ATG Capital LLC et al v. MGT Capital Investments, Inc. et al
Filing
63
MEMORANDUM OPINION & ORDER re: 47 MOTION to Dismiss The Complaint filed by Michael Onghai, John McAfee, Robert Ladd, H. Robert Holmes, Nolan Bushnell, MGT Capital Investments, Inc., 57 MOTION to Dismiss The Amended Comp laint filed by Michael Onghai, John McAfee, Robert Ladd, H. Robert Holmes, Nolan Bushnell, MGT Capital Investments, Inc. Defendants' motion to dismiss Plaintiffs' original complaint, Dkt. No. 47, is denied as moot. Defendants 39; motion to dismiss Plaintiffs' amended complaint, Dkt. No. 57, is granted as to Plaintiffs' tortious interference with contract and third-party beneficiary breach of contract claims but denied as to Plaintiffs' unjust enrichment cl aim. This resolves Docket Numbers 47 and 57. The Court hereby schedules an initial pretrial conference for April 27, 2018, at 4:00pm. The materials described at Docket Number 42 shall be due seven days before the conference. SO ORDERED. (Initial Conference set for 4/27/2018 at 04:00 PM before Judge Alison J. Nathan.) (Signed by Judge Alison J. Nathan on 3/19/2018) (mml)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
A TG Capital LLC, et al.,
Plaintiffs,
-V-
MGT Capital Investments, Inc., et al.,
MEMORANDUM OPINION &
ORDER
Defendants.
ALISON J. NA THAN, District Judge:
This case arises from Plaintiffs' decision to provide financing to two companies with the
expectation that Defendant MGT Capital Investments, Inc. ("MGT") would acquire those
companies and that Plaintiffs would receive stock in MGT when it did so, and MGT's
subsequent failure to close the acquisitions. Plaintiffs allege that Defendants tortiously interfered
with Plaintiffs' contracts with the target companies; that MGT breached its own contract with
one of those companies, a contract of which Plaintiffs were intended third-party beneficiaries;
and that Defendants unjustly enriched themselves at Plaintiffs' expense. Defendants have moved
to dismiss Plaintiffs' amended complaint. Oral argument is unnecessary, and for the reasons
below, the motion to dismiss is GRANTED in part and DENIED in pmi.
I.
BACKGROUND
The Court takes the following facts from Plaintiffs' amended complaint and from the
contracts at issue in this case. See Int 'l Audiotext Network, Inc. v. Am. Tel. & Tel. Co., 62 F.3d
69, 72 (2d Cir. 1995) (explaining that a complaint includes any statements or documents
incorporated in it by reference and that even when a plaintiff does not attach to the complaint or
incorporate by reference a document '"upon which it solely relies and which is integral to the
complaint,' the court may nevertheless take the document into consideration in deciding the
defendant's motion to dismiss, without converting the proceeding to one for summary judgment"
(quoting Cartee Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47-48 (2d Cir. 1991)).
Around October 8, 2015, Plaintiffs invested in MGT. Complaint 1 at~16. In April 2016,
John O'Rourke, the managing member of ATG Capital LLC, introduced Robert Ladd, MGT's
founder and CEO at the time, to John McAfee, the creator of an anti virus software that bears his
name. Complaint at~ 17. They, along with their advisors, agreed that MGT would rebrand itself
as a cybersecurity company, which McAfee would lead. Complaint
at~
17. They decided that
McAfee would become MGT's Chairman and CEO, and that MGT would then acquire an antispyware technology owned by D-Vasive, Inc. ("D-Vasive"). Complaint at~~ 18-19.
To support D-Vasive's operations while it awaited acquisition by MGT, McAfee and
Ladd requested a loan of $100,000 to D-Vasive. Complaint at~ 20. In May 2016, sixteen
investors, including the seven Plaintiffs here, provided financing to D-Vasive by purchasing
convertible promissory notes from the company. Complaint at~ 20. The investors also entered
into a Securities Purchase Agreement with D-Vasive. See Complaint at~ 21; Dkt. No. 61, Ex.
C-1 (D-Vasive SPA). The D-Vasive Note Agreement provided that D-Vasive was required to
pay back the investment at the earlier of six months from the date of issue or when repayment
was demanded. Dkt. No. 61, Ex. B-1 (D-Vasive Note) at 1. Pursuant to the Note Agreement's
1
"Complaint" refers to the Amended Complaint filed on June 26, 2017. See Dkt. No. 54.
2
"Voluntary Conversion" provision, the investors could elect to convert their notes into 8,800,000
shares ofD-Vasive common stock, divided among the investors on a pro rata basis according to
their relative contributions. Complaint at if 22. Alternatively, pursuant to the Note Agreement's
"Mandatory Conversion" provision, if all shares ofD-Vasive's capital stock were acquired or if
substantially all of the assets of D-Vasive were purchased, the amounts due under the Note
would be converted to common stock of the acquiring company. Complaint at if 22; see also DVasive Note at§ 4(d) (stating that if D-Vasive "effects a transaction whereby either (i) 100% of
the issued and outstanding shares of capital stock of [D-Vasive] are acquired, or, (ii),
substantially all of the assets of [D-Vasive] are acquired, in exchange for shares of capital stock
of an acquiring corporation ... then all amounts due and owing under this Note shall be deemed
converted to common stock of [D-Vasive]"); D-Vasive Note at § 5( c) ("Upon the occurrence of
any such Fundamental Transaction," like D-Vasive's acquisition, "the Successor Entity shall
succeed to, and be substituted for ... and may exercise every right and power of [D-Vasive] and
shall assume all of the obligations of [D-Vasive] under this Note ... as if such Successor Entity
had been named as [D-Vasive] herein.").
Plaintiffs agreed to provide the financing to D-Vasive because they expected that they
would receive shares of MGT common stock upon MOT's acquisition ofD-Vasive. Complaint
at iii! 20-21. Indeed, Plaintiffs deposited the funds in an escrow account, and they were released
to D-Vasive only when it entered an asset purchase agreement with MGT. Complaint at if 20.
On May 9, 2016, MGT and D-Vasive executed an Asset Purchase Agreement ("D-Vasive
APA") for MGT to acquire the D-Vasive technology. Complaint at if 23. Under the D-Vasive
APA, "in consideration for the sale, transfer, assignment, conveyance and delivery by D-Vasive
3
to [MGT] of[its] Assets," MGT agreed to (i) pay $300,000 to D-Vasive; (ii) issue to D-Vasive
or D-Vasive's designees and deliver to an escrow agent 4,760,000 unregistered shares of
Common Stock; and (iii) issue and deliver to D-Vasive or D-Vasive's designees 19,048,000
unregistered shares of Common Stock. Dkt. No. 59, Ex. D (D-Vasive APA) at§ 2.4. The DVasive APA also specified that "Holders of D-Vasive, Inc. Convertible Notes" would receive
8,800,000 shares ofMGT common stock at closing. D-Vasive APA, Annex A.
In addition, the D-Vasive AP A contained a "No Third Party Beneficiaries" provision,
which stated that "no provision of this Agreement shall be deemed to confer upon any other
Third Parties any remedy, claim, liability, reimbursement, cause of action or other right;
provided however, [MGT] understand[s] and agree[s] that D-Vasive's designees shall have a
right to receive the Common Shares constituting the Purchase Price." D-Vasive APA§ 8.11.
After the execution of the D-Vasive APA, McAfee proposed that MGT also acquire
another company, Demonsaw, LLC ("Demonsaw"). Complaint at if 25. Once again, Plaintiffs
provided financing to support the company until MGT could acquire it. Complaint at if 26.
Plaintiffs, along with one other investor, entered a Securities Purchase Agreement with
Demonsaw and purchased promissory notes from the company that were convertible into
10,000,000 shares of Demonsaw, divided among the investors on a pro rata basis according to
their contributions. Complaint at ifil 26-27. Like the D-Vasive Note Agreement, the Demonsaw
Note Agreement provided for mandatory conversion of the loans into equity upon MGT's
acquisition of Demonsaw. Complaint at if 27. The Demonsaw Note Agreement also required
Demonsaw to pay back the investment at the earlier of six months from the date of issue or when
repayment was demanded. Dkt. No. 59, Ex. G (Demonsaw Note) at 1. As with the D-Vasive
4
funds, the Demonsaw funds were released from escrow only when MOT and Demonsaw
executed an asset purchase agreement. Complaint at ~ 29.
On May 26, 2016, MOT and Demonsaw entered an Asset Purchase Agreement
("Demonsaw APA"). Complaint at~ 28. Under the Demonsaw APA, "in consideration for the
sale, transfer, assignment, conveyance and delivery by Demonsaw to [MOT] of [its] Assets,"
MOT agreed to (i) issue to Demonsaw or its designees and deliver to an escrow agent 4,000,000
unregistered shares of Common Stock; and (ii) issue and deliver to Demonsaw or Demonsaw's
designees 16,000,000 unregistered shares of Common Stock. Dkt. No. 61, Ex. F-1 (Demonsaw
AP A) at § 2.4. The Demonsaw AP A also contained a "No Third Party Beneficiaries" provision
substantially similar to that in the D-Vasive AP A. Demonsaw AP A § 8 .11.
In May 2016 filings with the Securities and Exchange Commission, MOT informed its
shareholders of the anticipated D-Vasive and
D~monsaw
to become MOT's Chairman and CEO. Complaint
at~
acquisitions and of the plan for McAfee
30. After the filings, MOT's stock price
increased significantly. Complaint at~ 30. Ladd then sold his shares in MOT, obtaining
significant proceeds. Complaint at ~ 31.
In June 2016, McAfee arranged for Defendant Nolan Bushnell to be appointed to MOT's
board as an independent director. Complaint at~ 33. As a result of their service on the board,
Bushnell, along with Defendants Robert Holmes and Michael Onghai, owned stock in MOT.
Complaint at ir 33.
In July 2016, MOT arranged for D-Vasive to acquire Demonsaw. Complaint at~ 34 n.1.
The D-Vasive AP A was amended to reflect that acquisition, and it explicitly provided that
"Holders of Demonsaw, LLC Convertible Notes" would receive 10,000,000 closing shares and
5
"Holders of D-Vasive Inc. Convertible Notes" would receive 8,800,000 closing shares.
Complaint at ii 34 n.1; Dkt. No. 59, Ex. J (Amendment to D-Vasive APA), Annex A.
On September 9, 2016, MGT's shareholders approved the acquisition of DVasive/Demonsaw and the appointment of McAfee as Chairman and CEO. Complaint at ii 35.
MGT refused to close the D-Vasive/Demonsaw acquisition, but MGT "publicly proceeded as if
the acquisitions had been completed." Complaint at iii! 35-36.
On October 13, 2016, O'Rourke and note purchaser Barry Honig met with McAfee, who
informed them that unless Plaintiffs invested an additional $11,655,000 in MGT, MGT would
not close the D-Vasive/Demonsaw acquisition. Complaint at ii 3 8. After Plaintiffs refused to
provide those additional funds, Ladd approached John Stetson, managing member of note
purchaser Stetson Capital Management, LLC, in November 2016 and proposed that Plaintiffs
pay MGT $3,750,000 in exchange for MGT closing the D-Vasive/Demonsaw acquisition.
Complaint at iii! 43-44. Plaintiffs again refused. Complaint at ii 44. On January 25, 2017, Honig
and Mark Groussman, President of note purchaser Melechdavid Inc., met with Ladd, who this
time asked Plaintiffs to pay $3,000,000 in exchange for MGT closing the acquisition. Complaint
at ii 46. Once again, Plaintiffs refused. Complaint at ii 46.
On March 3, 2017, MGT announced that it had acquired a 46% equity interest in
Demonsaw but did not announce a similar deal with D-Vasive. Complaint at iii! 47-48.
Plaintiffs have not received anything in exchange for the money that they invested in
MGT. Complaint at ii 50.
On April 4, 2017, Plaintiffs ATG Capital LLC; Four Kids Investment Fund LLC; GRQ
Consultants Inc. 401k FBO Barry Honig; Barry Honig; Jonathan Honig; Melechdavid Inc.; and
6
Stetson Capital Management LLC filed suit against Defendants MGT, John McAfee, Robert
Ladd, Nolan Bushnell, Robert Holmes, and Michael Onghai. Dkt. No. 1. Defendants filed a
motion to dismiss the complaint on June 5, 2017. Dkt. No. 47. In response, Plaintiffs filed an
amended complaint, asserting claims of (1) tortious interference with contractual relations
against all defendants; (2) breach of contract by MGT; and (3) unjust enrichment against all
defendants. Dkt. No. 54. Because Plaintiffs filed an amended complaint, Defendants' motion to
dismiss Plaintiffs' original complaint, Dkt. No. 47, is denied as moot.
On July 24, 2017, Defendants filed a motion to dismiss Plaintiff's amended complaint.
Dkt. No. 57. For the reasons below, that motion to dismiss is granted in part and denied in part.
II.
LEGAL STANDARD
A. Motion to Dismiss
In deciding a motion to dismiss pursuant to Rule 12(b)( 6), the Court accepts the
allegations in the complaint as true and draws all reasonable inferences in favor of the nonmoving party. McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir. 2007). To
survive a motion to dismiss, the complaint must include "enough facts to state a claim to relief
that is plausible on its face." Bell At!. Corp. v. Twombly, 550 U.S. 544, 570 (2007). "A claim
has facial plausibility when the plaintiff pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal,
· 556 U.S. 662, 678 (2009). "In considering a motion to dismiss for failure to state a claim
pursuant to Rule 12(b)(6), a district court may consider the facts alleged in the complaint,
documents attached to the complaint as exhibits, and documents incorporated by reference in the
complaint." DiFolco v. MSNBC Cable L.L.C, 622 F.3d 104, 111 (2d Cir. 2010).
7
B. Governing Law
New York law governs the D-Vasive and Demonsaw APAs, D-Vasive APA§ 8.5;
Demonsaw APA §·8.5, as well as the D-Vasive and DemonsawNote Agreements, D-Vasive
Note§ 8(d); Demonsaw Note§ 9(d); D-Vasive SPA§ 5.8; Demonsaw SPA§ 5.8.
III.
TORTIOUS INTERFERENCE WITH CONTRACT
A. Breach of Contract
Plaintiffs claim that Defendants caused D-Vasive and Demonsaw to breach the Note
Agreements with Plaintiffs by refusing to close MGT's acquisition of D-Vasive/Demonsaw.
Complaint at ~ 56. Defendants argue that Plaintiffs' claim fails because Plaintiffs have not
alleged an actual breach of either Note Agreement. Dkt. No. 58 (Def. Memo) at 11.
"Tortious interference with contract requires the existence of a valid contract between the
plaintiff and a third party, defendant's knowledge of that contract, defendant's intentional
procurement of the third-party's breach of the contract without justification, actual breach of the
contract, and damages resulting therefrom." Lama Holding Co. v. Smith Barney Inc., 668 N.E.2d
1370, 1375 (N.Y. 1996).
Here, Plaintiffs have not alleged D-Vasive's or Demonsaw's breach of its contract with
Plaintiffs as a result of its failure to convert Plaintiffs' debt into stock. According to the
complaint, "A Note Agreement exists between Plaintiffs and D-Vasive, pursuant to which DVasive is to convert all amounts owed under the notes between Plaintiffs and D-Vasive into
common stock upon D-Vasive 's acquisition." Complaint at~ 53 (emphasis added). Plaintiffs
make the same allegation regarding the Note Agreement with Demonsaw. Complaint at~ 54.
However, Defendants "refuse[d] to close the MGT/D-Vasive and MGT/Demonsaw
8
acquisitions," Complaint at,[ 56, so D-Vasive and Demonsaw were not acquired by MGT.
Because D-Vasive's and Demonsaw's obligations to convert Plaintiffs' debt into stock were
conditioned upon acquisition by MGT, but neither company was acquired, D-Vasive and
Demonsaw did not breach their obligations to Plaintiffs by failing to convert the debt into stock.
However, in their opposition to the motion to dismiss, Plaintiffs allege a slightly different
theory of D-Vasive's and Demonsaw's breaches. They emphasize that D-Vasive and Demonsaw
breached the Note Agreements by failing to repay the Notes, which came due in November
2016. Dkt. No. 60 (Pl. Memo) at 6-7 & n.5.
Nevertheless, assuming arguendo that the complaint sufficiently alleges that D-Vasive
and Demonsaw breached the Note Agreements by failing to repay the notes, Plaintiffs have not
alleged that Defendants intentionally procured that breach. Although in their opposition to the
motion to dismiss Plaintiffs insist that MGT "effectively controlled both D-Vasive and
Demonsaw and prevented them from repaying on maturity," Pl. Memo at 6, the complaint does
not make that claim. The complaint states that Plaintiffs "have not seen a single penny" in
exchange for their investments, Complaint at ~ 50, but does not allege that Defendants prevented
D-Vasive and Demonsaw from repaying the notes. Instead, Plaintiffs claim, "Defendants have
intentionally caused D-Vasive and Demonsaw to breach their Note Agreements with Plaintiffs
by refusing to close the MGT/D-Vasive and MGT/Demonsaw acquisitions, thus preventing DVasive and Demonsaw from converting the amounts owed under the D-Vasive and Demonsaw
Notes into stock .... Plaintiffs were deprived of the value of the 5.75 million shares of MGT
they should have received as a result of the D-Vasive acquisition and the value of the 8 million
shares of MGT they should have received as a result of the Demonsaw acquisition." Complaint
9
at~~
56, 59. The complaint thus alleges that Defendants caused D-Vasive's and Demonsaw's
failure to convert the amounts owed under the notes into stock; it does not allege that Defendants
caused D-Vasive' s and Demonsaw' s failure to repay the notes. And as previously explained, the
obligations of D-Vasive and Demonsaw to convert Plaintiffs' debt into stock was conditioned
upon the companies' acquisition by MGT, a condition that was not satisfied.
Accordingly, Plaintiffs' claim that Defendants tortiously interfered with Plaintiffs'
contracts by causing D-Vasive and Demonsaw to breach their Note Agreements fails.
B. Impossibility of Performance
Plaintiffs also allege that Defendants committed tortious interference by "frustrat[ing] DVasive and Demonsaw's performance under the Note Agreements, and/or render[ing] such
performance impossible." Complaint at~ 57. In response, Defendants contend that a claim of
tortious interference with contract can succeed only if the contract at issue was actually
breached, not if the defendant frustrated performance under the contract. Def. Memo at 10 n. l 0.
Although Plaintiffs dispute Defendants' contention, Pl. Memo at 8-9, the Court concludes
that New York law does not recognize a tortious interference with contract claim if the contract
at issue was not actually breached, see Baylis v. Marriott Corp., 906 F.2d 874, 877 (2d Cir.
1990) ("Under traditional principles of New York law, a party may not recover for tortious
inducement of breach of a contract without proving that the underlying contract has been
breached."); NBT Bancorp v. Fleet/Northstar Fin. Grp., 664 N.E.2d 492, 495 (N.Y. 1996)
("NBT urges that, as a matter of precedent and policy, a defendant's deliberate indifference with
plaintiff's contractual rights that causes damages should be punishable as tortious interference
whether or not the contract was actually breached. New York law is to the contrary."); see also
10
Samsung Display Co., Ltd. v. Acacia Research Corp., No. I4-CV-I353 (JPO), 20I4 WL
679I603, at* 4 (S.D.N.Y. Dec. 3, 20I4) (explaining that the argument that it is enough, for a
tortious interference claim, to allege that the defendant's interference made the contract
impossible to perform, or that that the defendant induced the third party to render performance
impossible "is directly at odds with controlling law. New York law is clear: nothing short of
actual breach gives rise to a claim for tortious interference with contractual relations."); Marzullo
v. Beekman Campanile, Inc., No. IO Civ. 0364(PGG), 2011WL3251507, at *3 (S.D.N.Y. July
22, 20 I I) (analyzing cases and concluding that "a tortious interference with contract claim may
not be premised on a theory that the defendant committed an act that rendered performance of a
contract impossible"); Fonar Corp. v. Magnetic Resonance Plus, Inc., 957 F. Supp. 477, 481
(S.D.N.Y. 1997) ("The court adheres to the rulings of New York's highest state court as well as
those of the Second Circuit and holds that in order to establish a claim under the tort of
interference with contractual relations, a third party must breach the contract after being induced
to do so by the defendant.").
Accordingly, Plaintiffs' theory that Defendants rendered D-Vasive and Demonsaw's
performance impossible cannot serve as a basis for Plaintiffs' tortious interference claim. The
motion to dismiss Plaintiffs' tortious interference with contractual relations claim is granted.
IV.
THIRD-PARTY BENEFICIARY BREACH OF CONTRACT
Plaintiffs claim that they are third-party beneficiaries of the D-Vasive APA and that
MGT breached its obligations under the APA by failing to close the D-Vasive acquisition. 2
2
In this section, the Court refers exclusively to the D-Vasive AP A and the D-Vasive acquisition
because, as Plaintiffs explain, "MGT originally sought to acquire D-Vasive and Demonsaw
separately but restructured the deal in July 2016 to acquire both in one fell swoop. The
1I
Complaint at~~ 61, 63. Defendants contend that Plaintiffs have no standing to bring a thirdparty beneficiary claim because the D-Vasive AP A expressly negates the intent to confer upon
third parties the right to enforce the contract. Defendants' Memo at 15. Defendants further
assert that Plaintiffs' third-party breach of contract claim must be dismissed because there was
no underlying breach of the D-Vasive APA by MGT. Defendants' Memo at 16-17.
To establish a breach of contract as a third-party beneficiary, a plaintiff must
demonstrate: "(1) the existence of a valid and binding contract between other parties, (2) that the
contract was intended for [its] benefit, and (3) that the benefit to [it] is sufficiently
immediate ... to indicate the assumption by the contracting parties of a duty to compensate [it] if
the benefit is lost." Mandarin Trading Ltd. v. Wildenstein, 944 N.E.2d 1104, 1110 (N.Y. 2011)
(alterations in original) (quoting Mendel v. Henry Phipps Plaza W, Inc., 844 N.E.2d 748, 751
(N.Y. 2006)). The contract must clearly demonstrate an intent to permit third-party enforcement
of the contract. Consolidated Edison, Inc. v. Northeast Utilities, 426 F.3d 524, 528 (2d Cir.
2005). Indeed, "[ d]ismissal of a third-party beneficiary claim is appropriate where the contract
rules out any intent to benefit the claimant, or where the complaint relies on language in the
contract or other circumstances that will not support the inference that the parties intended to
confer a benefit on the claimant." Bayerische Landesbank, NY Branch v. Aladdin Capital
Mgmt. LLC, 692 F.3d 42, 52-53 (2d Cir. 2012) (quoting Subaru Distribs. Corp. v. Subaru ofAm.,
Inc., 425 F.3d 119, 124 (2d Cir. 2005)).
restructured deal would have D-Vasive acquire Demonsaw and MGT acquire D-Vasive. Thus,
plaintiffs' breach of contract claim against MGT for shares they are owed as a result of both the
D-Vasive and Demonsaw acquisitions arises from the as-amended D-Vasive APA." Pl. Memo at
10 n. 9 (internal citations omitted).
12
In Consolidated Edison, Inc. v. Northeast Utilities, the Second Circuit considered
whether shareholders of the company NU enjoyed the right, as third-party beneficiaries, to sue a
company (CEI) that had failed to complete a merger with NU. See 426 F.3d at 525-27. The
court explained, "The question ... is whether CEI and NU intended to confer on NU's
shareholders a right to enforce CEl's promise to complete the merger .... Undoubtedly, the
merger agreement confers on NU's shareholders certain rights as third-party beneficiaries, so
that after the ... merger was to be complete, the shareholders could have enforced CEI' s
contractual obligation to pay them .... " Id. at 527. The court then turned to examine the
contract at issue. The agreement between CEI and NU stated that it was "not intended to confer
upon any person other than the parties any rights or remedies," with a few exceptions. Id. at 528.
Relevant here, the provision excepted a section of the agreement that stated that at the time the
merger was to be complete, each NU share would be converted into the right to receive cash or
stock in the post-merger company. Id. As the court interpreted that provision, "the parties to the
Agreement clearly created a third-party right, but just as clearly they took pains to assure that the
right was limited to a right to collect the shareholder premium if and when the merger happened,
not a right to sue to compel completion of the merger or for damages resulting from a party's
refusal to merge." Id. The court explained that "the only third-party right conferred on NU's
shareholders is a right, arising upon completion of the merger, to receive payment for their
shares." Id. (emphasis in original). Because the merger was never completed, "that right never
arose." Id.
By contrast, in Bayerische Landesbank, NY Branch v. Aladdin Capital Management
LLC, the Second Circuit held that the contract at issue there plausibly evinced an intent to allow
13
enforcement of the contract by third-party Noteholders. The agreement stated, "This Agreement
is made solely for the benefit of the [parties to the contract], their successors and assigns, and no
other person shall have any right, benefit or interest under or because of this Agreement, except
as otherwise specifically provided herein. The Swap Counterparty shall be an intended third
party beneficiary of this Agreement." 692 F.3d at 53. The court concluded that this language
did not unambiguously exclude an intent to benefit the Noteholders because (1) the "herein" in
"except as otherwise specifically provided herein" could apply to the entire agreement, not just
that section, and (2) the provision identified Swap Counterparty as an intended third-party
beneficiary but contained no limitation regarding other possible third-party beneficiaries. Id. at
53-54. The court thus looked at the contract as a whole, which included a provision that
established that one of the parties' obligations under the agreement "shall be enforceable at the
insistence of each Issuer, the Trustee on behalf of the holders of the relevant Notes, or the
requisite percentage of holders of the relevant Notes on behalf of themselves." Id. at 54.
Accordingly, the court concluded that the contract as a whole "plausibly demonstrate[d] an intent
to benefit the Noteholders." Id. at 55.
The D-Vasive APA is most similar to the contract at issue in Consolidated Edison. Like
the contract there, the contract at issue here does not evidence an intent to let Plaintiffs sue for
breach of contract, though it may give Plaintiffs a right to sue to enforce the AP A once the
acquisition is completed. The D-Vasive APA's "No Third Party Beneficiaries" provision states,
This Agreement and the Collateral Agreements are solely for the benefits of the
Parties and, only to the extent provided in Article VII hereof, their respective
Affiliates and employees, representatives, agents, directors, officers, partners or
principals, as applicable, or their respective assigns, for whom the parties shall be
entitled to enforce this Agreement, and no provision of this Agreement shall be
deemed to confer upon any other Third Parties any remedy, claim, liability,
14
reimbursement, cause of action or other right; provided however, [MGT}
understand[s} and agree[s} that D-Vasive 's designees shall have a right to receive
the Common Shares constituting the Purchase Price. Within 90 days of closing,
D-Vasive shall provide [MGT] with written notice of the intended recipients of the
shares of Common Stock and [MGT] shall use its best commercial efforts to honor
such transfer request, ... and [D-Vasive] shall have the right to enforce such
transfer request.
D-Vasive APA§ 8.11 (emphasis added). 3 The APA provides that, as part of the "Purchase
Price," MGT shall issue to D-Vasive or its designees, the noteholders, shares of Common Stock.
D-Vasive APA§ 2.4; Amendment to D-Vasive APA§ l(c)-(d); see also Amendment to DVasive APA, Annex A (showing the allocation of "Purchase Price" shares, including 10,000,000
closing shares to Demonsaw noteholders and 8,800,000 closing shares to D-Vasive noteholders ).
But the APA also states that MGT shall provide the Purchase Price "in consideration for the sale,
transfer, assignment, conveyance and delivery by D-Vasive to [MGT] of the Assets and [DVasive's] agreement to retain and satisfy" liabilities. D-Vasive APA§ 2.4. Moreover, the APA
states that "[a}t the Closing," MGT shall deliver to D-Vasive the Purchase Price. D-Vasive APA
§ 3.3(b)(iii)-(v) (emphasis added). Read together, the APA provisions establish that "the only
third-party right conferred on [Plaintiffs] is a right, arising upon completion of the [acquisition},
to receive payment." Consolidated Edison, Inc., 426 F.3d at 528. As in Consolidated Edison,
"that right never arose" because the acquisition was never completed.
Unlike in Bayerische Landesbank, the D-Vasive APA does not contain an ambiguous
carve-out like "except as otherwise specifically provided herein" to the general prohibition
3
Although the D-Vasive AP A was amended to account for the D-Vasive acquisition of
Demonsaw, the amended AP A does not alter the "No Third Party Beneficiaries" provision of the
D-Vasive APA. See Amendment to D-Vasive APA.
15
against third-party beneficiaries. Cf Bayerische Landesbank, 692 F.3d at 53-54. Likewise, the
AP A contains no comparable provision establishing that MGT' s obligations "shall be
enforceable at the insistence of [Plaintiffs]." Instead, the AP A establishes that Plaintiffs shall
have a right to receive their portion of the Purchase Price. However, as explained above, MGT
was only obligated to provide the Purchase Price in exchange for D-Vasive's assets, the transfer
of which did not occur.
Plaintiffs may not bring a breach of contract claim as third-party beneficiaries, so the
breach of contract claim is dismissed. Because the Court concludes that Plaintiffs may not
pursue a third-party beneficiary claim against Defendants, it does not consider whether MGT
breached the underlying contract.
V.
UNJUST ENRICHMENT
Plaintiffs allege that they "have expended considerable time and money in facilitating the
transformation of MGT from an obscure online gaming start-up to an emerging leader in
cybersecurity." Complaint at~ 68. Plaintiffs claim that "[i]t would be against equity and good
conscience for the Defendants to be permitted to retain the benefits which they received at
Plaintiffs' expense." Complaint at~ 71.
"To prevail on a claim for unjust enrichment in New York, a plaintiff must establish (1)
that the defendant benefitted; (2) at the plaintiffs expense; and (3) that equity and good
conscience require restitution." Beth Israel Med. Ctr. v. Horizon Blue Cross & Blue Shield of
New Jersey, Inc., 448 F. 3d 573, 586 (2d Cir. 2006) (quoting Kaye v. Grossman, 202 F.3d 611,
616 (2d Cir. 2000)).
16
a. Quasi-Contract Claim
Defendants contend that Plaintiffs' unjust enrichment claim must be dismissed because
"the subject matter of the claim is governed by valid contracts." Def. Memo at 20.
The '"theory of unjust enrichment lies as a quasi-contract claim,' and contemplates 'an
obligation imposed by equity to prevent injustice, in the absence of an actual agreement between
the parties."' Georgia Malone & Co., Inc. v. Rieder, 973 N.E.2d 743, 746 (N.Y. 2012) (quoting
IDT Corp. v. Morgan Stanley Dean Witter & Co., 907 N.E.2d 268, 274 (N.Y. 2009)). "While a
plaintiff may generally allege breach of contract and unjust enrichment simultaneously, the
'existence of a valid written contract generally precludes proceeding on grounds of unjust
enrichment ... unless there is a bona fide dispute over the existence of the contract or the
contract does not cover the dispute in question.'" Almazan v. Almazan, No. 14-cv-311 (AJN),
2015 WL 500176, at *13 (S.D.N.Y. Feb. 4, 2015) (alteration in original) (internal citation
omitted) (quoting Barbagallo v. Marcum LLP, 820 F. Supp. 2d 429, 443 (E.D.N.Y. 2011)).
Here, Plaintiffs allege that they provided a benefit to Defendants-funding for D-Vasive
and Demonsaw-expecting to receive compensation in the form of stock once the companies
were acquired by MGT. Plaintiffs contend that they only provided the funding because they
thought that they would receive compensation for it. See, e.g., Complaint at~ 20. However, no
contract between Plaintiffs and Defendants setting forth this understanding exists. Instead, the
only contracts that exist are ( 1) agreements between Plaintiffs and D-Vasive/Demonsaw, and (2)
contracts between D-Vasive/Demonsaw and MGT, to which Plaintiffs are not third-party
beneficiaries. At this point, it is disputed whether the contracts between MGT and DVasive/Demonsaw required MGT to acquire D-Vasive/Demonsaw and award Plaintiffs stock in
17
MOT. If the contracts did so require, then the contracts may govern this action, thereby dooming
the unjust enrichment claim. But if the contracts did not require MOT to acquire DVasive/Demonsaw under the facts of this case, Plaintiffs may have a claim for unjust enrichment
because they provided a benefit to Defendants in exchange for which they expected
compensation, and Defendants accepted that benefit but did not provide compensation-nor
were they required to provide compensation under the terms of any existing contract. In that
case, Plaintiffs may be able to recover under a theory of unjust enrichment. Accordingly,
because it is unclear whether the existing contracts "cover the dispute in question," at this stage,
the Court declines to dismiss Plaintiffs' unjust enrichment claim based on Defendants' argument
that "the subject matter of the claim is governed by valid contracts."
b. Loss
Defendants also argue that Plaintiffs' unjust enrichment claim fails because Plaintiffs do
not allege a cognizable loss. Def. Memo at 21-22.
To succeed on an unjust enrichment claim, Plaintiffs must establish that they suffered a
loss. See State v. Barclays Bank of NY, 563 N.E.2d 11, 15 (N.Y. 1990).
Read in the light most favorable to the Plaintiffs, the complaint alleges that they suffered
a loss. They claim that they provided funds to D-Vasive and Demonsaw but have "not seen a
single penny for the money they invested in the transformation of MOT," Complaint at~ 50; that
they "expended considerable time and money in facilitating the transformation of MOT,"
Complaint at~ 68; and that they have effectively lost "the value of the 13.75 million shares to
which [they were] entitled but that Defendants ... wrongfully retained," Complaint at~ 71.
Plaintiffs have thus sufficiently alleged a loss.
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c. Statute of Frauds
Defendants further argue that Plaintiffs' unjust enrichment claim is barred by New
York's Statute of Frauds. Def. Memo at 22-23.
New York law requires that agreements to compensate someone for "negotiating the
purchase [or] sale ... of a business opportunity, business, its good will, inventory, fixtures or an
interest therein, including a majority of the voting stock interest in a corporation" be in writing.
N.Y. Gen. Oblig. Law§ 5-701(a)(l0). This requirement applies to claims for unjust enrichment.
See N.Y. Gen. Oblig. Law§ 5-701(a)(10); Morris Cohan & Co. v. Russell, 245 N.E.2d 712, 715
(N.Y. 1969). 4
'"Negotiating' includes procuring an introduction to a party to the transaction or assisting
in the negotiation or consummation of the transaction." N.Y. Gen. Oblig. Law§ 5-701(a)(10).
"Negotiating a business opportunity includes providing services 'such as: (1) identifying and
analyzing the business opportunity; (2) identifying and analyzing potential business partners; (3)
and being a major contributor to the eventual formation of the [business opportunity]."'
Transition lnvs., Inc. v. Allen 0. Dragge, Jr. Family Trust, No. 11 Civ. 4775(PAC), 2011 WL
5865149, at *8 (S.D.N.Y. Nov. 21, 2011) (alteration in original) (quoting Gutkowski v.
Steinbrenner, 680 F. Supp. 2d 602, 613 (S.D.N.Y. 2010)). The Statute of Frauds thus applies
when "[t]he essence of plaintiffs claim is that he devoted years of work to finding a business to
4
Morris Cohan & Co. v. Russell specifically discusses quantum meruit claims, but quantum
meruit and unjust enrichment claims are not separate causes of action. See Mid-Hudson Catskill
Rural Migrant Ministry, Inc. v. Fine Host Corp., 418 F.3d 168, 175 (2d Cir. 2005).
19
acquire and causing an acquisition to take place" and that he should be compensated for such
services. Snyder v. Bron/man, 921 N.E.2d 567, 569 (N.Y. 2009).
Here, when the complaint is read in the light most favorable to them, Plaintiffs do not
seek compensation for "negotiating" the purchase of a business opportunity. Instead, Plaintiffs
contend that Defendants have been unjustly enriched by the funds that Plaintiffs provided to DVasive and Demonsaw, financing that they offered with the understanding that they would
eventually receive MGT stock in return. The essence of that claim is a loan agreement, rather
than an agreement to compensate Plaintiffs for "finding a business to acquire," Snyder, 921
N.E.2d at 569, or "identifying and analyzing [a] business opportunity ... [and] business
partners," Transition lnvs., Inc., 2011WL5865149, at *8. To the extent that Plaintiffs' unjust
enrichment claim is based on the efforts they exerted in identifying D-Vasive and Demonsaw as
potential businesses to acquire, the Court agrees with Defendants that, as in Snyder, the Statute
of Frauds would bar that claim, as there is no writing setting forth Plaintiffs' "employment by
[Defendants] to render the alleged services." Morris Cohan & Co., 245 N.E.2d at 715.
Nevertheless, the complaint, read in the light most favorable to Plaintiffs, sets forth an unjust
enrichment claim for the funding that Plaintiffs provided to D-Vasive and Demonsaw.
Accordingly, Plaintiffs' unjust enrichment claim is not barred by the Statute of Frauds.
VI.
CLAIMS AGAINST INDIVIDUAL DEFENDANTS
Finally, Defendants contend that Plaintiffs' tortious interference and unjust enrichment
claims should be dismissed against the individual defendants. Def. Memo at 23-24.
As explained above, the Court grants the motion to dismiss Plaintiffs' tortious
interference with contractual relations claim against all Defendants.
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As to the unjust enrichment claim, Defendants argue that the complaint fails to allege that
Defendants Bushnell, Holmes, or Onghai were enriched. Def. Memo at 24. But the complaint
alleges that "[t]he Individual Defendants also benefited from Plaintiffs' efforts, as each was a
shareholder of MGT at the time MGT's stock price skyrocketed. Not only did they benefit from
an increase in the value of their MGT stock, but also they benefited from wrongfully retaining
the 13. 75 million shares to which Plaintiffs were entitled, thus keeping their equity in MGT
undiluted." Complaint at i! 70. Plaintiffs have thus alleged that the individual defendants
benefited at Plaintiffs' expense, as necessary to support an unjust enrichment claim.
VII.
CONCLUSION
Defendants' motion to dismiss Plaintiffs' original complaint, Dkt. No. 47, is denied as
moot. Defendants' motion to dismiss Plaintiffs' amended complaint, Dkt. No. 57, is granted as
to Plaintiffs' tortious interference with contract and third-party beneficiary breach of contract
claims but denied as to Plaintiffs' unjust enrichment claim. This resolves Docket Numbers 47
and 57. The Court hereby schedules an initial pretrial conference for April 27, 2018, at 4:00pm.
The materials described at Docket Number 42 shall be due seven days before the conference.
SO ORDERED.
Dated:
,2018
New York, New York
United States District Judge
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