid Expense Fee (which shall be deposited in a
segregated clients due diligence account maintained by the
Company). . . . In the event, that the Prepaid Expense Fee is to
exhausted [sic] prior to the Closing, the Company agrees to tender
additional amounts to the Investor, or its counsel, to replenish the
Prepaid Expense Fee upon three (3) days written notice to the
Company with a detailed accounting of the expenses paid to such
date.
(ECF No. 42-14 at 9-10 (emphasis added).) As a preliminary matter, neither Section 18 nor 19 of
the Term Sheet takes into consideration opportunity costs associated with a transaction or
complexity of the transaction. Furthermore, contrary to Defendant’s argument, allocation of time
and expectation of a partner’s time working on a transaction were not entirely compensated for in
the Prepaid Expense Fee. Instead, the Prepaid Expense Fee provision in conjunction with the
Expenses provision demonstrates those damages were not precisely ascertainable and that the
$25,000 was a just an initial startup payment for Plaintiff to begin its due diligence. Indeed,
Plaintiff “seeks reimbursement of $23,500 in expenses incurred over and above the prepaid
expense fee.” (ECF No. 56 at 9 n.5 and ECF No. 42-3 ¶ 6.) Because Plaintiff has failed to establish
Plaintiff’s prospective damages were capable of precise estimation at the time the parties executed
the Agreement or that the Break-Up fee was grossly disproportionate to Plaintiff’s probable loss
and the New York Court of Appeals has “cautioned generally against interfering with parties’
29

agreements,” the Court finds the Break-Up fee enforceable. JMD Holding Corp., 828 N.E.2d at
609-10 (citing Fifty States Mgmt. Corp., 389 N.E.2d at 116 (“Absent some element of fraud,
exploitive overreaching or unconscionable conduct . . . to exploit a technical breach, there is no
warrant, either in law or equity, for a court to refuse enforcement of the agreement of the parties.”);
3 Farnsworth, Contracts § 12.18, at 303-04 (“[I]t has become increasingly difficult to justify the
peculiar historical distinction between liquidated damages and penalties. Today the trend favors
freedom of contract through the enforcement of stipulated damage provisions as long as they do
not clearly disregard the principle of compensation.”)). Accordingly, Plaintiff’s Motion for
Summary Judgment is GRANTED in its entirety and Defendant’s Motion for Summary Judgment
is DENIED in its entirety. 3
B. Writ of Attachment
Plaintiff seeks a writ of attachment because it doubts Defendant will be able to satisfy a
judgment for the full Break-Up fee, if judgment is entered in favor of Plaintiff at a later time. (ECF
No. 45-1 at 1.) Specifically, Plaintiff argues it is entitled to a writ of attachment because it has
established a probability that judgment will be rendered in its favor, a statutory basis for issuance
of the writ, and the existence of property in New Jersey subject to attachment. (See id.) Defendant
argues Plaintiff has failed to satisfy all the elements for a writ of attachment, specifically a
probability of success and the existence of property in New Jersey subject to attachment. (See ECF
No. 49.) However, at oral argument the parties agreed the granting of summary judgment in favor
of either Plaintiff or Defendant would render the writ of attachment moot. (ECF No. 63.) Because

3

In the alternative, Plaintiff sought summary judgment on its promissory estoppel claim. (ECF
No. 42-2 at 24-25.) However, because the Court finds Plaintiff is entitled to the Break-Up fee, it
need not address Plaintiff’s alternative argument of promissory estoppel.
30

the Court grants summary judgment in favor of Plaintiff, the Writ of Attachment is DENIED AS
MOOT.
IV.

CONCLUSION
For the reasons set forth above, Plaintiff’s Motion for Summary Judgment (ECF No. 42)

is GRANTED and Defendant’s Motion for Summary Judgment (ECF Nos. 38-39) is DENIED.
Plaintiff’s Motion for Writ of Attachment is DENIED AS MOOT.

Date: October 3, 2017

/s/ Brian R. Martinotti
HON. BRIAN R. MARTINOTTI
UNITED STATES DISTRICT JUDGE

31