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Cato Capital LLC v. Hemispherx Biopharma, Inc.

United States District Court, D. Delaware

September 29, 2014


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[Copyrighted Material Omitted]

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For Cato Capital LLC, a Connecticut limited liability company, Plaintiff: Kevin Michael Coen, LEAD ATTORNEY, Morris, Nichols, Arsht & Tunnell, Wilmington, DE; Melissa R. Roth, Michael P. O'Day, Neil Dilloff, Tracey Turner, PRO HAC VICE.

For Hemispherx Biopharma Inc., a Delaware corporation, Defendant: David Gerard Holmes, Joseph Grey, LEAD ATTORNEYS, Christopher Page Simon, Cross & Simon, LLC, Wilmington, DE.

For The Sage Group, Inc., Defendant: David Gerard Holmes, LEAD ATTORNEY, Christopher Page Simon, Cross & Simon, LLC, Wilmington, DE.

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The plaintiff, Cato Capital LLC (" Cato Capital" ), brought this action for damages and attorneys' fees against Hemispherx Biopharma, Inc. (" Hemispherx" ) alleging breach of contract, and fraudulent inducement, and against The Sage Group, Inc. (" Sage" ) alleging fraud and intentional interference with contractual relationship.[1] (D.I. 46.) Cato Capital claims entitlement to damages and attorneys' fees.

The court held a three-day bench trial in this matter from March 4, 2013 through March 6, 2013. After the trial, each party submitted Proposed Findings of Fact and Conclusions of Law. (D.I. 185; D.I. 186.) Pursuant to Federal Rule of Civil Procedure 52(a), and after having considered the entire record in this case and the applicable law, the Court makes the following findings of fact and conclusions of law.


A. The Parties

Plaintiff Cato Capital is a limited liability company in the investment banking business that was formed in mid-2005. (D.I. 157, Ex. A at ¶ 1; D.I. 185 at ¶ 1; D.I. 186 at ¶ 1.) Solomon Lax (" Mr. Lax" ) is one of Cato Capital's Managing Directors. ( Id.) Defendant Hemispherx is a publicly traded biopharmaceutical corporation and Dr. William Carter (" Dr. Carter" ) is its Chief Executive Officer, Chief Science Officer, Chairman, and President. (D.I. 157, Ex. A at ¶ 2; D.I. 185 at ¶ 2; D.I. 186 at ¶ 2.) Defendant Sage is a consulting firm that advises healthcare and life science companies regarding transactions and strategy. (D.I. 157, Ex. A at ¶ 3;

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D.I. 185 at ¶ 3; D.I. 186 at ¶ 3.) Since 1995, Sage has provided Hemispherx with consulting services and assistance in locating investors to fund and promote Hemispherx's products. (D.I. 157, Ex. A at ¶ 5; D.I. 185 at ¶ 4; D.I. 186 at ¶ 3.) Wayne Pambianchi (" Mr. Pambianchi" ) is an Executive Director of Sage, as is Douglas Hulse (" Mr. Hulse" ). (D.I. 157, Ex. A at ¶ 3, 6; D.I. 185 at ¶ 3; D.I. 186 at ¶ 3.) Mr. Pambianchi acted as Hemispherx's representative in the negotiations, communications, and transactions from which the instant action arises. (D.I. 185 at ¶ 3; D.I. 186 at ¶ ¶ 15-16.)

B. Beginning of the Business Relationship and Negotiation of the Engagement Letter

In October 2008, Mr. Hulse made the acquaintance of Kathleen Millier (" Ms. Millier" ), a prospector for Cato Capital. ( Id. at ¶ 6.) Ms. Millier had just joined Cato Capital and she was responsible for finding companies that might be looking for capital and bringing them to Cato Capital as clients. (D.I. 185 at ¶ 5; D.I. 186 at ¶ 4; Trial Transcript (" Tr." ) at 234:12-16.) Mr. Hulse knew that Hemispherx was seeking financing, so he put Ms. Millier in touch with his partner, Mr. Pambianchi. (D.I. 157, Ex. A at ¶ 7.) Acting on behalf of Hemispherx as a facilitator, Mr. Pambianchi discussed Hemispherx's immediate need for capital with Ms. Millier. (D.I. 186 at ¶ 5; Tr. 249:23-250:6, 345:12-346:5.) Specifically, he informed Ms. Millier that Hemispherx was contemplating a transaction in which it would attract investors' interest, despite the difficult economy, by using its FDA-approved facility in New Jersey as collateral. (D.I. 186 at ¶ 6; Tr. 188:6-189:4, 250:2-6.)

On November 10, 2008, after speaking with Mr. Lax, Ms. Millier informed Mr. Pambianchi and Dr. Carter that Cato Capital believed the transaction was " doable" and " definitely in our sweet spot." [2] (Joint Exhibit (" JX" ) 17; D.I. 186 at ¶ 9.) A day later, on November 11, 2008, the negotiation of the Engagement Letter[3] commenced when Ms. Millier e-mailed Mr. Pambianchi the template that Cato Capital used for capital raise transactions. (D.I. 185 at ¶ 6; D.I. 186 at ¶ 14.) She had received this draft from Mr. Lax. ( Id.) In the e-mail to which Ms. Millier attached the template, she wrote to Mr. Pambianchi that once the parties had executed the agreement and had agreed upon the talking points that Mr. Lax was to present to potential investors, they could expect a term sheet from an investor within a few weeks. (D.I. 186 at ¶ 10; Tr. 251:19-252:10.) While Ms. Millier expressed optimism to Mr. Pambianchi, Mr. Lax had reason to be less confident. At or about this time, Mr. Lax discussed the Hemispherx engagement with Michael Harstein (" Mr. Harstein" ), a friend who he considered to be very knowledgeable about private investments in public entities (" PIPE" ) and indeed, " a hard-core PIPE

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guy." (D.I. 186 at ¶ 11; Tr. 181:19-182:22.) Mr. Harstein was pessimistic about the engagement, saying to Mr. Lax " [f]orget it, it will never happen. The market is very terrible." ( Id.) Mr. Lax did not inform Hemispherx of his conversation with Mr. Harstein or of Mr. Harstein's strongly negative opinion of the engagement's likelihood of success. (D.I. 186 ¶ 12; Tr. 184:10-23.)

The parties negotiated the terms of the Engagement Letter from November 11, 2008 until November 19, 2008. (D.I. 185 at ¶ 6-7; D.I. 186 at ¶ ¶ 19-20.) Mr. Pambianchi served as Hemispherx's conduit during the negotiation. (D.I. 186 at ¶ ¶ 15-17; Tr. 351:10-18.) He transmitted drafts of the Engagement Letter to Dr. Carter, made revisions pursuant to Dr. Carter's instructions, and communicated both his own impressions and Dr. Carter's thoughts on the Engagement Letter to Mr. Lax and Ms. Millier. (Id) Ms. Millier served a similar function on behalf of Cato Capital. (D.I. 185 at ¶ 6; D.I. 186 at ¶ 15; Tr. 237:15-25.) On November 24, 2008, Mr. Lax signed the final engagement letter on behalf of Cato Capital and Dr. Carter signed the letter on behalf of Hemispherx. (JX 26.)

C. Terms of the Engagement Letter

The Engagement Letter is a non-exclusive contract, (D.I. 186 at ¶ 21; Tr. 215:9-14), the term of which extended from November 24, 2008 to March 24, 2009, with an additional eight-month tail period. (JX 26 at ¶ ¶ 2(b) and 3(a).) Paragraph 3(d) of the Engagement Letter's Terms and Conditions makes clear that the Engagement Letter is a fully integrated document that " contains all of the understandings between the parties hereto with reference to the subject matter hereof." Consequently, " [n]o party can rely or be bound by any understanding or statement, oral or otherwise, not specifically in this Agreement." ( Id.)

Under the terms in the first section of the Engagement Letter, Cato Capital was to act as Hemispherx's " financial advisor and placement agent in connection with facilitating debt and equity financings for the Company and its subsidiaries. . . ." ( Id.) In particular, Cato Capital was to " assist the Company in identifying potential investors and financing sources" and also provide the following services:

(i) Familiarizing itself...with the business operations, properties, financial condition, and prospects of the Company,
(ii) Screening and contacting prospective investors,
(iii) Assisting in negotiations with prospective investors, and
(iv) Advising and assisting the Company in structuring and pricing of placements or financings.

( Id. at ¶ 1.) Cato Capital was to render these services on a " 'best efforts only basis" and Cato Capital would " in its sole discretion, determine the reasonableness of its efforts and [would be] under no obligation to perform at any level other than what it deem[ed] reasonable." ( Id.)

The second section of the Engagement Letter, titled " Compensation for Services," governs the payment that Cato Capital was to receive in the event it fulfilled the Agreement's requirements. ( Id. at ¶ ¶ 2(a)-(c).) The paragraph states, in relevant part, that any fees due Cato Capital were to be calculated as follows:

(a) Placement fees: In the event that Cato locates a source of capital for the Company...Cato will be entitled to a " Placement Fee." The Placement Fee will be the sum of the following components:

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(i) A cash fee equal to 7% of the gross Proceeds that constitutes equity...
(ii) A cash fee equal to 7% of the gross Proceeds that constitutes participating...or subordinated debt; and
(iii) 3.5% of the portion of the gross Proceeds that constitutes non-participating debt, such as convertible debt;
(iv) Warrants to purchase a number of shares of Securities equal to 7% of the value of equity or participating debt Securities placed by Cato... and

(JX 26 at ¶ 2(a).)

Paragraphs 2(b) and 2(c) of the Engagement Letter provide additional requirements with which Cato Capital was mandated to comply in order to receive the fees detailed in paragraph 2(a):

(b) Payment of Fees: All applicable fees shall be payable, irrespective of any Services rendered or not rendered by Cato, with respect to any Transaction completed with any Cato Prospect during (i) the term of this Agreement or (ii) the eight month period (the " Tail Period" ) following the term of this Agreement. At the end of the term of this Agreement, Cato shall designate in writing to the Company all Cato Prospects. Cato will only be entitled to Placement Fees for Transactions during the Tail Period completed with any of the listed Cato Prospects or their affiliates. Placement Fees shall be paid in cash at the ...

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