KLS Diversified Master Fund, L.P. v. McDevitt

Filing 73

OPINION & ORDER re: 39 MOTION for Summary Judgment, filed by Sean McDevitt, 42 MOTION for Summary Judgment, filed by KLS Diversified Master Fund, L.P. Plaintiff's motion for summary judgment is GRANTED. Dkt. No. 42. Defendan t's motion for summary judgment is DENIED. Dkt. No. 39. The parties are directed to appear for a telephonic conference on December 28, 2020 at 11:00 a.m. Parties should dial into the Court's teleconference line at 888-251-2909, Access Code 2123101, and follow the necessary prompts. SO ORDERED. ( Telephone Conference set for 12/28/2020 at 11:00 AM before Judge Lewis J. Liman.) (Signed by Judge Lewis J. Liman on 12/15/2020) (va)

Case 1:19-cv-03774-LJL-DCF Document 73 Filed 12/15/20 Page 1 of 60

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
---------------------------------------------------------------------- X
:
KLS DIVERSIFIED MASTER FUND, L.P.,
:
:
Plaintiff,
:
-v:
:
SEAN MCDEVITT,
:
:
Defendant.
:
:
---------------------------------------------------------------------- X

12/15/2020

19-cv-3774 (LJL)
OPINION & ORDER

LEWIS J. LIMAN, United States District Judge:
Plaintiff KLS Diversified Master Fund, L.P. (“Plaintiff” or “KLS”) and Defendant Sean
McDevitt (“Defendant” or “McDevitt”) each move for summary judgment pursuant to Federal
Rule of Civil Procedure 56.
For the following reasons, Plaintiff’s motion is granted and Defendant’s motion is denied.
BACKGROUND
I.

The Relevant Parties
Plaintiff KLS is a Cayman Islands Limited Partnership with a principal place of business

in New York. Non-party Sensei, Inc. (“Sensei” or the “Company”) is a Delaware corporation
that has its principal place of business in Texas. It does business under the name “Kaviva” but
its legal name remains Sensei. Defendant McDevitt was an early investor in Sensei, and by
2014, he was the majority owner and Chief Executive Officer (“CEO”) of Sensei. At the end of
2016, he was Sensei’s CEO, Chairman, and majority stockholder. He was removed as CEO in
May 2018. McDevitt resides in Texas.

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II.

The Transaction
The events that form the basis of this case occur against the backdrop of a company

struggling for survival.1
Sensei marketed itself as “the leading digital entertainment platform and mobile
application that enables insurers, health systems, and employers to communicate with their
members/employees, engage and educate across various benefits and wellbeing enhancement
topics.” Dkt. No. 59 ¶ 4. However, as of late 2016, Sensei—then doing business as a limited
liability company—was losing money and running out of cash, it had few, if any, clients or
revenue sources, and it faced six-figure obligations for accounts payable, payroll, royalty
payments, legal fees, and several other categories of payables. Id. ¶¶ 6, 11. From at least 2014
through 2016, Sensei regularly deducted federal income taxes from employee paychecks and,
instead of paying them and other payroll taxes to the government, it funneled those funds into its
operations and accrued back taxes. Id. ¶ 7.
Faced with those challenges, in 2016, Sensei entered into negotiations with KLS about
KLS providing financing to Sensei. Id. ¶ 8. The investment was in the form of a promissory
note. In a transaction that closed on January 9, 2017, Sensei issued, and KLS purchased, a $3.33
million convertible promissory note, with a 4% annual coupon and a maturity date of two years
from the date of execution (with an option for KLS to extend the maturity date by one year) for a
purchase price of $2 million (the “Transaction”). Id. ¶ 10; Dkt. No. 53 ¶¶ 4-5. The Transaction
was implemented through three primary integrated documents: the secured convertible
promissory note purchase agreement (the “Note Purchase Agreement”) between KLS and Sensei,
the secured convertible promissory note (the “Note”) between KLS and Sensei, and the
conditional guaranty by McDevitt (the “Conditional Guaranty”). Dkt. No. 59 ¶ 9; see also Dkt.
1

The facts are undisputed unless otherwise noted.
2

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Nos. 45-1, 45-2, 45-3. All agreements were dated January 9, 2017. McDevitt signed the Note
and the Note Purchase Agreement on behalf of Sensei and signed the Conditional Guaranty in
his individual capacity. Dkt. No. 59 ¶ 10.
A.

Note Purchase Agreement

Under the Note Purchase Agreement, KLS agreed to purchase the Note from Sensei for
$2 million for Sensei to use as operating capital. See Dkt. No. 45-2. As reflected by the Note
Purchase Agreement, and in connection with it, Sensei agreed to convert from a Florida limited
liability company to a Delaware corporation and to form a board of directors of three persons, to
be comprised of McDevitt and two KLS representatives. Id. § 4.5; see also Dkt. No. 45-3 § C.
The Note Purchase Agreement contains a series of representations and warranties by both
Sensei and KLS as of the date of closing. See Dkt. No. 45-2 § 2 (Sensei representations); id. § 3
(KLS representations). As relevant here, Sensei made representations concerning “Litigation”
and “Agreements.” The “Litigation” representation stated as follows:
There is no Action2 pending or to the Company’s knowledge, currently threatened
(i) against the Company or any officer, director or Key Employee of the
Company; (ii) that questions the validity of the Transaction Agreements or the
right of the Company to enter into them, or to consummate the transactions
contemplated by the Transaction Agreements, or (iii) that would reasonably be
expected to have, either individually or in aggregate, a Material Adverse Effect.
Id. § 2.9. The “Agreements” representation stated as follows:
Except for the Transaction Agreements, there are no agreements, understandings,
instruments or proposed transactions to which the Company is a party or by which
it is bound that involve (i) obligations (contingent or otherwise) of, or payments
to, the Company in excess of $50,000 . . .
Id. § 2.12(a).

“Action” is defined broadly to mean “any claim, action, cause of action, demand, lawsuit,
arbitration, inquiry, audit, notice of violation, proceeding, litigation, citation, summons,
subpoena or investigation of any nature, civil, criminal, administrative, regulatory or otherwise,
whether at law or in equity.” Dkt. No. 45-2 § 1.3(a).
2

3

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Sensei’s representations and warranties were qualified by an attached disclosure schedule
(the “Disclosure Schedule”). Dkt. No. 45-5. Under “Litigation,” the Disclosure Schedule listed
litigation threatened against Sensei for the failure to pay for software development services (and
a $155,257.19 confession of judgment in connection with that dispute) and three collection
efforts threatened against Sensei in amounts of $25,000, $8,700, and $1,500. Id. § 2.9. Under
“Agreements,” the Disclosure Schedule reflected, among other items, that Sensei owed debts to
McDevitt in the amount of $480,824. Id. § 2.12(a)(3).
The Disclosure Schedule also noted that Sensei had not paid its employees since the pay
period ending September 15, 2016 and that the amounts owed had been accrued as liabilities on
Sensei’s financial statements. Id. § 2.18(c)(1). It further reflected, under Section 2.19, that
Sensei owed back taxes for payroll in a number of states and federally and had not yet completed
and filed its 2015 tax return. Id. § 2.19(1)-(2). Finally, the Disclosure Schedule reflected that, in
addition for use as working capital, Sensei proposed to use $1,036,835 of the $2 million proceeds
paid by KLS to pay pre-existing debt obligations and accrued payroll obligations. Id. § 2.33.
B.

The Note

Under the Note, Sensei agreed to pay KLS interest on the principal sum of $3.33 million
at a 4% annual interest rate compounded quarterly and to repay the entire outstanding principal
balance and all unpaid accrued interest on the earliest of: (1) the two year anniversary of the
issue date (January 9, 2017), (2) upon a company sale, or (3) upon the automatic acceleration of
the Note as a result of an “Insolvency Event.” Dkt. No. 45-1 § 2. The Note states that it is
issued pursuant to the Note Purchase Agreement. Id.
Under the Note, Sensei covenanted, among other things:
To provide weekly updates from CEO McDevitt via conference call or email, as
requested by KLS, and to provide a quarterly business and financial update, id.
§ 5(b)(iv);
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To make to KLS a “prompt report of any legal actions pending or threatened in
writing against the Company,” id. § 5(b)(vi); and
To “[t]imely file all required tax returns and reports and timely pay all foreign,
federal, state, and local taxes, assessments, deposits and contributions owed by
the Company,” id. § 5(c).
Sensei also agreed to a series of negative covenants, including with respect to
dispositions, indebtedness, and investments. Id. § 6.
Importantly, the Note provided that if one or more of a series of “Events of Default”
occurred, the Note would accelerate and all principal and unpaid accrued interest would become
due and payable. Id. § 7. The Events of Default included:
(a)

(b)
(c)
(e)
(f)

(g)

(h)

(j)

Company fails to pay timely any of the principal amount due under this
Note on the date and the same becomes due and payable or any accrued
interest or other amounts due under this Note on the date the same
becomes due and payable;
Company shall default in the performance of any covenant under this
Note;
a Material Adverse Change occurs;
....
. . . (ii) a notice of lien or levy is filed against any of Company’s assets by
any governmental authority . . .;
There is, under any agreement to which Company is a party with a third
party or parties, (a) any default resulting in a right by such third party or
parties, whether or not exercised, to accelerate the maturity of any
Indebtedness in an amount individually or in the aggregate in excess of
Fifty Thousand Dollars ($50,000); or (b) any breach or default by
Company, the result of which could result in a Material Adverse Change;
one or more fines, penalties or final judgments, orders or decrees for the
payment of money in an amount, individually or in the aggregate, of at
least Fifty Thousand Dollars ($50,000) shall be rendered against Company
by any governmental authority;
Company or any Person acting for Company makes any representation,
warranty, or other statement now or later in this Note, any Note
Transaction Document or in any writing delivered to [KLS] or to induce
[KLS] to enter this Note or any Note Transaction Document, and such
representation, warranty, or other statement is incorrect or misleading in
any material respect when made;
....
(i) Any guaranty of this Note terminates or ceases for any reason to be in
full force and effect; (ii) any guarantor of this Note does not perform any
obligation or covenant under any guaranty of this Note; (iii) any
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circumstance described in clause (c), (d), (e), (f) or (g) occurs with respect
to any such guarantor; (iv) the occurrence of a “Recourse Event” as set
forth in the Guaranty, dated as of January 9, by Sean McDevitt.
Id.
Finally, the Note granted a security interest to KLS in collateral to secure the payment
and performance of its obligations:
Company hereby grants [KLS], to secure the payment and performance in full of
all of the Obligations, a continuing security interest in, and pledges to Holder, the
Collateral. The security interest granted herein is and shall at all times continue to
be a first priority perfected security interest in the Collateral (subject only to
Permitted Liens). Company hereby authorizes [KLS] to file financing statements
with all appropriate jurisdictions to perfect or protect [KLS]’s interest or rights
hereunder and take such other steps as [KLS] deems appropriate to perfect and
protect the security interest granted pursuant hereto. [KLS], or its agents, shall
have the right, at any time, to inspect the Collateral and audit and copy
Company’s Books.
Id. § 4. “Collateral” was defined as follows:
[A]ll of the following personal property of Company, whether now owned or
hereafter acquired: all accounts; all chattel paper; all commercial tort claims; all
contracts; all deposit accounts, all documents; all general intangibles, including,
without limitation, Intellectual Property; all goods, equipment, inventory and
fixtures; all instruments, including, without limitation, all promissory notes; all
investment property; all letter-of-credit rights; all money; all securities accounts;
all supporting obligations; all other goods and personal property of Company,
wherever located, whether tangible or intangible, and whether now owned or
hereafter acquired, existing, leased or consigned by or to Company; and, to the
extent not otherwise included, all proceeds of each of the foregoing and all
accessions to, substitutions and replacements for and rents, profits and products of
each of the foregoing.
Id. § 15.
C.

The Conditional Guaranty

Finally, and “[a]s an essential inducement of and condition to” KLS purchasing the Note,
“and in consideration therefor,” McDevitt signed the Conditional Guaranty. Dkt. No. 45-3 § D.
Pursuant to Section 1 of the Conditional Guaranty, McDevitt agreed that he would “be fully and
personally liable for the payment and performance of any then remaining obligations of the

6

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Company set forth in the Note” provided any one of six “Recourse Events” occurs. Id. § 1. As
relevant here, those Recourse Events included the following:
a.

any fraud or intentional or willful misrepresentation by [McDevitt or
Sensei], or any intentional or willful failure to disclose a material fact in
connection with the issuance of the Note or at any time the Note is
outstanding;

b.

any gross negligence, willful misconduct, or commission or a criminal act
by [Sensei], or any gross negligence, willful misconduct, or commission
of felony or other crime by [McDevitt] that (i) involves moral turpitude or
dishonesty by [McDevitt], or (ii) could materially and adversely affect
Company, the Company’s prospects or the prospects of repayment of the
Note;

c.

any material breach of the material terms of the Note (including, without
limitation, with respect to restrictions on indebtedness, liens, dispositions
of assets, distributions in respect of capital stock, payments of
subordinated indebtedness, intellectual property, or affiliate transactions)
directly or indirectly caused by Guarantor;
....
any litigation or other legal proceedings is brought by current or former
employees of [Sensei] that materially and adversely affects Company, the
Company’s prospects or the prospects of repayment of the Note and any
such litigation or other legal proceedings arise from circumstances (i)
which were caused directly or indirectly by [McDevitt] or (ii) which
[McDevitt] knew or should have known to exist after conducting
reasonable investigations;

e.

f.

the Company becomes liable for any taxes, penalties, fees or similar
charges under foreign, federal, state or local tax laws or applicable rules or
regulations, the payment of which would materially and adversely affect
Company, the Company’s prospects or the prospects of repayment of the
Note, and any such liability arises from circumstances not described in
Section 2.19 of the Disclosure Schedule to the Purchase Agreement3 (i)
which were caused directly or indirectly by [McDevitt] or (ii) which
[McDevitt] knew or should have known to exist after conducting
reasonable investigations.

Id.

3

As stated supra, Section 2.19 of the Disclosure Schedule referred to Sensei’s tax returns and
payments.
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The Conditional Guaranty provided that “[u]pon the occurrence of a Recourse Event,
Guarantor shall pay the Guaranteed Obligations in full in cash upon demand by Holder [KLS].”
Id. “Guaranteed Obligations” were defined as “any then remaining obligations of the Company
set forth in the Note.” Id.
Finally, under the Conditional Guaranty, McDevitt “acknowledges that it is relying upon
its own knowledge of and is fully informed with respect to Company’s financial condition” and
that:
[McDevitt] assumes full responsibility for keeping fully informed of Company’s
financial condition and all other circumstances affecting Company’s ability to
perform the Guaranteed Obligations, and agrees that [KLS] will have no duty to
report to [McDevitt] any information which [KLS] receives about Company’s
financial condition or any circumstances bearing on Company’s ability to perform
all or any portion of the Guaranteed Obligations.
Id. § 5.
The Conditional Guaranty contained the acknowledgement that McDevitt would “obtain
substantial direct and indirect benefits from the issuance of the Note.” Id. § E.
III.

KLS Allegations of Recourse Events
Sensei’s travails continued after the Transaction closed on January 9, 2017. Those

challenges, and the disclosures and actions that were made both before and after the Note was
sold to KLS, form the basis for KLS’s action seeking to enforce the Conditional Guaranty. They
fall into three general categories.
A.

Porter Wright Agreements and Threatened Litigation

On March 14, 2014, before Sensei began its negotiations with KLS and almost three
years before the Transaction, Sensei entered into an agreement with Porter Wright Morris &
Arthur (“Porter Wright”) to represent it in connection with a private placement of securities by
Sensei. The written agreement succeeded a 2013 oral agreement with Porter Wright to provide

8

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services jointly to McDevitt and Sensei (together, with the written agreement, the “Porter Wright
Agreements”). Dkt. No. 59 ¶ 13.
The written agreement was addressed to Sensei, care of McDevitt as Manager and CEO.
It listed the services Porter Wright would perform on behalf of Sensei but recited that “since the
Company is not yet established, we will look to you individually for payment of any outstanding
invoices in the event the Company does not pay such invoices in a timely manner.” Dkt. No.
45-9.
Thereafter, Porter Wright issued invoices to McDevitt and to Sensei for services
rendered. On June 26, 2014, Porter Wright invoiced McDevitt approximately $125,201.97. Dkt.
No. 45-10; Dkt. No. 45-15, Ex. A. On December 12, 2014, Porter Wright issued two invoices to
Sensei totaling approximately $35,857.04. Dkt. No. 45-10.
Sensei and McDevitt did not pay their bills. In an email to McDevitt dated November 25,
2015, Mary Beth M. Clary of Porter Wright said that her “firm wants to sue you [McDevitt]
personally and Sensei for payment.” Dkt. No. 45-11. The email stated, in full:
Sean,
You’ve not answered any of my emails. I know you are struggling financially,
but it really disappoints me when you ignore me. I have always trusted you and
believed that when you say something, you will follow through. You made a
commitment to me to pay Porter Writer $5,000 per month. After the first
payment in September and a $50 payment in early October, we’ve not heard
anything from you or Sensei. I think after all these years, I deserve better than
that. If you can’t make the promised monthly payment, you should have told me
and we could have worked out a different payment plan.
We are now at a crossroads. My firm wants to sue you personally and Sensei for
payment. I’ve held them off thinking that is not the best approach for any of us.
But if you don’t communicate with me, I don’t think there is any other choice. Let
me know if that is what you want. If you do not respond to this email within the
next 7 days, that will say it all.
Id. (emphasis added).

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Sensei did not list either of the Porter Wright Agreements or the threat by Porter Wright
to institute litigation in the Disclosure Schedule it provided in connection with the Note Purchase
Agreement.
At the time of the Transaction’s closing, in January 2017, McDevitt claims that he
personally owed $125,000 and Sensei owed $35,000 to Porter Wright. Dkt. No. 53 ¶ 14.
Plaintiff disputes that the $125,000 amount was owed by McDevitt alone; it states that McDevitt
and Sensei jointly owned $125,000 to Porter Wright. Dkt. No. 58 ¶ 14.
On April 26, 2017, four months after the Transaction, Porter Wright filed a complaint
against Sensei and McDevitt in the County Court for the Twentieth Judicial Circuit in Collier
County, Florida. Dkt. No. 45-10. It alleged that Sensei had failed to make payments to Porter
Wright under the written agreement, causing Porter Wright damages in the amount of the
$35,307.04 it was owed under that agreement plus accrued interest at the time of the filing of that
action. Id. ¶¶ 14, 25. Porter Wright brought claims of breach of contract, open account, account
stated, and quantum meruit/unjust enrichment against Sensei. With respect to the oral
agreement, the complaint listed under the header, “general allegations as to Sean D. McDevitt
and Sensei, LLC,” that “[i]n 2013 and 2014, McDevitt hired Plaintiff to provide[] certain
Services to McDevitt and Sensei pursuant to an oral contract and an open account” and
“[s]pecfically, on or around September 2013, Defendant McDevitt hired Plaintiff to assist him
with the acquisition, reorganization and merger of Sensei, Inc. and Sensei Acquisitions, LLC.”
Id. ¶¶ 15-16. The complaint brought a claim of breach of oral contract against only McDevitt
seeking damages of $125,431.97, and brought claims of open account, account stated, and
quantum meruit/unjust enrichment against both McDevitt and Sensei seeking the same damages
amount. Id. ¶¶ 54, 59, 67-68, 76. Attached to the complaint were two letters from Porter Wright

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addressed to McDevitt: one advised him that “Sensei, LLC is indebted to Porter Wright, Morris
& Arthur LLP in the sum of $35,307.04” and the other advised him that “you are indebted to
Porter Wright, Morris & Arthur LLP in the sum of $125,431.97.” Id., Exs. C, E.
Sensei and McDevitt did not disclose the Porter Wright complaint to KLS when it was
filed.
On or about September 20, 2017, McDevitt entered into a settlement agreement with
Porter Wright on behalf of himself and Sensei. The agreement required Sensei and McDevitt,
defined as defendants, to pay Porter Wright a total of $80,000 in settlement of the lawsuit. Dkt.
No. 45-18.
Three months later, in December 2017, an update report was sent on behalf of McDevitt
to the two other Sensei board members, who also were KLS representatives. Dkt. No. 45-17. It
included a discussion of “Legal matters” that disclosed a lawsuit filed against Sensei to recover
on a finder’s agreement (discussed below) and another disagreement totaling $10,000. Id.
Notably, it contained no mention of the Porter Wright lawsuit or the Porter Wright settlement
agreement.
McDevitt and Sensei are alleged to have breached the settlement, and Porter Wright
brought suit against Sensei and McDevitt to recover outstanding amounts owed under the terms
of the settlement agreement. KLS learned about the lawsuit on May 30, 2018 when McDevitt
sent the related filings to Ashley Reynolds (“Reynolds”), who had replaced McDevitt as CEO of
Sensei, and Reynolds forwarded them to KLS. Dkt. No. 45-20 (email from Reynolds to KLS,
“This is mostly FYI but it appears Porter Wright is now suing Sean”). In June 2018, McDevitt
informed KLS that he alone would be resolving the Porter Wright legal matter. Dkt. No. 59 ¶ 22.

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On June 27, 2018, the county court entered a final judgment in favor of Porter Wright and
against Sensei and McDevitt “jointly and severally” in the total amount of $152,196.51. Dkt.
No. 45-21.
B.

Finder’s Agreement and Litigation

Sometime in 2016, and before the Transaction, Sensei entered into a Compensation,
Non-Circumvention, and Non-Disclosure Agreement (“Finder’s Agreement”) with Jonathan
Schwartz (“Schwartz”), an individual who was identified as having relationships with third
parties and investment banking entities involved in investing in early stage companies. Dkt. No.
45-22.4 The Finder’s Agreement states that it “is made as of November 6, 2015” by Sensei and
“its officers, principals, affiliates, related entities, and any entities owned or controlled by them”
“in favor of” Schwartz. Id. It is signed by McDevitt as CEO of Sensei and by Schwartz, but
there are no dates next to the signatures. It contemplated that Schwartz would be compensated if
a third party with whom Schwartz had a relationship either invested in Sensei or later found an
investor for Sensei. In particular, the Finder’s Agreement stated that, if one of these third parties
invested in Sensei or introduced Sensei to an investor, then Schwartz was to be paid a finder’s
fee in the amount of 7% of that investment to be paid simultaneously with the investment. In
addition, the Finder’s Agreement also provided that, if Sensei executed an investment in
violation of the Finder’s Agreement (e.g., by not paying Schwartz simultaneously), then
Schwartz would be entitled to a commission from Sensei of 15% of the total value of the
transaction in addition to any other compensation due Schwartz.

4

McDevitt has claimed in a sworn affidavit that the agreement was executed in late September
2016 but that they backdated the agreement to November 6, 2015. Dkt. No. 45-28 ¶ 15. He also
submits email correspondence that shows Schwartz sending him the executed agreement on
September 12, 2016. Dkt. No. 49-7.
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The Finder’s Agreement was not disclosed to KLS or listed in the Disclosure Schedule to
the Note Purchase Agreement.
On June 2, 2017, Schwartz filed a lawsuit in the Southern District of New York against
Sensei, claiming that he had identified an investment banking entity, Odeon Capital Group, LLC
(“Odeon”), to invest in Sensei and was entitled to a finder’s fee under the Finder’s Agreement.
Dkt. No. 45-23.5 Specifically, Schwartz alleged that he had introduced Sensei to Odeon in
March 2016, that Odeon had identified KLS as an investor which then went on to invest $2
million in Sensei through the Transaction in January 2017, and that Schwartz demanded payment
of the 7% fee on January 13, 2017 but that Sensei and McDevitt had not responded to the
demand. Id. ¶¶ 40, 46-47. The complaint further recited that, on February 9, 2017, Schwartz’s
attorneys had written to Sensei demanding that, in addition to the 7% fee of the $2 million
investment (or $140,000), Sensei pay Schwartz the liquidated damages amount of $300,000
(representing 15% of the $2 million investment). Id. ¶ 50. The complaint alleges that Sensei had
refused to pay on the grounds that Schwartz was acting as an unregistered broker-dealer. Id.
¶ 51. In the lawsuit, Schwartz claimed that Sensei breached the Finder’s Agreement by failing to
pay him either the 7% fee or the liquidated damages, and he sought damages in an amount not
less than $300,000. Sensei, not McDevitt, was the only named defendant.
McDevitt learned of the suit shortly after the June 2, 2017 filing date. Dkt. No. 59 ¶ 31;
Dkt. Nos. 45-24, 45-26; see also Dkt. No. 45-25 (“In June of 2017, Sensei was notified by Jack
Martel, Sensei’s attorney, that a complaint had been filed with a court in New York.”). An email
from Sensei’s counsel to McDevitt and Sensei’s Chief Financial Officer, Alexander Furer
(“Furer”), dated June 8, 2017, forwarded an email from Schwartz’s counsel, attaching a copy of

5

See Schwartz v. Sensei, LLC, No. 17-cv-4124 (S.D.N.Y.).
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the complaint. Dkt. No. 45-26.6 McDevitt maintains that Schwartz did not identify any investor
who invested in Sensei, but rather that a person named Edmund Zack (“Zack”) provided Odeon’s
contact to him and that Odeon identified Sensei. Dkt. No. 53 at 8-9.
Sensei and McDevitt did not disclose either the February 9, 2017 demand or the June 2,
2017 lawsuit to KLS. Dkt. No. 59 ¶ 32.
Sensei did not answer the complaint or appear in the Schwartz litigation. On September
27, 2017, the Honorable Robert W. Sweet, District Judge, to whom the case was assigned,
entered a default judgment in favor of Schwartz and against Sensei for $395,492.60 plus
post-judgment interest. Dkt. No. 45-27.
McDevitt claims to have learned of the default judgment on November 8, 2017, when he
observed that Sensei’s operating account had a $0 balance and that the funds in the operating
account had been garnished. Dkt. No. 45-25. He retained a law firm to represent Sensei on
November 9, 2017 and reported the Schwartz lawsuit to Sensei’s board (i.e., himself and the two
KLS representatives) on November 10, 2017. Id.; Dkt. No. 45-24; see also Dkt. No. 59 ¶ 32. In
that same report, McDevitt informed KLS that the most likely outcome, based on advice from
counsel, would be that Sensei would have to pay $140,000 over an extended period of time as
well as attorneys’ fees. Dkt. No. 45-25. Notwithstanding the June 2017 email from counsel to
McDevitt and Furer attaching the complaint, McDevitt stated that he did not have a copy of the
formal complaint document. Id.
On November 15, 2017, Sensei sought a temporary restraining order and preliminary
injunction preventing Schwartz from executing on the default judgment; it submitted a

6

In an affidavit filed in the Schwartz litigation in support of vacatur of the default judgment,
McDevitt asserted that the first time Sensei knew of the existence of this action was on or about
November 8, 2017. Dkt. No. 45-28 ¶ 20.
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declaration of McDevitt in support of the application. Dkt. No. 45-28. In the declaration,
McDevitt asserted that the first time Sensei learned about the existence of the action and the
default judgment was on November 8, 2017. Id. ¶ 20. He also asserted that Schwartz’s
“execution on its improperly obtained default judgment is causing irreparable harm to [Sensei],”
id. at 7, and that “[t]he freezing of [Sensei’s] operating and business accounts . . . has prevented
[Sensei] from continuing to operate its business,” id. ¶ 26. McDevitt went on to state that the
“harm caused by freezing the two Silicon Valley Bank accounts is devastating to [Sensei’s]
business, the lives of its employees, and the lives of its customers.” Id. ¶ 31.
The litigation premised on the Finder’s Agreement resulted in legal fees of at least
$58,142.52 as of November 5, 2018. Dkt. No. 59 ¶ 36; Dkt. No. 45-29 at 4.
The default judgment was ultimately vacated on November 30, 2017. The case was
referred to the Honorable Sarah Netburn, Magistrate Judge, for settlement in April 2018 and for
all purposes in September 2018. See Schwartz v. Sensei, LLC, 2020 WL 5817010, at *2-3
(S.D.N.Y. Sept. 30, 2020). The parties reached a settlement and the court dismissed the action
with prejudice on September 5, 2018. However, the parties were unable to finalize the
settlement agreement and the action was restored to the court’s calendar on February 13, 2019.
Schwartz filed an amended complaint that added McDevitt, Furer, and Odeon as defendants.7
Each of the defendants moved to dismiss.
On February 14, 2020, the court denied Sensei’s motion to dismiss as moot because
Sensei consented to entry of a default judgment. The court said it would address the issue of
damages after a decision on the remaining motions to dismiss.
A “court may take judicial notice of [] document[s] filed in another court ‘not for the truth of
the matters asserted in the other litigation, but rather to establish the fact of such litigation and
related filings.’” Int’l Star Class Yacht Racing Ass’n v. Tommy Hilfiger U.S.A., Inc., 146 F.3d
66, 70 (2d Cir. 1998) (quoting Kramer v. Time Warner Inc., 937 F.2d 767, 774 (2d Cir. 1991)).
7

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On September 30, 2020, the court dismissed the complaint against McDevitt, Furer, and
Odeon, and said it would address the allegations against Sensei separately. See id. at *11. For
the purposes of analyzing liability for McDevitt and Furer, and without ruling on Sensei’s
liability, the court found that Schwartz stated a plausible claim that Sensei breached the Finder’s
Agreement by failing to pay Schwartz a finder’s fee for his introduction of Sensei to Odeon who
in turn introduced Sensei to KLS. But the court declined to pierce the corporate veil for the
breach of contract claim and other state law claims as to McDevitt and Furer and thus dismissed
all claims against them.8 The sole remaining defendant in that action is now Sensei.
C.

Failure to Timely File and Pay Taxes

From at least 2014, Sensei had a practice of withholding payroll taxes from employees
but not remitting those funds to the appropriate state or federal tax authorities. Plaintiff learned
of this practice during due diligence on the Transaction. Dkt. No. 59 ¶ 39. The practice also was
disclosed in the Disclosure Schedule, which noted that Sensei “owes back taxes for payroll in a
number of states and federally.” Dkt. No. 45-5.
As described above, in the Note, Sensei had covenanted to “[t]imely file all required tax
returns and reports and timely pay all foreign, federal, state, and local taxes, assessments,
deposits and contributions owed by the Company.” Dkt. No. 45-1. In the Conditional Guaranty,
McDevitt had agreed to pay any amounts then due and owing under the Note if either of the
following Recourse Events had occurred:
(1) under Recourse Event (c), there was “a material breach of the material terms
of the Note (including, without limitation, with respect to . . . liens) . . . directly or
indirectly caused by [McDevitt],” or
(2) under Recourse Event (f), “the Company becomes liable for any taxes,
penalties, fees or similar charges under foreign, federal, state or local tax laws or
8

The court dismissed the claims brought against Odeon for reasons not relevant to this opinion.
See Schwartz, 2020 WL 5817010, at *5.
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applicable rules or regulations, the payment of which would materially and
adversely affect [the] Company, the Company’s prospects or the prospects of
repayment of the Note, and any such liability arises from circumstances not
described in Section 2.19 of the Disclosure Schedule to the Purchase Agreement
which were caused directly or indirectly by [McDevitt] or which [McDevitt]
knew or should have known to exist after conducting reasonable investigations.”
Dkt. No. 45-3.
On August 9, 2017, the Georgia Department of Revenue issued a lien against Sensei for
$55,464.30. Dkt. No. 45-36.
In addition, after the closing of the Transaction and while the Note was still outstanding,
Sensei failed to timely file and pay its federal taxes for the first and second quarters of 2018,
resulting in thousands of dollars of penalties for Sensei. Dkt. No. 59 ¶¶ 37, 41. In the summer of
2018, McDevitt with the help of his tax advisor belatedly filed federal tax forms (without
payment) for Sensei’s third quarter 2016; the late filing resulted in a $10,700.19 penalty for
filing tax returns after the due date, $4,779.72 in added interest, and over $12,000 in additional
penalties for late filing and federal tax deposit penalties. Id. ¶ 40; Dkt. No. 45-31 at 27-28.
Sensei also failed to timely make tax payments to various state authorities. Between
January 1, 2018, and May 25, 2018, Sensei made no tax payments and owed money for
California state unemployment insurance tax and employment training tax, federal
unemployment tax, Georgia unemployment tax, and Texas unemployment tax. Dkt. No. 59 ¶ 42;
Dkt. No. 45-34. In that same time period, Sensei made incomplete payments and owed money
for California personal income tax and state disability tax and Georgia income tax. Dkt. No. 59
¶ 42. The Georgia Department of Revenue showed a late filing and an outstanding balance of
$1,076.65 as of March 31, 2017, and a delinquent filing for March 31, 2018. Id. ¶ 43; Dkt. No.
45-35.

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1.

KLS Demands That McDevitt Personally Pays Sensei’s Taxes

On May 17, 2018, McDevitt was terminated as CEO of Sensei and was replaced by
Reynolds. Dkt. No. 59 ¶ 61; Dkt. No. 45-57.
On May 31, 2018, McDevitt wrote to KLS that he was “actively pursuing liquidity to
make a $350,000 contribution to the company to address back taxes.” Dkt. No. 59 ¶ 47; Dkt.
No. 45-38. The next day, he wrote to KLS with an update on his “liquidity to pay the taxes as
discussed.” Dkt. No. 45-39. He had “$250,000 available next week” and was “[w]orking on the
last $100,000” and “[e]xpect[ed] to have that soon.” Id.
On June 6, 2018, McDevitt wired $51,237.99 to Sensei’s operating account to pay for
Connecticut, Georgia, and California back taxes. Dkt. No. 49-10; Dkt. No. 60-32. On June 15,
2018, McDevitt wired $6,000 to Sensei’s operating account to pay for additional taxes and
penalties due to Georgia. Dkt. No. 49-10; Dkt. No. 60-33. Between June and July 2018,
McDevitt made various other deposits into Sensei’s operating account that he claims were
intended to pay for Sensei’s tax obligations. Dkt. No. 58 ¶ 53; Dkt. No. 49-10. All together,
these deposits totaled $165,202.28. Dkt. No. 58 ¶ 53; Dkt. No. 49-10. He also made payments
to state departments in varying amounts. Dkt. No. 49-11.
On June 27, 2018, McDevitt wrote again to KLS that he would keep KLS “informed on
the tax and legal matters” and that “[w]e have almost all of them resolved and I expect to have
the federal taxes resolved soon.” Dkt. No. 45-40.
On August 2, 2018, McDevitt wrote to KLS: “Good news on selling assets to meet the
$300K escrow demand. I expect to have the balance within the week.” Dkt. No. 45-41.
On August 14, 2018, KLS sent an email to McDevitt with the subject line “SEAN
WHERE ARE WE ON FUNDS?” without text in the body of the email. Id. McDevitt
responded that same day to say that he was “currently unwinding some illiquid investments that I
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have in real estate” that he was “having to sell . . . at a discount” and that “[b]ottom line, it will
probably take another two weeks before I have the cash in hand.” Id.
KLS responded the same day, saying that it was “unacceptable” because on August 2,
McDevitt had “told us you expected to have the rest of the 300k by the end of last week” and
“[w]hen we followed up last week you said you expected it to come this week.” Id. KLS further
stated it was “not sure you appreciate the financial position the Company is currently in. With
working capital swings, there will be a point in the near term where the Company is insolvent.”
Id. McDevitt replied, “I understand the frustration. If the company is wound down, I, alone, bear
a gigantic liability.” Id.
2.

Offer in Compromise

At least as early as June 2018, McDevitt asked his tax advisors at Joe Mastriano P.C.
(“JMPC”) to help Sensei with an Offer in Compromise (“OIC”), a process that allows companies
that have minimal assets, and therefore cannot afford to pay to settle large liabilities, to settle
their tax liabilities for less than the full amount owed. Joe Mastriano (“Mastriano”) and
Lekshmy Ravindranathan (“Ravidranathan,” and also known as Linda Pologruto) worked on the
OIC. Dkt. No. 45-43; Dkt. No. 48-4.
On September 6, 2018, McDevitt emailed a KLS representative to inform him that:
Our advisors have been in communication with the IRS and both sides are moving
forward on an Offer in Compromise of $19,920 to settle the legacy IRS taxes.
Please see the draft submission. Our advisors are planning to submit the Offer in
Compromise soon and are asking for a payment of $5,000 to continue work.
Dkt. No. 45-48. When asked by KLS whether the OIC was “agreed upon by the IRS through
these talks,” McDevitt responded that his “advisors have told me that they believe this is the
amount the IRS will agree to” and that they have had “multiple conversations with the IRS to
arrive at this number.” Id.

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On October 21, 2018, McDevitt emailed the KLS representatives that an OIC “is
currently being negotiated with the IRS,” that he “expect[s] to have updates every couple of
weeks until the offer in compromise is fully agreed to and settled,” and that Sensei “is not under
any threat of collection in the meantime, as we are pursuing a settlement.” Dkt. No. 45-50.
On October 25, 2018, McDevitt stepped down as Chairman of Sensei’s board and was
replaced with Patrick Cua (“Cua”). Dkt. No. 59 ¶ 62; Dkt. No. 45-58.
On November 17, 2018, McDevitt emailed Cua and Reynolds only—not KLS
representatives—to announce that “[w]e achieved a great deal with the IRS,” “[w]e are awaiting
final approval of the pay structure of the Offer in Compromise,” and “[w]e expect final approval
very soon.” Dkt. No. 45-52.
On November 28, 2018, an OIC was submitted to the IRS on behalf of Sensei to resolve
Sensei’s federal taxes. The OIC set forth a minimum offer of $16,351.88. McDevitt was listed
as the primary contact on the OIC form despite Reynolds being CEO of Sensei. Dkt. No. 45-51;
Dkt. No. 48-5.
On December 10, 2018, Reynolds emailed the KLS representatives to inform them that
the OIC had been filed but that they needed to “send two checks as per Sean’s email in order to
start the process of IRS review of our OIC and subsequent acceptance.” Dkt. No. 48-8. He said
that the “process is a tad more complex than previously described” and that “unfortunately,” they
would not “know how complex until we provide the IRS with the initial payment” of the two
checks. Id. He also said that Sensei did not currently have a contract with Mastriano’s office to
provide his tax advisory services because Mastriano had been operating under an older
agreement with McDevitt. Mastriano requested that Sensei execute a contract with a $5,000
down payment and $195 per hour with a total estimate of fees between $12,000 and $15,000. Id.

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On December 11, 2018, Reynolds emailed KLS to state that he and Cua agreed that “it
makes sense for us to pursue our course with Mastriano/OIC and work with the offer that’s on
the table.” Id. That meant drafting the initial OIC checks totaling $3,500 and signing a contract
with Mastriano that would “require an additional $5k payment to them.” Id. After Reynolds
confirmed that Sensei had sufficient funds in the operating accounts for such a course of action, a
KLS representative responded, “Ok. Agreed then.” Id.
On December 17, 2018, KLS emailed McDevitt after Sensei received an email from
Mastriano claiming Sensei owed it money for prior work done. Dkt. No. 45-55. McDevitt
responded that he had already paid for Sensei-related work by both Sensei and himself. He also
said, “My recommendation as stated often has been to pay the two checks to the IRS totaling
(one for $186 and one for about $3,200ish) so that the Offer in Compromise can be wrapped up
and put to bed.” Id. He added, “My recommendation is also that those checks be paid and the
countersignature be obtained by the end of the year as the agent wants to close this account out.”
Id. Later in the email thread, on the same date, McDevitt relayed a history of the OIC: “We
reached an Offer in Compromise for approximately $16K to settle past IRS taxes for 2014-2016
in November of this year. In order to get the countersigned OIC documents, two checks have to
be received by the IRS. One check is for $186 and the other for 20% of the OIC amount....about
$3,100. All of this documentation has been made available to Ashley. I assume he has shared it
with you.” Id.
On December 19, 2018, Reynolds emailed the KLS representatives to relate a discussion
he had with Cua. He said, “We both agree and feel as you both do about Mastriano and Sean;
however, Pat [Cua] made several points that I agree with.” Dkt. No. 48-8. He noted that Sensei
was “starting at a substantial deal of $16k to satisfy well over $500k in back taxes and there is no

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guarantee that our next tax representation will come up with the same amount.” Id. Moreover,
the amount paid to Mastriano for his services “is negligible (approx.. $8,200 ($3,200 fee to IRS
+ $5k payment to Mastriano)” and that “[t]ransitioning to new representation at this point will
put us backwards by at least 6 mos.” Id. Reynolds noted that Ravindranathan at JMPC “is both
a CPA and an attorney and we doubt she would jeopardize her credentials by lying to us about
the OIC.” Reynolds suggested “offer[ing] performance-based pricing to Mastriano and defer any
cash outlay now.” Id.
On January 4, 2019, Reynolds emailed the KLS representatives again, saying he had
negotiated the down payment to Mastriano from $5,000 to $2,000 and asked if he had their
permission to send the payment. Id. KLS responded, “No.” and asked “Whats the feedback
from the schwartz side about giving us some time to evaluate and get up to speed?” Id.
Plaintiff decided not to pursue an OIC and ultimately advanced a line of credit of up to
$720,000 to Sensei to pay off its tax liabilities. Dkt. No. 45-16 ¶ 14. Sensei used $570,000 of
that credit to pay off the liabilities. Id. Plaintiff asserts that Sensei does not have the assets to
repay the loan. Id.
IV.

KLS Foreclosure on Sensei’s Assets
Sensei did not pay the $3.33 million in principal owed to Plaintiff upon the Note’s

maturity date on January 9, 2019. On January 29, 2019, Plaintiff sent a notice to Reynolds and
Cua at Sensei that pursuant to the Note, KLS would sell at a public sale all of Sensei’s assets,
including its intellectual property, that was the collateral pledged due to Sensei’s default. Dkt.
No. 48-1, Ex. 11. As a result of the foreclosure sale, KLS did not obtain any money, but rather
ended up with title to Sensei’s collateral. Dkt. No. 48-1 at 293:20-296:3; see also Dkt. No. 58
¶ 67.

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PROCEDURAL HISTORY
KLS filed this action with a breach of guaranty claim on April 26, 2019 to recover $3.6
million from McDevitt, which it alleges is the payment due under the Note, including accrued
interest to date. Dkt. No. 1 ¶ 5. McDevitt filed an answer on July 15, 2019. Dkt. No. 13. The
case proceeded under the Honorable Debra C. Freeman, Magistrate Judge, for general pretrial
purposes. Dkt. No. 15.
The action was transferred to the undersigned on February 6, 2020.
KLS and McDevitt each filed a motion for summary judgment on June 5, 2020. Dkt.
Nos. 39, 42. They filed their opposition briefs on June 22, 2020, Dkt. Nos. 55, 57, and their
reply briefs on June 29, 2020, Dkt. Nos. 63, 66. Within McDevitt’s opposition brief, he also
moved to strike KLS’s Rule 56.1 Statement and memorandum in support of its motion for
summary judgment. Dkt. No. 57. Oral argument was held on December 4, 2020.
LEGAL STANDARD
Summary judgment is appropriate when the record shows that there is no genuine dispute
as to any material fact and the moving party is entitled to judgment as a matter of law. Fed. R.
Civ. P. 56(a); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). “An issue of fact is
‘material’ for these purposes if it ‘might affect the outcome of the suit under the governing
law,’” while “[a]n issue of fact is ‘genuine’ if ‘the evidence is such that a reasonable jury could
return a verdict for the nonmoving party.’” Konikoff v. Prudential Ins. Co. of Am., 234 F.3d 92,
97 (2d Cir. 2000) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). In
determining whether there are any genuine issues of material fact, the Court must view all facts
“in the light most favorable to the non-moving party,” Holcomb v. Iona Coll., 521 F.3d 130, 132
(2d Cir. 2008), and the movant bears the burden of demonstrating that “there is no genuine
dispute as to any material fact,” Fed. R. Civ. P. 56(a).
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If the movant meets its burden, “the nonmoving party must come forward with
admissible evidence sufficient to raise a genuine issue of fact for trial in order to avoid summary
judgment.” Jaramillo v. Weyerhaeuser Co., 536 F.3d 140, 145 (2d Cir. 2008). It may not rely
on “mere speculation or conjecture as to the true nature of the facts,” Hicks v. Baines, 593 F.3d
159, 166 (2d Cir. 2010) (citation omitted), or “on the allegations in [its] pleading, or on
conclusory statements, or on mere assertions that affidavits supporting the motion are not
credible,” Gottlieb v. Cnty. of Orange, 84 F.3d 511, 518 (2d Cir. 1996) (internal citation
omitted). Rather, to survive a summary judgment motion, the opposing party must establish a
genuine issue of fact by “citing to particular parts of materials in the record,” Fed. R. Civ. P.
56(c)(1)(A), and demonstrating more than “some metaphysical doubt as to the material
facts,” Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986); see
also Wright v. Goord, 554 F.3d 255, 266 (2d Cir. 2009). If “the party opposing summary
judgment propounds a reasonable conflicting interpretation of a material disputed fact,”
summary judgment shall be denied. Schering Corp. v. Home Ins. Co., 712 F.2d 4, 9-10 (2d Cir.
1983).
Local Civil Rule 56.1 of the Local Rules for the Southern District prescribes the manner
and method in which a party is to present undisputed issues of fact to the Court. The moving
party must annex to its notice of motion “a separate, short and concise statement, in numbered
paragraphs, of the material facts as to which the moving party contends there is no genuine issue
to be tried.” S.D.N.Y. Loc. Civ. R. 56.1(a). The party opposing the motion must “include a
correspondingly numbered paragraph responding to each numbered paragraph in the statement of
the moving party, and if necessary, additional paragraphs containing a separate, short and
concise statement of additional material facts as to which it is contended that there exists a

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genuine issue to be tried.” S.D.N.Y. Loc. Civ. R. 56.1(b). All statements in a Local Rule 56.1
submission “must be followed by citation to evidence which would be admissible.” S.D.N.Y.
Loc. Civ. R. 56.1(d). “Each numbered paragraph in the statement of material facts set forth in
the statement required to be served by the moving party will be deemed to be admitted for
purposes of the motion unless specifically controverted by a correspondingly numbered
paragraph in the statement required to be served by the opposing party.” S.D.N.Y. Loc. Civ. R.
56.1(c).
Pursuant to Local Civil Rule 56.1, the movant’s “statements are deemed to be admitted
where [the non-moving party] has failed to specifically controvert them with citations to the
record.” Knight v. N.Y.C. Hous. Auth., 2007 WL 313435, at *1 (S.D.N.Y. Feb. 2, 2007); see,
e.g., Cayemittes v. City of N.Y. Dep’t of Hous. Pres. & Dev., 974 F. Supp. 2d 240, 243 (S.D.N.Y.
2013) (holding that denials that are not supported by citations to admissible record evidence are
to be disregarded); see also N.Y. Teamsters Conf. Pension & Ret. Fund v. Express Servs., Inc.,
426 F.3d 640, 648-49 (2d Cir. 2005) (upholding grant of summary judgment where “[t]he district
court, applying [Northern District of New York’s analogue to S.D.N.Y. Loc. Civ. R. 56.1]
strictly, reasonably deemed [movant’s] statement of facts to be admitted” because the nonmovant submitted “offered mostly conclusory denials of [movant’s] factual assertions and failed
to include any record citations”); Colton v. N.Y. Div. of State Pol., 2017 WL 5508911, at *2
(N.D.N.Y. Feb. 8, 2017) (“The failure to properly controvert a supported statement of fact by
pointing to admissible evidence contravening the movant’s evidence results in the movant’s
statement being deemed admitted.”).

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DISCUSSION
I.

Defendant’s Motion to Strike
In his brief opposing Plaintiff’s motion for summary judgment, Defendant asks the Court

to strike Plaintiff’s Rule 56.1 Statement and its memorandum of law on the grounds that they are
“replete” with unfounded factual assertions and legal arguments and that the same statements
that appear in Plaintiff’s memorandum of law also appear in the Rule 56.1 statement. He further
argues that the Court should strike the declaration of Michael Zarrilli (“Zarrilli”), Dkt. No.
45-16, in support of Plaintiff’s motion for summary judgment as not based on personal
knowledge. The application is denied.
A.

Rule 56.1 Statement and Memorandum of Law

With one arguable exception, Plaintiff’s Rule 56.1 Statement conforms to the local rule
requirement that statements submitted in support of a motion for summary judgment should
include “a separate, short and concise statement, in numbered paragraphs, of the material facts as
to which the moving party contends there is no genuine issue to be tried.” S.D.N.Y. Loc. Civ. R.
56.1(a). The statements about which Defendant complains, for the most part, are simple and
concise statements of what Plaintiff contends to be undisputed material facts. They include that:
“Sensei’s financial status was weak,” Dkt. No. 47 ¶ 19; “McDevitt knew, or should have known,
of Sensei’s tax liabilities accruing after January 9, 2017. McDevitt also caused and knew about
the late filings,” id. ¶ 45; “McDevitt’s misrepresentations resulted in Sensei facing additional
taxes and penalties,” id. ¶ 58; and “[n]either Sensei nor McDevitt have paid the amounts owed to
KLS” and “[t]o date, the entire $3.33 million, plus accrued interest, remains outstanding,” id.
¶ 64.
Some of these factual assertions may have legal meaning and legal consequences, such as
that the claim that “McDevitt knew, or should have known, of Sensei’s tax liabilities.” Id. ¶ 45.

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Others, Defendant argues, are not supported by the evidence. But “the Court can also disregard
legal conclusions or unsubstantiated opinions in a Local Rule 56.1 statement.” Congregation
Rabbinical Coll. of Tartikov, Inc. v. Vill. of Pomona, 138 F. Supp. 3d 352, 394 (S.D.N.Y. 2015),
aff’d sub nom. Congregation Rabbinical Coll. of Tartikov, Inc. v. Vill. of Pomona, NY, 945 F.3d
83 (2d Cir. 2019); see also Simmons v. Woodycrest Ctr. for Human Dev., Inc., 2011 WL 855942,
at *1 n.1 (S.D.N.Y. Mar. 9, 2011) (disregarding plaintiff’s responding statement of undisputed
facts that did “not cite to record evidence to support any of its contentions,” and where “several
of its ‘facts’ are, in actuality, legal conclusions”). This Court is capable of reading the
statements and the evidence and of citing to the statements only insofar as they are supported by
the evidence, and it has done so in this opinion.
The single exception is paragraph 57 of Plaintiff’s Rule 56.1 Statement. That paragraph
spans five pages and has ten paragraphs, each of which has between one and three subparts. It
thus is in technical violation of Local Civil Rule 56.1 which requires each “separate, short and
concise statement” to be contained within its own numbered paragraph. S.D.N.Y. Loc. Civ. R.
56.1(a). But Defendant has demonstrated no prejudice. The purpose of Local Civil Rule 56.1 is
to permit the non-moving party simply to admit or deny each separate statement standing on its
own and thus to facilitate a court’s review of the summary judgment record. That purpose thus is
satisfied if each statement is in its own standalone paragraph, permitting the non-moving party
either to admit or deny the statement and if denying the statement, to identify facts supporting its
counterstatement. That objective was satisfied here. Although each statement is not in a
“numbered” paragraph, it is in a standalone paragraph. Plaintiff’s Rule 56.1 Statement permits
the Court to do its job in analyzing the summary judgment record and permits Defendant to

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identify facts that it contends are in genuine dispute. It will not be stricken.9 See Holtz v.
Rockefeller & Co., 258 F.3d 62, 73 (2d Cir. 2001) (“A district court has broad discretion to
determine whether to overlook a party’s failure to comply with local court rules.”).
Finally, Plaintiff cannot be faulted for including in its memorandum of law, in haec
verba, the same factual assertions that are contained in the Rule 56.1 Statement. Defendant
complains that both Plaintiff’s Rule 56.1 Statement and memorandum of law contain assertions
such as “[t]he disclosure schedule appended to the Purchase Agreement fails to include the
Porter Wright Agreements, and McDevitt failed to disclose them” and “McDevitt did not
disclose these threats to KLS.” Dkt. No. 57 at 4. But this Court’s Individual Practices in Civil
Cases encouraged this practice by requiring that “the memorandum of law itself . . . must set
forth all material facts in a fact section” and not just incorporate the Rule 56.1 Statement by
reference. See Rule 3(D)(i) of this Court’s Individual Practices in Civil Cases. The Court will
not strike those statements.
B.

Zarrilli Declaration

Defendant also argues that the declaration of Michael Zarrilli in support of Plaintiff’s
motion for summary judgment should be stricken as it is not based on personal knowledge. See
Dkt. No. 57 at 7-10. Federal Rule of Civil Procedure Rule 56(c)(4) requires that “[a]n affidavit
or declaration used to support or oppose a motion must be made on personal knowledge, set out
facts that would be admissible in evidence, and show that the affiant or declarant is competent to
testify on the matters stated.” Fed. R. Civ. P. 56(c)(4). Thus, for example, an assertion made
“on information and belief” or a “hearsay assertion that would not be admissible at trial if
9

In Congregation Rabbinical College of Tartikov, the court denied defendant’s motion to strike
plaintiffs’ Rule 56.1 statement, even though it was 998 paragraphs long, supported by 11
declarations and 370 exhibits, included “redundant or incomprehensible facts,” and contained
improper legal conclusions. The court concluded that the appropriate outcome was not to strike
the statement but simply to disregard the faulty sections. 138 F. Supp. 3d at 396-97.
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testified to by the affiant” cannot be relied upon to support or contest summary judgment.
Patterson v. Cnty. of Oneida, N.Y., 375 F.3d 206, 219 (2d Cir. 2004); see Sarno v. Douglas
Elliman-Gibbons & Ives, Inc., 183 F.3d 155, 160 (2d Cir. 1999) (assertion by affiant as to what
he was told was not competent evidence sufficient to defeat summary judgment).
Zarrilli was Chief Operating Officer of KLS at the time of the Transaction and remains in
that position. In that capacity, he signed the Note Purchase Agreement on behalf of KLS. Dkt.
No. 45-2. He also signed the Note and it was his email address to which Notices were to be sent
by Sensei under the Note. Dkt. No. 45-1. He is also listed as the person to whom notice to KLS
was required to be delivered under the Conditional Guaranty. Dkt. No. 45-3 ¶ 15. He makes his
declaration “upon personal knowledge, except as otherwise noted.” Dkt. No. 45-16 ¶ 2.
Certain of the assertions in Zarrilli’s declaration are hearsay, such as the assertion that he
has “seen communications in which [McDevitt] portrayed the process [of making an OIC to the
IRS] as quick, easy, and virtually guaranteed to succeed,” and that “[w]hen the KLS
representatives who served on the Sensei board learned that, in fact, the OIC process could take a
year or more, . . . they decided not to continue to pursue McDevitt’s proposed OIC.” Id. ¶ 13.
They will be disregarded.
Other statements by Zarrilli, however, are based on personal knowledge. These
statements include the statements that “[n]either [he], nor to [his] knowledge, KLS was aware of
the Porter Wright Agreement until Porter Wright sued Sensei,” id. ¶ 6, KLS did not know of the
threat to sue Sensei prior to the closing of the Transaction, id. ¶ 7, “[n]either [he], nor to [his]
knowledge, KLS was aware of the Finders Agreement until Jonathan Schwartz sued Sensei,
obtained a judgment, and restrained Sensei’s bank account, all of which was well after the
closing of the Transaction,” id. ¶ 9, and “KLS was not aware of the Schwartz lawsuit claiming

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breach of the Finders Agreement until after Schwartz obtained a judgment and restrained
Sensei’s accounts,” id. ¶ 11. Those statements will not be disregarded and, because they are not
controverted by admissible evidence, will be taken as true for purposes of summary judgment.
II.

The Cross Motions for Summary Judgment
“A guaranty is ‘the promise to answer for the payment of some debt or the performance

of some obligation, on default of such payment or performance, by a third person who is liable in
the first instance[.] It is an obligation to answer for the debt of another.’” Terwilliger v.
Terwilliger, 206 F.3d 240, 246 (2d Cir. 2000) (citation omitted). It is a “contract of secondary
liability,” and “[a] guarantor will be required to make payment only when the primary obligor
has first defaulted.” Id.
Under New York law, in cases involving debt owed under guaranty obligations, “a
plaintiff establishes its prima facie entitlement to summary judgment by establishing the
execution of the agreements at issue and nonpayment thereunder.” GCCFC 2006-GG7
Westheimer Mall, LLC v. Okun, 2008 WL 3891257, at *2 (S.D.N.Y. 2008) (citation omitted); see
also TD Bank, N.A. v. Clinton Ct. Dev., LLC, 965 N.Y.S.2d 129, 132 (2d Dep’t 2013) (plaintiff
established its prima facie entitlement to judgment “by presenting evidence of the existence of
the promissory notes and personal guarantees executed by each of the guarantors . . . and their
failure to make payment in accordance with the terms of those instruments”).
“The interpretation of a guaranty is governed by the same principles that govern the
interpretation of other forms of contract.” In re S. Side House, LLC, 470 B.R. 659, 675 (Bankr.
E.D.N.Y. 2012) (citing Gen. Phoenix Corp. v. Cabot, 89 N.E.2d 238, 241 (1949)). “A guaranty
is a contract, and in interpreting it we look first to the words the parties used.” G3-Purves St.,
LLC v. Thomson Purves, LLC, 953 N.Y.S.2d 109, 112 (2d Dep’t 2012) (quoting Louis Dreyfus
Energy Corp. v. MG Ref. & Mktg., Inc., 812 N.E.2d 936, 939 (2004)). It also “must be read in
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the context of the loan agreement which was executed contemporaneously.” Id. “[T]he court
should arrive at a construction which will give fair meaning to all of the language employed by
the parties to reach a practical interpretation of the expressions of the parties so that their
reasonable expectations will be realized.” Id. (citation omitted).
“Under New York law, guarantee agreements must be strictly construed according to
their terms.” Chase Manhattan Bank, N.A. v. Am. Nat. Bank & Trust Co. of Chi., 93 F.3d 1064,
1073 (2d Cir. 1996); see also Ninety-Five Madison Co., L.P. v. Vitra Int’l AG, 2020 WL
1503640, at *5 (S.D.N.Y. Mar. 30, 2020); AXA Inv. Managers UK Ltd. v. Endeavor Cap. Mgmt.
LLC, 890 F. Supp. 2d 373, 380 (S.D.N.Y. 2012). Thus, “[a] guarantor’s obligation must be
‘narrowly construed and cannot be extended by construction beyond the plain and explicit
language of the contract.’” Chase Manhattan Bank, 93 F.3d at 1073 (citation omitted). But what
that means is that “a guaranty within the four corners of a specific contract should not be used to
create perpetual indebtedness.” AXA Inv. Managers, 890 F. Supp. 2d at 380; see Citibank, N.A.
v. Jacobsen, 2020 WL 7046841, at *6 (S.D.N.Y. Dec. 1, 2020) (“[C]ourts must interpret
guaranties strictissimi juris, meaning that courts must protect guaranties against liabilities that
are not strictly within their terms.”). At the same time, a “surety is not entitled to any particular
tenderness in the interpretation of the language of his contract.” Compagnie Financiere CIC et
de L’Union Europeenne v. Merrill Lynch, Pierce, Fenner & Smith Inc., 188 F.3d 31, 34 (2d Cir.
1999). A “written agreement that is complete, clear and unambiguous on its face must be
enforced according to the plain meaning of its terms.” G3-Purves, 953 N.Y.S.2d at 112 (citation
omitted).

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Plaintiff has established the existence of the Conditional Guaranty and non-payment.
The only remaining question is whether Plaintiff has established the absence of a genuine fact
issue that payment was due, i.e., that a Recourse Event has occurred.
Plaintiff argues that Recourse Events (a), (c), and (f) were triggered by events relating to
the Porter Wright Agreements, the Finder’s Agreement, and the failure to pay taxes, and that the
occurrence of those Recourse Events triggers McDevitt’s obligations under the Conditional
Guaranty. These provisions, “when read in conjunction with the loan agreement entered into
contemporaneously, operat[e] to define the terms and conditions of personal liability.”
G3-Purves, 953 N.Y.S.2d at 113.
Specifically, Plaintiff argues that there is no genuine issue of fact that McDevitt or
Sensei: (1) made willful or intentional misrepresentations or omissions of material fact by failing
to disclose the Porter Wright Agreements, the Finder’s Agreement, and their related litigation,
and made willful or intentional misrepresentations about the OIC process (Recourse Event (a));
(2) materially breached the Note by failing to promptly disclose the Porter Wright litigation and
Schwartz litigation, by failing to timely file and pay taxes, and by permitting a lien to be filed
against Sensei’s assets by the Georgia Department of Revenue (Recourse Event (c)); and (3)
incurred taxes, penalties, or interest that materially and adversely affected Sensei as caused by or
known to McDevitt (Recourse Event (f)). Dkt. No. 43 at 1-2.
McDevitt’s motion for summary judgment argues that no Recourse Events occurred and
therefore there are no remaining obligations under the Conditional Guaranty because: (1) “the
amounts owed to Porter Wright were minimal and McDevitt will be paying off all amounts owed
by Sensei and McDevitt”; (2) McDevitt had a good-faith belief that Schwartz was not entitled to
a finder’s fee prior to closing the Transaction; (3) Plaintiff decided not to pursue the OIC to

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resolve Sensei’s tax obligations but rather loan Sensei $720,000 to pay the taxes; and
(4) Plaintiff’s actions in foreclosing Sensei’s assets have extinguished any further obligations of
Sensei to Plaintiff and in turn McDevitt’s liability under the Conditional Guaranty. Dkt. No. 53
at 1.
The Court considers the motions together, in each case construing the evidence in the
light most favorable to the non-moving party.
A.

Recourse Events Related to Porter Wright
1.

Porter Wright Agreements

There are genuine issues of material fact as to whether McDevitt made an intentional or
willful misrepresentation in the Note Purchase Agreement by stating that it had disclosed all
obligations of Sensei in excess of $50,000 without disclosing the Porter Wright Agreements.
Recourse Event (a) requires a finding that Sensei or McDevitt made an intentional or
willful misrepresentation or intentionally or willfully failed to disclose a material fact in
connection with the issuance of the Note or at any time that the Note is outstanding. Although
the omission trigger has a materiality qualifier, the misrepresentation trigger does not.
The Note Purchase Agreement contains a representation that, except for agreements
mentioned in the attached Disclosure Schedule and “[e]xcept for the Transaction Agreements,
there are not agreements, understandings, instruments or proposed transactions to which the
Company is a party or by which it is bound that involve (i) obligations (contingent or otherwise)
of, or payments to, the Company in excess of $50,000.” Dkt. No. 45-2 § 2.12(a).
Porter Wright had two agreements to provide services to Sensei at the time of the
Transaction: an oral agreement as to which at least McDevitt was party and a written agreement
to which Sensei was party. Dkt. No. 59 ¶ 13. Porter Wright issued two invoices to Sensei in the
total amount of $35,307.04 for the written agreement in December 2014. Dkt. No. 45-10, Ex. B.
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Because the Note Purchase Agreement required the disclosure only of obligations in excess of
$50,000, the written agreement did not have to be disclosed in the Transaction Documents and
its omission does not render any of Sensei’s statements in those documents to be
misrepresentations. Thus, there was no misrepresentation or actionable omission and Recourse
Event (a) was not triggered.
Porter Wright was also owed $125,201.97 as of June 2014 in connection with services
that it rendered to Sensei pursuant to an oral agreement. However, the representation in the Note
Purchase Agreement relates only to obligations of Sensei. Unlike other representations in the
Note Purchase Agreement that related as well to Sensei’s officers and directors, the agreements
representation did not relate to Sensei’s officers and directors and did not require the disclosure
of agreements as to which only McDevitt and not Sensei was an obligor.
There are genuine factual issues as to whether Sensei was an obligor under the oral Porter
Wright agreement. Plaintiff points to evidence that, in June 2018—long after the Transaction’s
closing—Porter Wright obtained a judgment against Sensei and McDevitt, jointly and severally
for $152,196.51. Dkt. No. 45-21. But that judgment was based on the breach of a settlement
agreement between Porter Wright, Sensei, and McDevitt, reached after the Transaction’s closing
and that required, in the event of a default, a payment from McDevitt and Sensei of $160,739.01,
minus any payments already made by them. Dkt. No. 45-18. Moreover, the underlying claim in
the Porter Wright complaint against McDevitt and Sensei alleged claims in quasi-contract against
Sensei and not in contract with respect to the oral agreement. The evidence thus is capable of the
interpretation that Sensei was not a party to the oral contract at the time of the Transaction and
only became liable in contract as a result of the settlement agreement.

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In support of its argument, Plaintiff also points out that Sensei carried a $145,000 liability
to Porter Wright in its internal files as an account payable before the Transaction and the same
liability in the amount of $150,000 after the Transaction, Dkt. No. 55 at 21, and also points to
correspondence on the closing date of the Transaction from Porter Wright to Sensei’s CFO,
Furer, that follows up on the “outstanding invoices from Porter Wright issued to Sensei and Sean
McDevitt,” Dkt. No. 60-2. But the internal files establish only that Sensei believed it had an
obligation to Porter Wright to $145,000, not that it in fact had such an obligation. A contract, of
course, requires a meeting of the minds and there is evidence that Porter Wright—the contractual
counterparty—believed that its obligor was McDevitt and not Sensei directly.
The invoices are to the same effect. The email from Porter Wright to Furer includes a
summary of the invoices: one set directed to Sensei for an amount below $50,000 and one set
directed to McDevitt alone in an amount over $125,000. Id. Moreover, although Furer proposed
to Porter Wright a payment plan that would have Sensei pay for the total amount (then due by
both McDevitt and Sensei) of $160,739.01, that document does not establish the reasons why
Sensei would be paying both sets of invoices—whether because it was liable to Porter Wright, in
satisfaction of McDevitt’s obligations to Porter Wright, or for some other reason.
Defendant submits a declaration from a partner at Porter Wright that states, based on
Porter Wright’s records, as of May 6, 2020, McDevitt “currently owes” Porter Wright
$110,431.97 and that Sensei “currently owes” Porter Wright $35,307.04. Dkt. No. 51 ¶¶ 4-5.
That declaration is based on the invoices that list McDevitt and Sensei as separate clients. Id.;
Dkt. No. 51-1. The letters from Porter Wright addressed to McDevitt advised him, in one letter,
that “you are indebted to Porter Wright, Morris & Arthur LLP in the sum of $125,431.97,” and

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in the other letter, that “Sensei, LLC is indebted to Porter Wright, Morris & Arthur LLP in the
sum of $35,307.04.” Dkt. No. 45-10, Exs. C, E.
This evidence is sufficient to create a genuine issue of material fact. Moreover, even if
there were no genuine issue of fact that Sensei was obligated to Porter Wright at the time of the
Transaction, Recourse Event (a) would only be triggered if Sensei and/or McDevitt made a
willful or intentional misrepresentation in connection with the failure to disclose the oral
agreement. Based, in part, on the open questions with respect to the identity of the obligor under
the oral agreement, the Court concludes there also are genuine issues of fact with respect to
intent or willfulness. See Patrick v. LeFevre, 745 F.2d 153, 159 (2d Cir. 1984) (“[W]here
subjective issues regarding a litigant’s state of mind, motive, sincerity or conscience are squarely
implicated, summary judgment would appear to be inappropriate and a trial indispensable.”).
2.

Threatened and Pending Porter Wright Litigation

There are no genuine issues of material fact that McDevitt made willful and intentional
misrepresentations or omissions of material fact in connection with the failure to disclose the
threatened and pending Porter Wright Litigation and that McDevitt caused a material breach of
the material terms of the Note in causing Sensei to fail to promptly report that threatened and
pending litigation.
Porter Wright’s November 25, 2015 email to McDevitt about the unpaid Porter Wright
bills threatened a lawsuit against Sensei with respect to those bills. See Dkt. No. 45-11 (email
from Porter Wright to McDevitt, stating “My firm wants to sue you personally and Sensei for
payment. I’ve held them off thinking that is not the best approach for any of us. But if you don’t
communicate with me, I don’t think there is any other choice. . . . If you do not respond to this
email within the next 7 days, that will say it all”). McDevitt (to whom the email was sent) knew
of the threatened lawsuit. The threatened lawsuit was not disclosed at the time of the
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Transaction. McDevitt did not report that threat to Plaintiff, promptly or not. Porter Wright
made good on its threat in April 2017 when it commenced a lawsuit against both McDevitt and
Sensei action seeking over $160,000 in payment. The lawsuit was not disclosed to KLS at the
time it was filed in April 2017 or even later in September 2017 when McDevitt entered into a
settlement agreement with Porter Wright on behalf of himself and Sensei. KLS learned about the
legal difficulties with Porter Wright only in May 2018 after Porter Wright sued McDevitt and
Sensei for breaching that settlement agreement and only when the filings were forwarded to
Plaintiff by Sensei’s new CEO, Reynolds. Dkt. No. 45-20. McDevitt admits that he did not
inform Plaintiff of the litigation until June 2018. Dkt. No. 59 ¶ 22.
McDevitt’s conduct in connection with the Porter Wright litigation triggered two separate
Recourse Events. First, Sensei’s failure to disclose Porter Wright’s threatened lawsuit at the time
of the Transaction triggered Recourse Event (a) because it rendered misleading the
representation that, except for agreements mentioned in the attached Disclosure Schedule,
“[t]here is no Action pending or to the Company’s knowledge, currently threatened (i) against
the Company or any officer, director or Key Employee of the Company.” Dkt. No. 45-2 § 2.9.
The litigation representation, unlike the agreements representation, is not limited to litigation
against Sensei. It includes actions threatened against “Sensei” or “any officer, director, or key
employee of Sensei.” Id. Nor is it qualified by a $50,000 or other monetary threshold. It states
that only that there is “no” action threatened or pending against the officers or directors other
than those referenced in the Disclosure Schedule, which did not disclose the Porter Wright threat.
Dkt. No. 45-5.
The Court has little difficulty concluding that the threatened litigation would be material.
See Morgan Art Found. Ltd v. Brannan, 2020 WL 469982, at *17 (S.D.N.Y. Jan. 28, 2020)

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(while “the question of materiality is generally left to the fact finder,” where “the evidence
concerning the materiality is clear and substantially uncontradicted . . . the question is a matter of
law for the court to decide”); see Restatement (Second) of Contracts § 241 (1981) (“In
determining whether a failure to render or to offer performance is material, the following
circumstances are significant . . . (a) the extent to which the injured party will be deprived of the
benefit which he reasonably expected.”); see also Hadden v. Consol. Edison Co. of N.Y., 312
N.E.2d 445, 449 (1974). Even if the threat were made against only Sensei for the amount it
owed under the written agreement, the invoice required Sensei to pay $35,307.04 at the time of
the Transaction, a substantial sum for a company McDevitt admits was “low on cash flow” and
trying to find “a path toward profitability.” Dkt. No. 53 ¶ 2; see also Dkt. No. 60-2. The threat
also presented the possibility of unknown litigation costs to Sensei.
Defendant also offers no evidence to refute the conclusion that his failure to disclose
Porter Wright’s litigation was intentional or willful. He admits the existence of the November
2015 email and offers no explanation as to why it was not disclosed to KLS before or at the time
of the Transaction. The Porter Wright email was not ambiguous. It threatened litigation against
both McDevitt and Sensei in no uncertain terms. It also was directed to McDevitt and Sensei,
and not to anyone else, and McDevitt himself was Sensei’s signatory on the Note Purchase
Agreement and the person making the representations. Finally, the fact that Sensei disclosed in
the Disclosure Schedule, and McDevitt must have thought about, threatened litigation in the
amounts due to vendors of $25,000, $8,700, and $1,500, leads to the ineluctable conclusion that
McDevitt’s failure to disclosure the much larger sum as to which Porter Wright was threatening
suit was intentional and willful. See Dkt. No. 45-5 § 2.9. Indeed, Sensei disclosed a settlement

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agreement with a vendor, MentorMate, in the amount of $155,257.19, a sum similar to—but less
than that—threatened by Porter Wright. Id.
Moreover, even if McDevitt and Sensei’s representations about threatened litigation were
not intentionally and willfully false at the time of the Transaction, McDevitt’s conduct in causing
Sensei’s failure to promptly disclose the Porter Wright litigation after it was filed breached a
covenant in the Note and, in turn, gave rise to Recourse Event (c).
Recourse Event (c) is triggered when McDevitt has directly or indirectly caused “any
material breach of the material terms of the Note.” Dkt. No. 45-3 § 1(c). The use of the word
“material” twice in Recourse Event (c) is telling. The Recourse Event is addressed not only to
breaches that “go to the root” of the Note as a whole, see VFS Fin., Inc. v. Falcon Fifty LLC, 17
F. Supp. 3d 372, 379-80 (S.D.N.Y. 2014) (defining a “material” breach as one that “go[es] to the
root of the agreement between the parties”) (quoting Frank Felix Assocs., Ltd. v. Austin Drugs,
Inc., 111 F.3d 284, 289 (2d Cir. 1997)), but also to those breaches that undermine or go to the
root of any of the Note terms that are themselves material, in the sense of being “significant” or
“essential,” Black’s Law Dictionary (11th ed. 2019) (also defining “material” as “[o]f such
nature that knowledge of the item would affect a person’s decision-making”); see also MerriamWebster Online Dictionary, https://www.merriam-webster.com/dictionary/material (last visited
Dec. 15, 2020) (“[H]aving real importance or great consequences.”). Recourse Event (c)
excludes breaches of Note terms that are themselves trivial, inconsequential, “slight, casual or
technical,” as immaterial breaches of material terms. WILJEFF, LLC v. United Realty Mgmt.
Corp., 920 N.Y.S.2d 495, 497 (4th Dep’t 2011) (citation omitted).
There can be little question that the affirmative covenant that Sensei must make “[a]
prompt report of any legal actions pending or threatened in writing against the Company” is a

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material term of the Note. Dkt. No. 45-1 § 5(b)(vi). It was one of several provisions in the
Transaction agreements that was significant and went to the heart of the agreement between
Sensei and Plaintiff. Plaintiff exposed itself to significant risk to Sensei, in general, and to
McDevitt, in particular, in connection with the purchase of the Note. It extended a large credit to
Sensei, a company that was failing, and put its faith in McDevitt, who was the CEO and
Chairman of Sensei (and a person to whom Sensei was indebted). See Dkt. No. 45-5
§ 2.12(a)(3). Plaintiff also bought for itself significant protection to mitigate against that risk.
One form of protection in the Note Purchase Agreement was the understanding that two KLS
representatives would be on the Sensei board. Another important set of protections, however,
was the information rights that Sensei extended directly to Plaintiff in the Note itself, including
the obligation of Sensei to deliver to Plaintiff monthly and annual financial statements, biannual
operating budgets and financial projections, management updates, and “legal action notice.” See
Dkt. No. 45-1 § 5(b)(vi).
Reflecting the importance of the legal action notice was the fact that the covenant was not
subject to a materiality threshold. Sensei was required to make a prompt report of “any” legal
actions pending or threatened in writing against itself. Another reflection of the importance of
that affirmative covenant is the fact that the drafters of the Note made a breach of that provision,
and of any of the other covenants, an Event of Default entitling Plaintiff—without more—to
accelerate all principal and unpaid accrued interest and make the Note due and payable
immediately, limiting any further risk to Plaintiff. See id. § 7(b) (stating an Event of Default
occurs when the “Company shall default in its performance of any covenant under this Note”).10

10

Indeed, the same conclusion follows from the language of the Conditional Guaranty itself
which lists as among the material terms of the Note—the violation of which would give rise to
Recourse Event (c)—the various negative covenants, including restrictions on indebtedness,
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There is no genuine dispute that Sensei breached the affirmative covenant and that
McDevitt caused that breach. The Note requires Sensei to make a “prompt” report of actual or
threatened legal action. “Prompt” means “performed readily or immediately.”
Merriam-Webster Online Dictionary, https://www.merriam-webster.com/dictionary/prompt (last
visited Dec. 15, 2020); Oxford English Dictionary Online, https://www.oed.com/view/Entry/
152488?isAdvanced=false&result=3&rskey=vX2RDD& (last visited Dec. 15, 2020) (“[R]eady,
quick; done, performed, etc., without delay.”). In the context of litigation, “prompt” must mean
shortly after Sensei became aware of the threatened or actual legal action. It must mean, in a
timeframe whereby the notice would be meaningful to Plaintiff and permit it to have
involvement in the legal action.
McDevitt breached that material obligation. As previously stated, McDevitt never
reported the November 25, 2015 email from Porter Wright threatening him and Sensei with
litigation. McDevitt did not report to KLS when Porter Wright initiated litigation in April 2017
or when Porter Wright and McDevitt, individually and on behalf of Sensei, entered into a
settlement agreement in September 2017. McDevitt also did not tell Sensei of litigation related
to breach of that settlement agreement until May 2018 when he forwarded an email to Reynolds,
who immediately sent it to KLS, and McDevitt did not tell KLS of the litigation until June 2018.
The litigation was notably absent from McDevitt’s report to Sensei’s board in December 2017.
See Dkt. No. 45-17. In sum, McDevitt failed to disclose the litigation to KLS until 14 months

liens, disposition of assets, distributions in respect of capital stock, payments of subordinated
indebtedness, intellectual property, or affiliate transactions. Dkt. No. 45-3 § 1(c). That list of
material terms “include[es], without limitation” the negative covenants. Id. Based on that list,
there is no reason to think that the contracting parties did not intend an affirmative covenant with
respect to litigation to also constitute a material term of the Note. Much like taking on
indebtedness or a lien, being subject to a lawsuit can impose a future limitation on the ability of
the target of the lawsuit to enjoy its assets. The affirmative covenant was a material term.
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after it was initiated and only after KLS learned of the lawsuit from someone else at Sensei the
month before.
Finally, the breach of the covenant was material. The Porter Wright lawsuit did not seek
de minimis damages, like some of the litigation or threatened litigation referenced in the
Disclosure Schedule. It sought total damages of $160,000 against Sensei and McDevitt jointly
and severally. The sum was 8% of the funds KLS advanced to Sensei and 16% of the funds
allocated for Sensei to use for its working capital. Dkt. No. 45-5 § 2.33. It was larger than all
but one of the items in the “Use of Proceeds” list in the Disclosure Schedule; it was larger than
the next largest items: a $140,000 fee to Odeon, overdue payroll expenses of $116,000, and a
$100,000 loan from Sensei to McDevitt personally. Id. And it was larger than any of the other
pending or threatened litigation disclosed in the Disclosure Schedule. Id. § 2.9
The delay in McDevitt’s reporting of the lawsuit to Plaintiff was also not immaterial or
inconsequential. In the first place, the Porter Wright litigation asserted claims against both
Sensei and McDevitt that McDevitt now asserts were the result of an obligation that McDevitt
alone (and not Sensei) owed. On that account, Sensei would have both important defenses
against Porter Wright as to the oral agreement and important crossclaims as against McDevitt.
The delay alone from when the lawsuit was filed in April 2017 until when it was disclosed to
KLS in the spring of 2018 had both the potential and effect of compromising those rights and the
ability to timely assert them in the litigation. Particularly where, as here, the litigation was
brought against both Sensei and McDevitt, and where the two obviously had differing interests,
McDevitt’s many month delay in reporting to KLS (whose interest was solely in Sensei) was
hardly immaterial.

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Moreover, as a matter of fact, from the time the lawsuit was filed in April 2017, until it
was ultimately disclosed by McDevitt to Reynolds in May 2018 (and by McDevitt to KLS in
June 2018), important events transpired and important decisions were made. McDevitt had the
opportunity to, and did, attempt to settle the litigation on behalf of himself and Sensei for a sum
of $80,000, and then to breach that settlement agreement. KLS bargained for the right to be
informed of litigation so it could have a say in such decisions. Instead, both the decision to agree
to pay that $80,000 and to resolve the litigation, and the decision not to satisfy the agreement,
were made entirely without KLS’s knowledge or involvement, as a result of McDevitt’s failure
to disclose.
McDevitt argues that it was not a material breach to omit the Porter Wright litigation
because “[o]nly if the judgment had been paid, thus actually depleting Sensei’s financial
resources, could Plaintiff even attempt to argue that a Recourse Event occurred” and Sensei
never paid any portion of the judgment. Dkt. No. 57 at 15-16. He argues, in essence, either that
no breach occurred or he should be relieved from the consequences of the breach under the
Conditional Guaranty because he ultimately agreed to satisfy or will agree to satisfy the Porter
Wright obligation.
There are two flaws with that argument. First, as a matter of contract interpretation of the
Note, KLS did not bargain just to be informed of a judgment rendered against Sensei after that
judgment was rendered but also for the right to be informed of a litigation or threatened litigation
before it resulted in a judgment or adverse consequences against Sensei and at a time that KLS
could take actions to protect itself and Sensei. That plainly did not happen here. McDevitt’s
argument conflates the obligation to timely inform KLS of pending or threatened litigation with
the consequences of the breach of that obligation. The obligation arises when litigation is either

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pending or threatened. The breach occurs when the disclosure does not happen “promptly,” and
the Recourse Event is triggered as long as the breach is material, as measured at the time the
breach occurs. Indeed, taken to its logical conclusion, McDevitt’s argument admits of the
possibility that there could never be a material breach of the affirmative covenant to timely
disclose a threatened or pending litigation for, under that argument, the obligation would not
arise until after the litigation is concluded and would never be triggered for litigation that is
resolved favorably. It would also permit McDevitt to be able to forestall, for an indefinite
period, the triggering of a Recourse Event by continuing to litigate and attempting to delay a
resolution until McDevitt decided he wanted to disclose to KLS. That plainly was not the intent
of the parties.
Second, and equally fundamentally, McDevitt’s argument misunderstands the nature of
the obligation he undertook pursuant to the Conditional Guaranty. That Conditional Guaranty
was not limited to (and did not include) McDevitt’s guarantee to bear the costs of any litigation
and judgment against Sensei. McDevitt guaranteed that, if he caused Sensei to materially breach
a material term of the Note (which would permit KLS to accelerate the Note), he would pay any
then remaining obligations of Sensei set forth in the Note, which included the full amount due
under the Note. The function of that provision, as KLS’s counsel noted at oral argument, was to
help ensure that Sensei would comply with those covenants and that KLS would enjoy the full
benefits it had bargained for under the Note when it agreed to extend significant financing to
Sensei. McDevitt was the CEO, Chairman, and majority shareholder; he was in a position
where, on the one hand, he could help ensure that Sensei complied with the covenants and, on
the other hand, could cause Sensei to breach those obligations. KLS wanted to ensure that he did
not cause Sensei to breach the obligations. It thus does not matter whether the litigation that

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caused the material breach resulted in any damages to Sensei. Neither the Note nor the
Conditional Guaranty contained a cure provision pursuant to which McDevitt—if he caused a
breach—could cure it and avoid a Recourse Event by paying the judgment. Once the material
breach occurred, KLS had the right to accelerate the Note as an Event of Default and to proceed
against McDevitt for any then remaining obligations. If McDevitt now believes that that result is
unfair and that he did not cause Sensei to default, his recourse—if any—is against Sensei. The
answer is not to deprive KLS of the guarantee on which it relied in purchasing the Note. Thus,
McDevitt’s promise that he will pay the judgment, as evidenced by the fact that he “is currently
in negotiations with a Court-appointed receiver to collect the judgment solely from him,” Dkt.
No. 57 at 16, does not immunize him from his obligations under the Conditional Guaranty. Cf.
G3-Purves, 953 N.Y.S.2d at 112-14 (rejecting argument that guarantor should be relieved of
obligations it owed because “the full amount sought by the lender under the loan is vastly out of
proportion to the amount of the liens resulting in the borrower’s defaults,” and holding that “the
carve-out provisions were bargained for as part of the guaranty [and] . . . affected the value of the
collateral that secured the loan, as they afforded the lender the protection required by causing the
borrower and the guarantors to be personally liable, thus enabling the lender to look beyond the
mortgaged property for repayment of the loan”).
The Court grants summary judgment in favor of Plaintiff with respect to Recourse Event
(c) concerning the threatened and pending Porter Wright litigation.
B.

Recourse Events Related to the Finder’s Agreement and the Schwartz
Litigation
1.

Finder’s Agreement

The Note Purchase Agreement required disclosure of all agreements involving
obligations in excess of $50,000, including contingent obligations. See Dkt. No. 45-2 § 2.12(a).

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“Contingent” is defined as “dependent on or conditioned by something else.” Merriam-Webster
Online Dictionary, https://www.merriam-webster.com/dictionary/contingent (last visited Dec.
15, 2020); see Oxford English Dictionary Online, https://www.oed.com/view/Entry/40248?
redirectedFrom=contingent (last visited Dec. 15, 2020) (“Liable to happen or not; of uncertain
occurrence or incidence,” “Incidental (to).”); see also Black’s Law Dictionary (11th ed. 2019)
(“Possible; uncertain; unpredictable,” “Dependent on something that might or might not happen
in the future; conditional.”). The purpose is evident from the context: before investing $2
million in Sensei, KLS wanted to know what potential obligations Sensei would face in the
future and to be able to judge for itself whether the contingencies would be realized.
The Finder’s Agreement was a contingent obligation in excess of $50,000. Sensei agreed
to provide a 7% cash commission to Schwartz on an investment size of up to $2 million if an
investor with whom Schwartz had a relationship invested in Sensei or, in the case of an
investment banking entity with which he had a relationship, if that entity introduced other parties
to Sensei who ultimately invested in Sensei. Dkt. No. 45-22 § 3. The Finder’s Agreement
provided that Schwartz would be paid only if at least $2 million was investment. See id.
(“Payments shall be made as the Investments are wired into the Sensei bank account, however,
no fee shall be paid until the first $2,000,000 is invested.”). Therefore, if a finder’s fee were to
be paid at all, it would be a minimum amount of $140,000 (7% of $2 million). Sensei’s
statement that it had no obligations (contingent or otherwise) in excess of $50,000 without
disclosing the Finder’s Agreement was a misrepresentation.
Though not necessary to the Court’s conclusion, the misrepresentation (and omission)
was material. If the contingent Finder’s Agreement occurred, Sensei would be required to pay at
least $140,000—7% of KLS’s investment in Sensei. At least $1 million—or half of the $2

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million investment—was already allocated to pay pre-existing debt obligations, which left only
$1 million for operations. Dkt. No. 45-5 § 2.33. That meant that if the contingency occurred,
14% of proceeds earmarked for Sensei’s operations would have to be spent on Schwartz.
McDevitt argues that he did not need to disclose the Finder’s Agreement because he
believed that the contingency that would have triggered Sensei’s obligation had not occurred and
would not occur. He asserts that Zack had introduced McDevitt to Odeon in March 2016, Odeon
introduced McDevitt to Plaintiff in July 2016, and that Schwartz was not a party to any of the
communications between Plaintiff, Odeon, and Sensei. Dkt. No. 53 at 19-20. McDevitt asserts
that he himself was not a party to any communications in March 2016 between Schwartz and
Odeon to set up a meeting with Sensei, and that he was not aware of the connection between
Schwartz and Odeon prior to the closing of the Transaction. Id. at 20; see Dkt. No. 57 at 17.
McDevitt further notes that on May 10, 2016, he, on behalf of Sensei, entered into an agreement
with Odeon for Odeon to provide financial advisory and investment banking services—which
was before the Finder’s Agreement signed on September 12, 2016. Dkt. No. 49-6. McDevitt
points to the Disclosure Schedule, which lists $140,000 owed to Odeon and $75,000 owed to
Zack, to argue that those payments demonstrate that he thought Zack and Odeon had connected
Sensei to Plaintiff, not Schwartz. Dkt. No. 53 at 9; Dkt. No. 45-5 § 2.33. Thus, he argues that
Odeon—not Schwartz—introduced KLS and that Sensei would have no obligation to Schwartz.
On that basis, he argues both that summary judgment should be denied as to KLS and granted in
his favor.
Plaintiff disputes McDevitt’s intent, arguing that McDevitt knew Schwartz connected
Sensei with Odeon and knew of the contingent obligation under the Finder’s Agreement, and
therefore acted intentionally or willfully in not disclosing the agreement. Plaintiff points to a

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March 30, 2016 email that Schwartz sent to Zack and Zack forwarded to McDevitt in which
Schwartz said, “have Sean [McDevitt] call Andrew Feldschreiber at Odeon Capital.” Dkt. No.
49-5. It further highlights an August 17, 2016 email that discusses drafting the Finder’s
Agreement in which Schwartz says to McDevitt, cc’ing Zack, “As it seems now, Odeon will be
orchestrating the deal, so I also added ‘investment banking entity’” to the draft Finder’s
Agreement. Dkt. No. 60-23. McDevitt responded on August 30, 2016, saying “I am fine with
7% on the first $2mm, regardless of where it comes from. If an additional $4 or $5mm is raised
through Odeon, a 7% cash fee on top of the fee I am paying Odeon is really rich.” Id.
McDevitt’s assertions, taken as true, would not have relieved him and Sensei from
disclosing the Finder’s Agreement. The Note Purchase Agreement required Sensei to disclose
contingent obligations. At the time of the closing, the Finder’s Agreement was still in place.
Regardless of whether the event that could trigger Sensei’s obligation to pay Schwartz had
occurred or would be likely to occur, the Finder’s Agreement at that time imposed a contingent
obligation on Sensei and thus had to be disclosed. It was not up to McDevitt to decide for
himself whether Sensei would have a $140,000 obligation to Schwartz. KLS bargained for the
right to be informed of any agreements that could—if a contingency occurred—result in an
obligation on the part of Sensei so it could judge for itself whether the circumstances had or
would occur and judge for itself whether—in light of that contingent obligation—it still wanted
to purchase the Note and invest $2 million into Sensei.
As to McDevitt’s intent or willfulness on this misrepresentation, however, the Court need
not reach the question of whether the undisputed evidence supports a finding for KLS on this
element because (1) the evidence does not support a judgment for McDevitt, and (2) regardless
of whether Recourse Event (a) occurred with respect to the failure to disclose the Finder’s

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Agreement at the time of the Transaction, there is no genuine dispute that Recourse Event (c)
occurred as a result of McDevitt and Sensei’s failure to promptly disclose the Schwartz
litigation.
2.

Schwartz Litigation

It is undisputed that McDevitt learned of the Schwartz litigation shortly after the
complaint in that action was filed on June 2, 2017. Sensei’s counsel emailed McDevitt on June
8, 2017 with a copy of the complaint. McDevitt did not report the litigation to KLS until
November 10, 2017. That report also stated that Sensei had been notified of the action in June
2017, when McDevitt was CEO and Chairman. In the interim, the court in that action entered a
default judgment in favor of Schwartz and against Sensei in the amount of $395,492.60 on
September 27, 2017, and McDevitt learned on November 8, 2017 that Sensei’s operating account
had been reduced to a balance of $0 and its funds garnished.
“Prompt” reporting cannot mean reporting as soon as an adverse action is taken. Nor can
it mean reporting only after Sensei and McDevitt were properly served. In the first instance, the
reporting obligation extends not only to pending legal actions but also to threatened legal actions
in writing—actions as to which there is no current filing and as to which, by definition, Sensei
and McDevitt have not been served. If McDevitt’s interpretation were right, the reference to
threatened actions and Sensei’s obligation to report such actions would be meaningless and the
rights for which KLS contracted would be rendered hollow.
Second, any alternative interpretation would defeat one of the purposes of prompt
reporting—that KLS would know in advance of a potential adverse outcome or forestall it.
Indeed, taken to its logical extension, McDevitt’s argument would mean that Sensei would not
have to report any litigation in which it was successful. By any measure of “promptness,”

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McDevitt and Sensei failed to report the litigation promptly, which was a material term of the
Note, for the reasons already described in this opinion.
There is no genuine issue that McDevitt caused the breach of Sensei’s affirmative
covenant to report to Plaintiff. The undisputed evidence shows that McDevitt learned of the
Schwartz litigation in early June 2017 and he did not report it until November 2017. He waited
five months—almost one quarter of the term of the Note—to comply with the Note’s affirmative
covenant.
Finally, the breach was material. The Schwartz lawsuit sought damages of not less than
$300,000, a full 15% of KLS’s investment in Sensei, or 30% of the funds available for Sensei’s
working capital. The delay in reporting was not a mere few days or weeks; it was five months
and it was consequential. The failure timely to investigate and answer a complaint has
consequences. As here, it can lead to default. Indeed, the delay was such that a default judgment
was entered against Sensei for $395,492.60 in November 2017. The lapse of time can also affect
a defendant’s ability both to defend itself and to proceed against others. It does not matter
whether Sensei ever lost any defenses. The point of the covenant was to permit KLS to have
input into whether there were defenses and how to assert them in a litigation that presented a
material threat to its investment.
McDevitt attempts to excuse his failure to report the litigation by asserting that he did not
think he needed to disclose the litigation because he believed that Schwartz did not properly
serve McDevitt or Sensei with the complaint and because they never received notice that
Schwartz would be seeking a default judgment against Sensei. Dkt. No. 53 at 20-21; Dkt. No. 57
at 17. There are at least two flaws in that argument.

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First, neither Recourse Event (c) nor the affirmative covenant requires KLS to plead or
prove intent or willfulness. It is not a defense to the affirmative covenant that McDevitt did not
think the litigation need be disclosed. Nor is it a defense to Recourse Event (c). Unlike
Recourse Event (a), which requires a finding of intent or willfulness, in the case of Recourse
Event (c), KLS bargained for and received the right to hold McDevitt liable on the guarantee
regardless of whether he intentionally or willfully caused a breach of a Note covenant. Under
the doctrine of expressio unius est exclusio alterius, when a term is expressly included in a
contractual provision, its exclusion from other provisions within the same contract reflects the
parties’ intent that the omission was intentional; such was the exclusion from Recourse Event
(c). See Hardy v. N.Y.C. Health & Hosp. Corp., 164 F.3d 789, 794 (2d Cir. 1999) (describing
“expressio unius est exclusio alterius” as the principle that “the mention of one thing implies the
exclusion of the other”); Matter of Trs. Established under the Pooling & Servicing Agreements
relating to the Wachovia Bank Com. Mortg. Tr. Com. Mortg. Pass-Through Certificates, Series
2007-C30, 375 F. Supp. 3d 441, 453 (S.D.N.Y. 2019) (“The Second Circuit has held that ‘the
presence of a phrase applicable to one factor makes clear that the phrase’s omission elsewhere
was deliberate.’”) (quoting United States v. Zukerman, 897 F.3d 423, 431 (2d Cir. 2018), cert.
denied, 139 S. Ct. 1262 (2019)); see also Bank of N.Y. Mellon Tr. Co. v. Morgan Stanley Mortg.
Cap., Inc., 821 F.3d 297, 306 (2d Cir. 2016) (“The failure to couch the request-for-cure provision
in the explicit language of condition is particularly significant here because the sophisticated
drafters elsewhere employed precisely such language.”); Novella v. Westchester Cnty., 661 F.3d
128, 142 (2d Cir. 2011) (finding that “the presence of [a] provision applicable to one type of
pension makes clear that the omission of that provision in the [same contract] governing another
type of plan was deliberate”).

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Second, and more fundamentally, McDevitt’s argument rests on a wholly implausible and
meritless reading of the affirmative covenant. The affirmative covenant applies both to pending
legal actions and to threatened legal actions. A filed complaint that is not properly served is still
“pending.” See Fed. R. Civ. P. 3 (“A civil action is commenced by filing a complaint with the
court.”); Charles A. Wright and Arthur R. Miller, 4 Fed. Prac. & Proc. Civ. § 1052 (4th ed. 2020)
(“Filing a complaint requires nothing more than delivery of the document to a court officer
authorized to receive it; the actual establishment of personal jurisdiction over the defendant, by
service of process or other means, is not essential to the commencement of the action.”); see also
United States ex rel. Wood v. Allergan, Inc., 899 F.3d 163, 172 (2d Cir. 2018) (“Legal
proceedings are instituted by the origination of formal proceedings, such as the filing of an initial
complaint.”). A pending action is one that is before a court but has not yet been decided. And,
even if an action were not pending, the sending of a complaint to McDevitt with an email that the
lawsuit has been filed would constitute a threat. Indeed, McDevitt’s interpretation of the
affirmative covenant would read the word “threatened” out of Sensei’s obligations. By his
definition, only proper service of a complaint makes a lawsuit pending, and only such a lawsuit
must be disclosed. But, if that is so, then there would never be a threatened lawsuit that would
have to be disclosed and Sensei’s obligation would be rendered illusory. See Lantheus Med.
Imaging, Inc. v. Zurich Am. Ins. Co., 255 F. Supp. 3d 443, 457 (S.D.N.Y. 2015), aff’d, 650 F.
App’x 70 (2d Cir. 2016) (“New York courts ‘will not adopt an interpretation that renders a
contract illusory when it is clear that the parties intended to be bound thereby.’”) (quoting
Blandford Land Clearing Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 698 N.Y.S.2d
237, 243 (1st Dep’t 1999)); see also Shaw Grp. Inc. v. Triplefine Int’l Corp., 322 F.3d 115, 124
(2d Cir. 2003) (“An interpretation of a contract that has the effect of rendering at least one clause

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superfluous or meaningless . . . is not preferred and will be avoided if possible.”) (citation
omitted).
McDevitt also argues that the breach was not material because he ultimately agreed to
satisfy Sensei’s obligation, the default judgment was improperly obtained, and the default
judgment was lifted. Dkt. No. 57 at 17; Dkt. No. 53 at 20. Relatedly, he argues that “the
disruption that was caused to Sensei and the legal fees expended to vacate the default judgment
are solely attributable to Mr. Schwartz’s deliberate misrepresentations to this Honorable Court,
not to any wrongdoing by Mr. McDevitt.” Dkt. No. 57 at 17; see Dkt. No. 53 at 21.
McDevitt’s arguments fall prey to the same flaw as with the Porter Wright litigation. The
affirmative covenant to promptly report litigation was not limited to litigation that turned out to
be meritorious or that required Sensei to make payments or impaired the ability of Sensei to
operate as a going concern. A separate Recourse Event, Recourse Event (b), addressed gross
negligence on the part of Sensei or McDevitt that “could materially and adversely affect
Company, the Company’s prospects or the prospects of repayment of the Note.” Dkt. No. 45-3
§ 1(b). The parties clearly knew how to limit an affirmative covenant or a Recourse Event to
actions that could materially or adversely affect Sensei’s ability to repay the Note. See Quadrant
Structured Prod. Co. v. Vertin, 16 N.E.3d 1165, 1172 (2014) (“If parties to a contract omit terms
. . . the inescapable conclusion is that the parties intended the omission.”). The affirmative
covenant to promptly report pending or threatened legal actions was intended to do something
else. It was intended to give KLS—which had extended substantial sums to Sensei—information
for planning, to mitigate its risk, and to permit KLS—if Sensei failed to provide it with such
information—to accelerate the Note and eliminate continuing risk.

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The Court grants summary judgment in favor of Plaintiff with respect to Recourse Event
(c) concerning the Schwartz litigation.
C.

Failure to Timely File and Pay Taxes

Plaintiff argues that Recourse Events (a), (c), and (f) were triggered in connection with
McDevitt’s misrepresentations and actions regarding Sensei’s taxes. The Court grants Plaintiff’s
motion for summary judgment with respect to Recourse Event (c), specifically McDevitt’s
breach of the Note’s affirmative covenant to timely file and pay taxes. The Court accordingly
need not and does not reach the question whether Plaintiff is entitled to summary judgment with
respect to Recourse Events (a) and (f).
Under the Note, Sensei agreed to the affirmative covenant to “[t]imely file all required
tax returns and reports and timely pay all foreign, federal, state and local taxes, assessments,
deposits and contributions owed by Company.” Dkt. No. 45-1 § 5(c). Plaintiff claims that
McDevitt caused Sensei to materially breach this affirmative covenant when Sensei failed to
timely pay its state and federal taxes in 2018. Specifically, Plaintiff points to Sensei’s failure to
timely file and pay its federal taxes for the first and second quarters of 2018, which resulted in
thousands of dollars of penalties for Sensei. In addition, between January 1, 2018 and May 25,
2018, Sensei made no tax payments and owed money to California, Georgia, and Texas state tax
authorities. McDevitt was Chairman and CEO of Sensei through May 17, 2018 and Chairman
through October 25, 2018; after his removal as CEO, he also agreed to continue to work with
JMPC to facilitate resolution of Sensei’s tax obligations. There is no genuine dispute that in his
capacities as CEO and as Chairman, McDevitt caused Sensei’s failure to timely file and pay
taxes.
The Note covenant required the “timely” filing and payment of taxes. This affirmative
covenant was a material term of the Note. The Note was negotiated and purchased against a
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backdrop of Sensei having failed to pay taxes in the past and having promised that it would
timely file and pay them in the future. Sensei specifically represented in the Note Purchase
Agreement that, with the exception of items listed in Section 2.19 of the Disclosure Schedule,
“[t]here are no federal, state, county, local or foreign taxes due and payable by the Company
which have not been timely paid” and that “[t]he Company has duly and timely filed all federal,
state, county, local and foreign tax returns required to have been filed by it.” Dkt. No. 45-2
§ 2.19. The Note then required Sensei to maintain this status quo by agreeing to “timely” file
and pay its taxes. Dkt. No. 45-1 § 5(c). Any failure to timely file, as well as to timely pay,
constituted an Event of Default and permitted KLS to accelerate the Note and require Sensei to
repay KLS its investment with interest. Id. § 7(b). Moreover, as with the affirmative covenant
to make a prompt report of “any” threatened or pending litigation, the affirmative covenant that
Sensei timely file and pay its taxes was not subject to a materiality threshold.
The obligation to “timely” file and pay taxes required Sensei to meet all applicable
deadlines both with respect to filing and with respect to payment. See Black’s Law Dictionary
(11th ed. 2019) (“Within a specified deadline.”); Merriam-Webster Online Dictionary, https://
www.merriam-webster.com/dictionary/timely (last visited Dec. 15, 2020) (“[C]oming early or at
the right time.”); Oxford English Dictionary Online, https://www.oed.com/view/Entry/202120?
rskey=Blh76u&result=1&isAdvanced=false#eid (last visited Dec. 15, 2020) (“Done or occurring
sufficiently early or in good time; prompt.”). There is no genuine issue of material fact that
Sensei failed to satisfy this covenant. Sensei filed its tax return for the first quarter of 2018 on
July 23, 2018, almost one month after the deadline of June 27, 2018, and also failed to pay the
full amount due, $31,597.28, by that deadline. Dkt. No. 45-31 at 72-73. It incurred penalties for
these actions that it did not pay off until February 21, 2019. Id. In addition, Sensei made no

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payments towards state taxes between January 1, 2018 and May 25, 2018 that became due after
the Transaction. Dkt. No. 45-34. Indeed, McDevitt does not argue that the tax returns, reports,
and taxes were not filed or paid “timely” or dispute that these tax liabilities are at issue.
McDevitt argues that the late filings and fees were not “directly or indirectly caused by”
him. Dkt. No. 45-3 § 1(c). That argument is based on the contention that the federal tax
liabilities in the first quarter of 2018 would have been settled by the OIC that McDevitt, along
with his tax advisors, submitted to the IRS in November 2018 but because KLS decided to
“simply pay off Sensei’s tax liability in full, against the advice of Sensei CEO Ashley Reynolds
and Chairman of the Sensei Board, Patrick Cua,” KLS stopped the OIC process. Dkt. No. 57 at
19; see also Dkt. No. 53 at 24-25. McDevitt argues that he deposited over $165,000 in Sensei’s
bank account between June and July 2018 in order to help personally pay Sensei’s taxes and also
negotiated certain state taxes. Dkt. No. at 26.
That argument misunderstands the obligation imposed by the affirmative covenant. The
affirmative covenant required Sensei to timely file and pay taxes. The breach of the affirmative
covenant thus occurred when Sensei failed to timely file the tax returns in 2018 and also failed to
timely pay the taxes associated with those returns. It did not address the settlement of tax
liabilities already incurred by the failure to timely pay or contain a loophole that would excuse
the failure to timely file or pay if McDevitt was able to settle with the IRS or contributed his own
funds to satisfying Sensei’s tax liabilities. Thus, whether McDevitt attempted to later reduce
those liabilities through the OIC process or by personal payments, or KLS paid the full amount
of the liabilities is irrelevant to whether a breach occurred. Nor is it relevant to whether the
breach was material. The time for measuring materiality would have been when the breach
occurred.

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The breach was material. McDevitt claims, in essence, that KLS manufactured its own
materiality by paying far more than was necessary to satisfy the IRS. But that argument rests on
an implausible and counterintuitive notion that KLS—which had a direct claim against Sensei
under the Note and expected repayment of the loan—would cause Sensei knowingly to waste or
dissipate Sensei’s assets. There is no evidence to support that contention.
Moreover, even if one were to credit McDevitt’s arguments that his strategy, rather than
the strategy Sensei adopted after his departure, was the right one, the failure timely to file and
pay was material. The amount of the liability was significant. So too were the consequences of
failure to timely file and pay. For the first quarter of 2018, the IRS assessed against Sensei a
total of $5,499 in late fees, penalties, and interest: $2,287 fee for late filing of the tax return, a
$254 penalty for late payment of the tax, $399 of interest for the late payment, and $2,559 in
related penalties. Dkt. No. 45-31 at 72-73. Sensei also owed at least $4,251 in state taxes by the
end of 2018. Dkt. No. 45-34. Altogether, Sensei owed $9,750 to the IRS for just the first quarter
of 2018 and to state tax authorities for 2018—a substantial amount for a company that, by
November 2018, had only roughly $16,000 in cash in its accounts and that still owed amounts to
various tax authorities for prior tax periods. Dkt. No. 53 at 23; Dkt. No. 45-51. Nor was the OIC
process, which had been negotiated for over a year, certain to resolve these overdue taxes and
penalties.11 The consequence of this material breach was that KLS had to loan its own money to

11

At her deposition, JMPC tax advisor Ravindranathan stated that even once the OIC was
submitted to the IRS, it would take an additional two months to receive confirmation of its
receipt and then an additional four to six months after that letter to connect with the IRS
examiner assigned to the case. Dkt. No. 48-5 at 12:7-23. Given that the OIC was submitted in
November 2018 (and Plaintiff disputes that it was submitted properly), it would take until at least
May or July 2019 for Sensei to speak with an IRS examiner about the OIC or, in best case
scenario, receive an acceptance letter. And even if such an offer is accepted, Sensei would likely
be required to comply with other terms of the OIC for the next five years, including to pay tax
returns and payments on time. Id. at 18:14-19:6.
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Sensei to cover these and other liabilities, thus leading KLS to pay for liabilities that Sensei and
McDevitt had promised not to create. The breach exposed Sensei to significant risk and required
a significant expenditure of time and effort. It does not matter if Sensei paid more than it would
have paid had McDevitt stayed in control (an assertion that is dubious). Even under McDevitt’s
approach, the risk and the liability were substantial.
D.

KLS Foreclosure

Finally, McDevitt relies on two provisions of the Note to argue that, regardless of
whether a Recourse Event was triggered, KLS’s foreclosure on Sensei’s assets means that there
are no remaining obligations of Sensei for which McDevitt can be held liable. Because Section 4
of the Note says the collateral is given to KLS “to secure the payment and performance in full of
all the Obligations,” McDevitt argues that once KLS is granted the collateral, Sensei has
“performed all of its obligations under the Promissory Note ‘in full’ and no further obligations
remain.” Dkt. No. 53 at 27-28. He then argues that, once these obligations are fulfilled, under
Section 7 of the Conditional Guaranty he would have continuing liability only if either payment
or performance of Sensei’s obligations is avoided or recovered from KLS, or KLS is required to
restore or return such payment or performance in connection with bankruptcy, insolvency, or
reorganization of Sensei or otherwise. Id.
McDevitt’s argument rests on a misunderstanding of the Note and the Conditional
Guaranty and would render meaningless important rights granted to KLS under the Conditional
Guaranty. The Conditional Guaranty gave KLS the right, “[u]pon a default of [Sensei] under the
Note,” to proceed against Sensei, McDevitt, or both, and provided that KLS “may elect to
exercise any remedy against [Sensei] or any collateral or any guarantor or other person” and
“[n]o such action by [KLS] will release or limit the liability of Guarantor [i.e., McDevitt].” Dkt.
No. 45-3 § 6.1. One of the important remedies KLS had against Sensei in the event of a default
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was the right to foreclose against Sensei’s collateral, defined as personal property of Sensei,
whether now owned or hereafter acquired, including all contracts, intellectual property, goods,
equipment, inventory, and fixtures, and money. See Dkt. No. 45-1 §§ 4, 7-8. Sensei granted to
KLS “a continuing security interest in, and pledge[d] to [KLS], the Collateral” in order “to
secure the payment and performance in full of all of the Obligations,” id. § 4, with Obligations
defined to mean KLS’s obligations “to pay when due any principal, interest, Make-Whole
premium, fees, [KLS] Expenses, and other amounts due pursuant to this Note,” id. § 15.
KLS’s remedies against Sensei in the event of a default were not in derogation of, but
were in addition to, KLS’s remedies against McDevitt under the Conditional Guaranty. Under
that agreement, McDevitt is “fully and personally liable for the payment and performance of any
then remaining obligations of Company set forth in the Note (collectively, the ‘Guaranteed
Obligations’) only in the event” of a Recourse Event. Dkt. No. 45-3 § 1. Contrary to McDevitt’s
interpretation of Section 7 of the Conditional Guaranty, that section does not limit McDevitt’s
liability but rather provides for its “continuance.” Id. § 7. Section 7 states that McDevitt’s
liability “shall continue in effect notwithstanding any payment or performance of the Guaranteed
Obligations by [Sensei] such that, if any such payment or performance is avoided or recovered
from [KLS] or [KLS] is otherwise required to restore or return any such payment or performance
in connection with the bankruptcy, insolvency or reorganization of [Sensei] or otherwise,
[McDevitt] shall remain liable hereunder as though such payment or performance had not
occurred.” Id. It does not say that McDevitt’s liability continues only if those situations occur; it
says that his liability continues despite their occurrence.
Thus, reading the documents together, and in particular reading Section 6.1 of the
Conditional Guaranty, KLS’s exercise of its rights against Sensei did not compromise its rights

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against McDevitt or “release or limit the liability of Guarantor.” Id. § 6.1. If the Collateral was
insufficient, McDevitt would pay for “any then remaining obligations” under the Note. That
interpretation comports with KLS’s public notice of the foreclosure sale in which it attempted to
sell the Collateral “in order to satisfy the Debtor [defined as Sensei] to the Secured Party
[defined KLS].” Dkt. No. 48-1.
CONCLUSION
Plaintiff’s motion for summary judgment is GRANTED. Dkt. No. 42. Defendant’s
motion for summary judgment is DENIED. Dkt. No. 39.
The parties are directed to appear for a telephonic conference on December 28, 2020 at
11:00 a.m. Parties should dial into the Court’s teleconference line at 888-251-2909, Access
Code 2123101, and follow the necessary prompts.

SO ORDERED.

Dated: December 15, 2020
New York, New York

__________________________________
LEWIS J. LIMAN
United States District Judge

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