Zadar Universal Corp. v Lemonis
Annotate this CaseDecided on September 16, 2020
Supreme Court, New York County
Zadar Universal Corp., Plaintiff,
against
Marcus Anthony Lemonis, ML FASHION, LLC, and INKKAS LLC., Defendants.
650902/2018
The Law Office of James C. Kelly, New York, NY (James C. Kelly of counsel), for plaintiff.
The Kagan Law Group, P.C., New York, NY (Linda S. Kagan of counsel), for defendants.
Gerald Lebovits, J.
Plaintiff, Zadar Univeral Corp., commenced this action against defendants, Marcus Anthony Lemonis, ML Fashion, LLC, and Inkkas LLC, for breach of contract, fraud, and unjust enrichment. Plaintiff has alleged that defendants failed to make required payments to plaintiff to satisfy a $250,000 cash loan provided by plaintiff to Inkkas. Defendants now move under CPLR 3212 (b) for summary judgment dismissing complaint. Plaintiff cross-moves under CPLR 3126 and 22 NYCRR 130-1.1 for sanctions against defendants and under CPLR 3124 to compel the production of certain documents.
BACKGROUND
On November 12, 2014, plaintiff received a $250,000 unsecured convertible promissory note from Inkkas. Section 3 (d) of the Zadar Note provides that if Inkkas undertakes a "Sale of the Company," plaintiff is entitled to receive written notice five days before the anticipated closing date, and also to receive a payment of 1.5 times the aggregate amount of principal and [*2]interest then outstanding under the note. (NYSCEF No. 40 at 2.) A Sale of the Company, as defined by § 3 (e) of the Zadar Note, includes
"any transaction or series of related transactions to which [Inkkas] is a party in which in excess of 50% of [Inkkas's] voting power is transferred; provided, however, that a Sale of the Company shall not include any transaction or series of transactions principally for bona fide equity financing purposes in which cash is received by [Inkkas] or any successor or indebtedness of [Inkkas] is cancelled or converted or a combination thereof." (NYSCEF No. 40 at 2-3.)On March 1, 2016, Gooberry Corp. invested in Inkkas as a secured senior noteholder through a secured demand promissory note. (See NYSCEF No. 71.) On May 24, 2017, the Gooberry Note was transferred to ML Fashion and then immediately transferred again to ML Retail. (See NYSCEF Nos. 76, 77.) The Gooberry Note provides the noteholder a collateral assignment option, which requires Inkkas to assign assets if Inkkas could not satisfy its debt.
On June 6, 2017, ML Retail demanded, pursuant to the Gooberry Note, that Inkkas assign ML Retail certain assets. Inkkas and ML Retail executed the Bill of Sale and Assignment, reducing Inkkas's debt by $429,937. The transferred assets included all of Inkkas's inventory, patents, and trademarks. (See NYSCEF No. 78.) Inkkas did not notify plaintiff about the asset transfers.
Plaintiff had sought a buyout of the Zadar Note from Lemonis before he invested in Inkkas. Lemonis gave several buyout options, and plaintiff answered by email that he could go forward with one of the options. (See Eisenman February 17, 2020 Deposition, NYSCEF No. 82 at 33-34.) Another letter sent from Lemonis to plaintiff, dated April 12, 2016, included the words "I will guaranty the payment." (NYSCEF No. 84 at 2.) But the buyout did not go through. Knowing that Lemonis would not buy the note, plaintiff decided on October 9, 2017, to convert the Zadar Note into Inkkas's equity. Plaintiff did not know about the asset transfers at the time it elected to convert the note. Plaintiff asserts that had it known about the asset transfers, it would not have elected to convert the Zadar Note into equity. Plaintiff did not sign the conversion agreement.
Plaintiff later sued defendants, arguing that Inkkas's asset transfers constituted a Sale of the Company under the Zadar Note—and thus that defendants breached their contractual obligations by not notifying plaintiff about the asset transfers or making the payments required by § 3 (d) of the Zadar Note. Plaintiff also asserts that Lemonis guaranteed the payment and that Lemonis made the guarantee only to avoid litigation. Plaintiff argues that Lemonis's guarantee was a fraudulent representation on which plaintiff reasonably relied and was consequently damaged. Defendants now move for summary judgment under CPRL 3212 (b). Plaintiff cross-moves to compel discovery and for sanctions.
DISCUSSION
I. Defendants' Motion for Summary Judgment
On a motion for summary judgment, the moving party must "make a prima facie showing of entitlement to judgment as a matter of law." (Alvarez v Prospect Hosp., 68 NY2d 320, 324 [1986].) The moving party's "failure to make a prima facie showing requires a denial of the motion, regardless of the sufficiency of the opposing papers." (Id.) In deciding the motion, the court must view the facts "in the light most favorable to the non-moving party." (Ortiz v Varsity Holdings, LLC, 18 NY3d 335, 339 [2011].)
A. Breach of Contract
Defendants argue that Inkkas's transfer of assets was not a Sale of the Company. In particular, defendants argue that the asset transfers were proper assignments of collaterals permitted by a senior secured note and that the transfers supersede the junior unsecured Zadar Note. Defendants also argue that the asset transfers qualify as an exception to a Sale of the Company under § 3 (e) (ii) of the Zadar Note. This court concludes that neither argument satisfies defendants' prima-facie burden at summary judgment.
With respect to the interaction between the Gooberry and Zadar Notes, defendants merely assume, rather than show, that Inkkas's obligations to Gooberry under the Gooberry Note would oust Inkkas's additional obligations to plaintiff under the Zadar Note. Thus, on the record before the court, the asset transfers that Inkkas undertook to satisfy its debt under the Gooberry Note could still constitute a Sale of the Company under the Zadar Note.
With respect to the Zadar Note's definition of Sale of the Company in § 3 (e), defendants rely on language in § 3 (e) (ii) of the note stating that the definition does not include transactions "principally for bona fide equity financing purposes in which . . . indebtedness of [Inkkas] is cancelled." (NYSCEF No. 40 at 2-3.) This language, though, fails in at least two respects to aid defendants. First, by its express terms, that language is merely a proviso limiting the scope of the definition of Sale of the Company in § 3 (e) (ii): "any transaction or series of related transactions to which [Inkkas] is a party" in which more than "50% of [Inkkas's] voting power is transferred." (Id. at 2.) There is no suggestion here that the transfers made by Inkkas to satisfy the Gooberry Note included a transfer of Inkkas voting power, as opposed to tangible and intangible assets. Section 3 (e) (ii) of the note—including its proviso—is thus inapplicable here. Second, even the § 3 (e) (ii) proviso were applicable, the asset transfer would only come within the scope of the proviso if it were undertaken "for bona fide equity financing purposes." (Id.) And defendants have not shown (and do not attempt to show) that the asset transfer here was made in order to obtain equity financing for Inkkas.
B. Fraud
Plaintiff has alleged that Lemonis committed fraud because he falsely stated that he would buy the Zadar Note, in order to avoid litigation. Defendants argue that Lemonis never guaranteed that he would buy the Zadar Note: any such guarantee would go into effect only if Zadar and Lemonis successfully concluded their negotiation for purchase of the Zadar Note, which did not occur. This court agrees.
Defendants have made a prima facie showing of entitlement to summary judgment. It is not disputed that the potential buyout of the Zadar Note did not go through. Defendants provide an affirmation from Robert G. Gerbers, Esq., counsel to defendants during the negotiations, to support their arguments that there was no guarantee. (NYSCEF No. 89.) No other evidence shows that Lemonis's statement during negotiations that "I will guaranty the payment" was fraudulent. Nor does plaintiff otherwise provide evidence creating a material dispute of fact on this question.
II. Plaintiff's Cross-Motion to Compel Discovery and for Sanctions
A. Plaintiff's Sanctions Request
Plaintiff asks this court to sanction defendants pursuant to CPLR 3126 and 22 NYCRR 130-1.1. Plaintiff asserts that defendants failed to produce relevant documents sought by plaintiff and moved for summary judgment prematurely, and that defendants did so with the improper purpose of delaying and prolonging this litigation. This court disagrees. As discussed further below, many of the documents sought by plaintiff are not relevant and material to the action. Nor does this court agree with plaintiff that defendants' motion for summary judgment—which is in part successful—was brought for an improper purpose.
B. Plaintiff's Discovery Requests
Plaintiff also cross-moves under CPLR 3214 to compel defendants to produce eight categories of documents itemized in plaintiff's motion papers. The motion to compel is granted in part and denied in part.
First category of documents: The investment documents into Inkkas by Lemonis, Gooberry, ML Retail, and ML Fashion are relevant to this case. A sale of Inkkas's ownership is an element of a Sale of the Company under the Zadar Note. Defendants must produce these documents within 45 days.
Second category of documents: The expenses, money transfers, invoices, and purchase/sale agreements show Inkkas's daily operation. They are irrelevant to this case.
Third category of documents: Gooberry and ML Retail are not parties to this case. The ownership structures of Gooberry, ML Retail, and ML Fashion are irrelevant to this case.
Fourth category of documents: There is no evidence that Inkkas had any bankruptcy filings, and, as defendants have proved, the taking of Inkkas's asset is an assignment rather than a foreclosure. There are no bankruptcy-related documents to turn over.
Fifth category of documents: Defendants provided the Gooberry Note. The evidence of money transfers pursuant to the Gooberry Note is unnecessary for this case.
Sixth category of documents: The Bill of Sale and Assignment and the list of sold assets together with the purchase price were provided already.
Seventh category of documents: The list of Inkkas's total indebtedness to ML Retail and related money transfers documents are irrelevant to this case.
Eighth category of documents: The documents related to the subsequent sale of Inkkas's assets are irrelevant to this case.
Accordingly, it is hereby
ORDERED that defendants' motion for summary judgment under CPLR 3212 is denied as to plaintiff's breach-of-contract claim, and granted as to plaintiff's fraud claim; and it is further
ORDERED that the branch of plaintiff's cross-motion seeking to compel discovery under CPLR 3214 is granted in part and denied in part as set forth above; and it is further
ORDERED that defendants shall produce the required documents within 45 days from the date of entry of this order; and it is further
ORDERED that the branch of plaintiff's cross-motion seeking the imposition of sanctions under CPLR 3126 and 22 NYCRR 130-1.1 is denied; and it is further
ORDERED that the parties shall appear for a telephonic status conference on October 16, 2020; and it is further
ORDERED that plaintiff's note of issue deadline is extended until October 19, 2020, with any further extensions to be discussed at the October 16 status conference.
DATE 9/16/2020
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