Signature Exploration and Production Corporation v. GCM Administrative Services, LLC et al
Filing
78
OPINION AND ORDER: On July 1, 2015, Counterclaim-Defendants filed a motion for leave to file a supplemental complaint, seeking to add a breach of contract claim against Counterclaimants. For the reasons set forth above, Counterclaim-Defendants' motion to file a supplemental complaint is DENIED. The Clerk of the Court is respectfully directed to terminate the motion, Doc. 48. It is SO ORDERED. (As further set forth in this Order.) (Signed by Judge Edgardo Ramos on 4/29/2016) (kko)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
GROWBLOX SCIENCES, INC.,
Plaintiffs,
– against –
GCM ADMINISTRATIVE SERVICES, LLC,
SETH M. LUKASH, GARY HERMAN, and
STRATEGIC TURNAROUND EQUITY
PARTNERS, LP (CAYMAN),
OPINION AND ORDER
14 Civ. 2280 (ER)
Defendants.
DIGITAL CREATIVE DEVELOPMENT
CORPORATION, GCM ADMINISTRATIVE
SERVICES, LLC, STRATEGIC TURNAROUND
EQUITY PARTNERS, LP (CAYMAN), SETH M.
LUKASH, and GARY HERMAN,
Counterclaimants,
– against –
GROWBLOX SCIENCES, INC., TODD DENKIN,
JOSEPH J. BIANCO, TUMBLEWEED HOLDINGS,
INC. f/k/a GROWOPP HOLDINGS, INC., CRAIG
ELLINS, and GROWOPP, LLC,
Counterclaim-Defendants.
RAMOS, D.J.:
Plaintiff GrowBlox Sciences, Inc. (“Growblox Sciences”) brings this action against GCM
Administrative Services, LLC (“GCM”), Strategic Turnaround Equity Partners, LP (“Strategic”),
Seth M. Lukash (“Lukash”), and Gary Herman (“Herman”) (collectively, “Defendants”). See
Am. Compl., Doc. 3. Plaintiff seeks a declaratory judgment as to whether Defendants have a
right to convert certain debt instruments into shares of Growblox Sciences common stock, 1
pursuant to promissory notes which Strategic and GCM Administrative Services, LLC (“GCM”)
issued to an entity named GrowOpp, LLC (“GrowOpp”). Id. at ¶¶ 2, 11, 12.
Defendants, along with Digital Creative Development Corporation (“DCDC”)
(collectively, “Counterclaimants”), filed counterclaims against Plaintiff, GrowOpp LLC, Craig
Ellins (“Ellins”), Todd Denkin (“Denkin”), Joseph J. Bianco (“Bianco”) and Tumbleweed
Holdings, Inc. (“Tumbleweed”) (collectively, “Counterclaim-Defendants”). Am. Countercl.,
Doc. 26. Counterclaimants asserted five causes of action: (1) declaratory relief that a general
partnership was formed; (2) breach of fiduciary duty; (3) unjust enrichment; (4) quantum meruit;
and (5) breach of contract. Id. Counterclaim-Defendants moved to dismiss the first four
counterclaims pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Counter-Def.’s
Mot. Dismiss, Doc. 30. The Court denied the motion with respect to the unjust enrichment and
quantum meruit claims, but granted the motion with respect to the declaratory judgment and
breach of fiduciary duty claims, dismissing those claims without prejudice. Order, Doc. 44.
On July 1, 2015, Counterclaim-Defendants filed a motion for leave to file a supplemental
complaint, seeking to add a breach of contract claim against Counterclaimants. 2 Proposed
Supplemental Complaint of Plaintiff and Counterclaim-Defendants (“Suppl. Compl.”), Doc. 48-
1
Plaintiff filed its Amended Complaint under the name Signature Exploration and Production Corporation
(“Signature”). Since then, Plaintiff has started operating under the name GrowBlox Sciences, Inc. See Countercl.,
Doc. 11; Answer Countercl., Doc. 14 at 2.
2
Counterclaimants simultaneously moved for leave to file amended counterclaims. See Doc. 50. In addition to the
surviving unjust enrichment and quantum meruit claims, Counterclaimants repleaded the declaratory judgment and
breach of fiduciary duty claims. Proposed Second Amended Counterclaims, Doc. 51-1. Additionally, as an
alternative to the breach of fiduciary duty claim, Counterclaimants pleaded that Denkin and Bianco aided and
abetted Ellins’s breach of fiduciary duty. Id. On March 31, 2016, the Court issued an order granting
Counterclaimants’ motion. Doc. 73.
2
1, ¶¶ 82-84. Specifically, Counterclaim-Defendants assert that Counterclaimants’ unjust
enrichment claim was made in breach of a waiver provision contained in a contract signed on
July 31, 2013 by Herman on behalf of DCDC, Denkin on behalf of GrowOpp, and Lukash on
behalf of GrowBlox Holdings, Inc. Id. For the reasons set forth below, CounterclaimDefendants’ motion is DENIED.
I.
BACKGROUND
A. Factual Background 3
In early 2013, Counterclaim-Defendants Ellins, Denkin, and Bianco (the “Ellins Group”)
sought to raise capital to develop a new public company devoted to the development of “growing
systems” for marijuana. Suppl. Compl. ¶ 32. GrowOpp, a company founded by Denkin, already
possessed the intellectual property that would form the foundation of the new company. Id. ¶¶
22-23. The Ellins Group sought to transfer the GrowOpp intellectual property to the new
company, and obtain financing to take that company public. Id. ¶¶ 32, 36.
Around the same time, Counterclaimant Herman contacted Ellins and suggested that he
and his associates could assist Ellins in raising capital for the development of the company. Id. ¶
33. Specifically, Herman represented that he and Lukash (the “Herman/Lukash Group”) could
raise at least $2 million to finance the company. Id. ¶ 35. The Herman/Lukash Group further
proposed to employ a private placement of securities of an existing public “shell” company that
Herman and Lukash controlled, DCDC, and represented that they could bring that company into
the transaction in a “clean” status (i.e. without existing stockholders whose holdings or potential
claims could complicate an offering or additional financings). Id. ¶ 38. Thus GrowOpp would
3
The following factual background is based on the allegations in the Proposed Supplemental Complaint of Plaintiff
and Counterclaim-Defendants, Doc. 48-1, which the Court accepts as true for purposes of the instant motion. See
Koch v. Christie’s Int’l PLC, 699 F.3d 141, 145 (2d Cir. 2012). In addition, it cites documents which are
incorporated by reference. DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d Cir. 2010) (citations omitted).
3
transfer its cannabis-related assets and intellectual property to DCDC, which would raise capital
for the company and issue stock to shareholders.
On July 31, 2013, the Ellins Group and the Herman/Lukash Group executed a nonbinding letter of intent (“LOI”). Id. ¶ 39. By its terms, the LOI describes a “Proposed
Transaction” whereby DCDC, GrowOpp, and a company known as GrowBlox Holdings, Inc.
would merge through the acquisition by DCDC of substantially all of the assets of GrowOpp and
GrowBlox Holdings, Inc. 4 Am. Compl., Ex. H (“LOI”) at 1. DCDC would then be renamed
Growblox Holdings, Inc. (“Growblox Holdings”), and reincorporate in Delaware. 5 Suppl.
Compl. ¶ 38; LOI at 1.
The LOI states that in connection with the Proposed Transaction, the parties would raise
$1.5 million. LOI at 1. According to Counterclaim-Defendants, the understanding amongst the
parties was that the Herman/Lukash Group would raise those funds, while the Ellins Group
continued development of the product. Suppl. Compl. ¶ 41.
The LOI also contained a waiver of liability provision (“Waiver Provision”) with respect
to the parties and their representatives. LOI ¶ 6. The Waiver Provision states, in pertinent part:
Unless and until the Purchase Agreement has been so executed and
delivered, none of the parties or any of their respective
Representatives has any legal obligation to any other party of any
kind with respect to the Proposed Transaction, whether because of
this letter of intent or any other written or oral expression with
respect to the Proposed Transaction or otherwise[.] [. . .]
Neither party will have (and each party hereby irrevocably waives)
any claims against the other party or any of its Representatives
4
The LOI describes GrowBlox Holdings, Inc. as a Delaware Corporation with its principal place of business in
Henderson, Nevada. Am. Compl., Ex. H at 1. It is not a party to this litigation, however, and its management is
nowhere described.
5
The LOI indicates that Growblox Holdings would hold 60% of the resulting company’s shares, with the remaining
40% of shares designated for new investors and existing shareholders of DCDC. LOI at 8.
4
arising out of or relating to the Proposed Transaction other than
those, if any, that either such party may in the future have as a
party to a Definitive Agreement (if any) with the other party and
then only in accordance with the terms thereof, or with respect to
the Binding Matters.
Id. (emphases added). The LOI was signed by Herman on behalf of DCDC, Denkin, on behalf
of GrowOpp LLC, and Lukash as “Chief Executive Officer” on behalf of Growblox Holdings,
Inc. Id. at 6.
The LOI terminated by its own terms, ninety days after signing, on October 29, 2013,
without the proposed transaction having taken place. 6 Suppl. Compl. ¶ 48. However, the
Waiver Provision survived termination of the agreement. Although the LOI provides that the
agreement shall be deemed “null, void, and of no further force or effect” upon termination,
paragraph six carves out exceptions to this provision, including with respect to the Waiver
Provision. LOI ¶¶ 6-7.
The parties subsequently proposed another potential transaction, detailed in a document
entitled “Confidential Private Placement Memorandum,” (the “PPM”). See Fleming Aff., Doc.
35, Ex. 1 (“PPM”). The PPM, dated December 15, 2013, describes a private placement offering
of shares of Tumbleweed Holdings, Inc. (“Tumbleweed”), a Delaware corporation. Id. The
PPM states that 13,714,350 shares of Tumbleweed stock were outstanding and owned in equal
amounts by Herman, Lukash, Ellins, Denkin, and Bianco. Id. at 00004057. Furthermore,
according to the PPM, Tumbleweed controlled one hundred percent of GrowOpp’s “membership
interests.” Id. As with the Proposed Transaction in the LOI, however, the transaction described
in the PPM never occurred. Suppl. Compl. ¶ 71.
6
Between July 5, 2013 and December 20, 2013, Herman and Lukash, through entities named GCM and Strategic,
provided GrowOpp with loans in the form of promissory notes, which included an option to convert the principal
due into shares of DCDC common stock. Suppl. Compl. ¶ 59; see Am. Compl., Exs. A-G.
5
According to Counterclaim-Defendants, the transactions described in the PPM and the
LOI, though involving differently named entities, are “for all intents and purposes the same
transaction; a transaction in which GrowOpp, which held the intellectual property and related
business assets developed by the Ellins Group, was to merge into a public shell to be furnished
by the Herman/Lukash Group.” Id.
Although neither transaction came to pass, the Ellins Group continued to work on the
development and execution of the cannabis business. Id. ¶ 49. According to CounterclaimDefendants, in February 2014, the Ellins Group, without the assistance of the Herman/Lukash
Group, located financing in excess of $4 million. Id. ¶ 51. In March 2014, the Ellins Group sold
the cannabis-related intellectual property and assets, and merged their business into a public
vehicle called Signature exploration. Id. ¶ 52. That entity later changed its name to GrowBlox
Sciences. Id.
B. Procedural Background
GrowBlox Sciences commenced this declaratory judgment action against GCM,
Strategic, Lukash, and Herman on April 1, 2014. See Compl., Doc. 2. It filed an Amended
Complaint on April 9, 2014. See Doc. 3. On May 9, 2014 , Defendants filed their Answer,
which included counterclaims brought by themselves, along with DCDC, against GrowBlox
Sciences, GrowOpp LLC, Ellins, Denkin, Bianco, and Tumbleweed. Countercl., Doc. 11.
Defendants filed Amended and Supplemental Counterclaims on November 19, 2014. Am.
Countercl., Doc. 26. On June 2, 2014, this Court issued an Order granting in part and denying in
part Counterclaim-Defendants’ motion to dismiss four of the five alleged Counterclaims,
preserving Counterclaimants’ unjust enrichment and quantum meruit claims, and dismissing
Counterclaimants’ declaratory judgment and breach of fiduciary duty claims without prejudice.
Order, Doc. 44.
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Counterclaimants’ unjust enrichment claim alleges that Herman and Lukash contributed
their efforts, skills, and capital to help develop the intellectual property and assets of the cannabis
business. Am. Countercl. ¶¶ 17-21, 26, 53-54. In doing so, they conferred a benefit to
Counterclaim-Defendants, for which they were not paid. Id. ¶¶ 55-57.
On July 1, 2016, Counterclaim-Defendants filed a motion for leave to file a supplemental
complaint, asserting that Counterclaimants’ unjust enrichment claim breached the Waiver
Provision of the LOI. Suppl. Compl. ¶¶ 82-84. Counterclaim-Defendants further allege that
“[a]s a direct and proximate result” of the Herman/Lukash Group’s breach of the LOI, the Ellins
Group has been injured by “expenditure for and the accumulation of legal fees and costs, by
interference with the Ellins Group’s business and development activities, and by inability to raise
funds due to the litigation.” Id. at ¶ 84. Counterclaim-Defendants claim damages estimated to
exceed $10 million. Id.
II.
DISCUSSION
A. Motion for Leave to File a Supplemental Complaint
Federal Rule of Civil Procedure Rule 15(d) provides that “the court may, on just terms,
permit a party to serve a supplemental pleading setting out any transaction, occurrence, or event
that happened after the date of the pleading to be supplemented.” Fed. R. Civ. P. 15(d); see also
Shi-Hsin Chang v. Phoenix Satellite Television (U.S.), Inc., No. 14 Civ. 2686 (PKC), 2014 WL
5017838, at *5 (S.D.N.Y. Sept. 22, 2014). Absent evidence of bad faith, futility, or prejudice, a
motion to supplement a pleading should be granted. Quaratino v. Tiffany & Co., 71 F.3d 58, 66
(2d Cir. 1995); see also Witkowich v. Gonzales, 541 F. Supp. 2d 572, 590-91 (S.D.N.Y. 2008)
(same). The burden is on the non-moving party to demonstrate the existence of such grounds.
See Beckett v. Inc. Vill. of Freeport, No. 11 Civ. 2163 (LDW) (AKT), 2014 WL 1330557, at *7
(E.D.N.Y. Mar. 31, 2014).
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Counterclaim Defendants’ theory is that Counterclaimants’ unjust enrichment
counterclaim violated the Waiver Provision of the LOI, and thus that Counterclaimants breached
the LOI in bringing the counterclaim. Because the counterclaim arose after the filing of the
original complaint – “the pleading to be supplemented,” Fed. R. Civ. P. 15(d) – it is within the
category of “transaction[s], occurrence[s], or event[s] that happened” after that time, id.
However, because the Court finds Counterclaim-Defendants’ claim that Counterclaimants
breached the LOI to be futile, their motion to supplement the complaint with a breach of contract
claim must be dismissed.
B. Rule 12(b)(6) Motion to Dismiss Standard
A supplemental pleading is deemed futile only if it could not withstand a motion to
dismiss pursuant to Rule 12(b)(6). Cummings-Fowler v. Suffolk Cty. Cmty. Coll., 282 F.R.D.
292, 298 (E.D.N.Y. 2012); cf. Lucente v. Int'l Bus. Machines Corp., 310 F.3d 243, 258 (2d Cir.
2002). When ruling on a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6),
the court must accept all factual allegations in the complaint as true and draw all reasonable
inferences in the plaintiff’s favor. Nielsen v. Rabin, 746 F.3d 58, 62 (2d Cir. 2014). The court is
not required to credit “mere conclusory statements” or “[t]hreadbare recitals of the elements of a
cause of action.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atl. Corp. v. Twombly,
550 U.S. 544, 555 (2007)); see also id. at 681 (citing Twombly, 550 U.S. at 551). “To survive a
motion to dismiss, a complaint must contain sufficient factual matter . . . to ‘state a claim to relief
that is plausible on its face.’” Id. at 678 (quoting Twombly, 550 U.S. at 570). A claim is facially
plausible “when the plaintiff pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged.” Id. (citing Twombly, 550 U.S.
at 556). More specifically, the plaintiff must allege sufficient facts to show “more than a sheer
possibility that a defendant has acted unlawfully.” Id. If the plaintiff has not “nudged [his]
8
claims across the line from conceivable to plausible, [the] complaint must be dismissed.”
Twombly, 550 U.S. at 570; Iqbal, 556 U.S. at 680.
The question in a Rule 12 motion to dismiss “‘is not whether a plaintiff will ultimately
prevail but whether the claimant is entitled to offer evidence to support the claims.’” Sikhs for
Justice v. Nath, 893 F. Supp. 2d 598, 615 (S.D.N.Y. 2012) (quoting Villager Pond, Inc. v. Town
of Darien, 56 F.3d 375, 378 (2d Cir. 1995)). “[T]he purpose of Federal Rule of Civil Procedure
12(b)(6) ‘is to test, in a streamlined fashion, the formal sufficiency of the plaintiff’s statement of
a claim for relief without resolving a contest regarding its substantive merits,’” and without
regard for the weight of the evidence that might be offered in support of Plaintiffs’ claims.
Halebian v. Berv, 644 F.3d 122, 130 (2d Cir. 2011) (quoting Global Network Commc’ns, Inc. v.
City of New York, 458 F.3d 150, 155 (2d Cir. 2006)).
The Court may consider a document that is attached to the complaint, incorporated by
reference or integral to the complaint, provided there is no dispute regarding its authenticity,
accuracy or relevance. DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d Cir. 2010)
(citations omitted). “To be incorporated by reference, the [c]omplaint must make a clear,
definite and substantial reference to the documents.” Mosdos Chofetz Chaim, Inc. v. Vill. of
Wesley Hills, 815 F. Supp. 2d 679, 691 (S.D.N.Y. 2011) (internal quotation marks and citation
omitted). The Proposed Supplemental Complaint cites and relies on two documents: (1) the July
31, 2013 LOI, attached to Plaintiff’s Amended Complaint; and (2) the December 15, 2013 PPM,
which Counterclaimants submitted contemporaneously with the filing of their opposition papers.
See Suppl. Comp ¶¶ 39-53, 71-72. The LOI and PPM are clearly referenced by the Proposed
Supplemental Complaint, are relevant to the question of whether Counterclaimants breached the
9
LOI’s Waiver Provision, and are therefore incorporated by reference. Thus, the Court will
consider the LOI and PPM in deciding the present motion.
C. Application to the Pleadings
Counterclaim-Defendants argue that Counterclaimants’ unjust enrichment claim breached
the LOI’s Waiver Provision, which states in pertinent part:
Unless and until the Purchase Agreement has been so executed and
delivered, none of the parties or any of their respective
Representatives has any legal obligation to any other party of any
kind with respect to the Proposed Transaction[.] [. . .]
Neither party will have (and each party hereby irrevocably waives)
any claims against the other party or any of its Representatives
arising out of or relating to the Proposed Transaction . . .
LOI ¶ 6.
Counterclaim-Defendants assert that the Waiver Provision constitutes a covenant not to
sue. “Covenants not to sue, requiring that the obligor forbear from bringing any current or future
claims against the obligee, are valid in New York.” 7 Kamfar v. New World Restaurant Group,
Inc., 347 F. Supp. 2d 38, 50 (2004) (listing cases). However, under New York law, “[a]
defendant normally may not recover damages—i.e., litigation expenses—for breach of a
covenant not to sue unless the parties specifically intended such recovery.” Id. at 51 (dismissing
a breach of contract claim for violation of a covenant not to sue). As explained by the Second
Circuit:
Certainly it is not beyond the powers of a lawyer to draw a
covenant not to sue in such terms as to make clear that any breach
7
Counterclaimants argue that the Waiver Provision is not in fact a “covenant not to sue.” According to
Counterclaimants, the Waiver Provision, rather than indicating any agreement by the parties to restrain from
bringing claims arising out of or relating to the Proposed Transaction, merely states that those claims shall be
unavailable should the parties bring suit. The Court expresses doubt as to whether this is a meaningful distinction.
However, it need not decide one way or the other. Even interpreting the Waiver Provision as a covenant not to sue,
Counterclaim-Defendants may not use the Waiver Provision offensively to assert a breach of contract claim.
10
will entail liability for damages, including the most certain of all –
defendant’s litigation expense. Yet to distill all this out of the
usual formal covenant would be going too far; its primary function
is to serve as a shield rather than as a sword. . . . In the absence of
contrary evidence, sufficient effect is given the usual covenant not
to sue if, in addition to its service as a defense, it is read as
imposing liability only for suits brought in obvious breach or
otherwise in bad faith . . . .
Artvale v. Rugby Fabrics Corp., 363 F.2d 1002, 1008 (2d Cir. 1966) 8; see also Sauer v. Xerox
Corp., 5 Fed. Appx. 52, 56 (2d Cir. 2001) (upholding dismissal of a counterclaim alleging
violation of an express covenant not to sue, because there was “no affirmative indication that
violation of this provision of the lease gives rise to an independent cause of action for attorney’s
fees.”); Bellefonte Re Ins. Co. v. Argonaut Ins. Co., 757 F.2d 523, 529 (2d Cir. 1985) (upholding
the district court’s dismissal of a counterclaim for damages incurred in defending a lawsuit
because the covenant not to sue lacked a clear provision for recovery of litigation expenses and
the plaintiff’s suits “were not brought in bad faith”).
Here, the LOI does not indicate any intention by the parties to provide for damages in the
event that a party brings a claim waived under the LOI. Nor was Counterclaimants’ unjust
enrichment claim brought in obvious breach of the LOI or in bad faith. The Court has already
found that the LOI did not necessarily continue to define the relationship between the parties
after it expired by its terms. Order, Doc. 44, at 10-11. In fact, whether the parties continued to
operate under the terms of the LOI, or whether they instead formed a partnership or entered into
8
The Second Circuit opinion in Artvale did not state explicitly whether its holding was based on New York or
federal common law, but subsequent cases have treated Artvale as expressing the Second Circuit’s view of New
York law on this issue. See Bellefonte Re Ins. Co. v. Argonaut Ins. Co., 586 F. Supp. 1286, 1288 (S.D.N.Y.
1984), aff'd, 757 F.2d 523; Versatile Housewares & Gardening Systems, Inc. v. Thill Logistics, Inc., 819 F. Supp. 2d
230, 245 (S.D.N.Y. 2011) (“Artvale and its progeny are generally taken to be the Second Circuit’s view on New
York law”).
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