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Scott v. Vantage Corp.

United States District Court, D. Delaware

November 13, 2018



          Mary Pat Thynge, Chief U.S. Magistrate Judge.

         I. Introduction

         Defendants/counterclaim-plaintiffs Vantage Corporation (“Vantage”), Brian Askew (“Askew”), and Gerald Finegold (“Finegold”) filed their counterclaims pursuant to Fed.R.Civ.P. 13 against plaintiffs/counterclaim-defendants Tara Scott (“Scott), and Wilson Carter (“Carter”), both individually and as Trustee of the Bailey Middleton Carter 2009 Trust, the Mary Wilson Carter 2009 Trust, and the Wilson M. Carter 1988 Trust. Currently before the court are plaintiffs' motion to dismiss defendants' counterclaims pursuant to Fed.R.Civ.P. 12(b)(6).[1]


         Vantage, a privately-held Delaware corporation, maintains its principal office in Alpharetta, Georgia.[2] Askew, Finegold, and Carter are citizens of Georgia, while Scott is a resident of Colorado.[3]

         Since the early 1990s, defendants have invested and worked together to create and enhance sophisticated proprietary trading software.[4] In March 2014, defendants formed Vantage and TradeLogix LLC (“TradeLogix”), a wholly owned subsidiary of Vantage that engages in trading using their proprietary trading software.[5]

         In late 2015, Carter approached Askew to become a potential investor, and also introducing Scott.[6] Scott made clear she spoke with Carter about investing and expressed the ability and desire to fund a substantial dollar investment.[7] Carter and his advisors sought investing information from Vantage, who provided documentation concerning investments, including documents seeking confirmation that each was an accredited, sophisticated investor with the ability to invest.[8] Plaintiffs represented an understanding and acumen to assess the investments, and represented an understanding they would receive shares of Vantage which had no public market for resale and were illiquid.[9]

         Plaintiffs were informed their investments would be utilized for Vantage operations, a portion of which would be placed in Vantage's trading account to generate additional funds utilizing its proprietary trading technology.[10] Those funds would operate its business if needed.[11]

         Plaintiffs received and executed a Stock Subscription Agreement, advising: (1) the number of shares of Class A common stock acquired and price per share of $2, 096.60; (2) the investor's recognition that the stock was not registered and could not be sold or distributed without registration; (3) there was no public market for the shares and no assurance there would be; and (4) the company had no obligation to register the shares.[12]

         Further, the Stock Subscription Agreement represented and warranted that plaintiffs: (1) understood the nature of the investments; (2) had sufficient financial resources to bear the risk of their investment in Vantage stock; (3) were sufficiently experienced in financial and business matters to understand the merits and risks of investing in a private company; and (4) were purchasing the Stock for investment purposes and understood that their shares could not be sold without registration.[13]Defendants relied on plaintiffs' representations and warranties when they sold shares of Vantage stock to them.[14] Critical to Vantage were investors that shared the same long-term views and would not have near-term liquidity needs inconsistent with its goals.[15]

         Plaintiffs also signed individual Joinder Agreements, whereby they were joined and became a party to the Amended and Restated Stockholders Agreement dated January 1, 2016, between Vantage and the other shareholders.[16] The Stockholders Agreement contained a general restriction on the transfer of plaintiffs' shares, along with a clause titled “Further Assurances”, in which plaintiffs agreed to “cooperate and take such action as may be reasonably requested in order to carry out the provisions and purposes of this Agreement and the transactions contemplated by this Agreement.”[17]

         Additionally, plaintiffs agreed to a remedies clause in the Stockholders Agreement, which provided that “if any party to this Agreement breaches or threatens to commit a breach . . . such Stockholder shall pay, indemnify and hold the Company harmless from all reasonable costs, damages, and expenses, including attorneys' fees, expended or incurred by the Company.”[18]

         Plaintiffs received a Term Sheet with their investments made in an offering of $5 to $15 million of shares of class A common stock in Vantage.[19] The price was $2, 096.60 per share and the “[s]hares [were] being offered only to accredited investors.”[20] The Term Sheet described the “Use of Proceeds” of the January 2016 Offering as: “[p]roceeds from the investment will be used to execute proprietary trading strategy and for working capital and other general corporate purposes.”[21] Investors, including plaintiffs, received share certificates each time they purchased stock.[22]

         In 2016, Vantage formed an additional subsidiary, Vantage Advisory Management, LLC (“Advisory”). Advisory is the general partner of a hedge fund, VF(x) LP, also formed in 2016, and utilized Vantage's proprietary trading software.[23]Defendants claim investors, including Scott, desired to become limited partners and invest in the VF(x) LP hedge fund.[24] After making four separate purchases of stock in Vantage totaling $2 million, Scott invested $250, 000 in the hedge fund.[25] VF(x) had a liquidity provision requiring a one-year commitment with a 90-day notification as a condition precedent for redemption.[26] Scott received quarterly statements from Trident Fund Services, the fund administrator, detailing the activity of her investment after active trading began in September 2016.[27]

         Within six months of her purchase, Scott sought liquidity.[28] Her initial requests were to discuss Vantage's daily business activity.[29] However, Scott soon escalated to demanding that $1 million of her $2 million investment be moved from Vantage to VF(x), which had liquidity rights.[30] These requests were made notwithstanding documentation provided to her, and other communications reiterating that she held stock in a privately held corporation that had no ready market and no redemption rights.[31] Scott was made aware that her investment was already being used as part of the operational reserve for Vantage.[32] If granted, Scott's demands to redeem her stock would allegedly deplete Vantage's operations reserves.[33]

         However, Vantage acquiesced in the Fall 2016 to Scott's demands, selling half of the $1 million in funds Scott was seeking to redeem.[34] Scott re-sold a portion of her Vantage Class A shares to new investors for a total of $500, 000.[35] She then expanded her demands, requesting Vantage buy back her shares for the remainder of her $2 million investment.[36] Defendants claim her unrelenting communications became so distracting to daily operations and management that even Carter reminded her that the investment in Vantage was a long term endeavor requiring patience, that no promises were made to repay her investment or a rate of return in the short term, and chastised her for attempting to extract a premium for an unanticipated very early redemption.[37]

         Askew suggested that there was liquidity in VF(x) LP and her commitment of a one year and 90-day redemption notice could be waived to provide liquidity.[38] Scott refused, stating she wanted to keep her investment in the hedge fund, VF(x), but wanted a return of the monies she paid for shares in Vantage.[39] Since her interests were not aligned with other investors, and after notice, Advisory exercised its right to redeem Scott's interest in the hedge fund.[40] Advisory directed the fund administrator to return Scott's principal and interest investments in VF(x) LP, in which she received the amount of $250, 000 and profit of $6, 639.47.[41]

         In mid-December 2016, Carter told Askew he was in urgent need of liquidity because his spending had outstripped his income.[42] Carter was reminded there was no ready market for his Vantage shares and no immediate buyer.[43] Carter asked if he could remove at least $1 million which he needed in a few days.[44] He then became increasingly hostile when he was unable to liquidate or sell his stock.[45] Plaintiffs were aware that their stock in Vantage was illiquid and they had no right to seek redemption of their shares.[46] Further, they were informed that redeeming their shares would result in substantial diminution of the remaining capital reserves and risked on-going viability and ability to succeed on its strategic plans. As a result, Vantage could not redeem their shares.[47]

         Plaintiffs were informed that Vantage had been engaged in discussions with potential investors for over a year and were close to completing another deal that would benefit Vantage shareholders, in that this business dealing created a potential opportunity for an investor to purchase their shares.[48] Despite this information, plaintiffs allegedly accelerated their demands and threats to force Vantage to acquiesce, and to capitulate to their redemption demands for all of their stock.[49]

         Defendants maintain plaintiffs, through legal counsel, threatened to involve governmental authorities unless their shares were redeemed immediately, as well as a lawsuit.[50] Vantage made clear that if plaintiffs engaged in such action, it would detrimentally affect on-going, long-developed dealings meant for the benefit of all shareholders, including investments in Vantage and its hedge fund and other significant opportunities involving Vantage's proprietary trading technology.[51]

         Plaintiffs filed this lawsuit, naming defendants.[52] Plaintiffs' actions allegedly damaged Vantage's ability to conduct business and proceed with business opportunities, to the detriment of Vantage and its other shareholders, diminished the value of Vantage shares, and cost Vantage significant legal expenses in its defense.[53]Defendants purport the threats and actions of plaintiffs breached the Stockholder Agreement.

         III. Governing Law

         A. Motion to Dismiss

          In analyzing a motion to dismiss under Fed.R.Civ.P. 12(b)(6), a review of Rule 8(a)(2) is necessary. It requires that a pleading contain a “short and plain statement of the claim showing that the pleader is entitled to relief.”[54] That standard “does not require ‘detailed factual allegations,' but . . . demands more than an unadorned, the-defendant-unlawfully-harmed me accusation.”[55] Thus, to survive a motion to dismiss under Rule 12(b)(6), a complaint “must contain sufficient factual matter, accepted as true, to ‘state a claim for relief that is plausible on its face.”[56] The purpose of a Rule 12(b)(6) motion to dismiss is to test the sufficiency of the complaint, not to resolve disputed facts or decide the merits of the case.[57] Evaluating a motion to dismiss under Rule 12(b)(6) requires the court to accept as true all material allegations of the complaint.[58] “The issue is not whether a plaintiff will ultimately prevail, but whether the complaintant is entitled to offer evidence to support the claims.”[59] A motion to dismiss may be granted only if, after, “accepting all well-pleaded allegations in the complaint as true, and viewing them in the light most favorable to the plaintiff, plaintiff is not entitled to relief.”[60]

         To survive a motion to dismiss under Rule 12(b)(6), the factual allegations must be sufficient to “raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true (even if doubtful in fact).”[61] A plaintiff is obliged “to provide the ‘grounds' of his entitle[ment] to relief” beyond “labels and conclusions.”[62] Heightened fact pleading is not required: rather “enough facts to state a claim to relief that is plausible on its face” must be alleged.[63] Rejected are unsupported allegations, “bald assertions, ” or “legal conclusion.”[64] Further, “the tenet that a court must accept as true all of the allegations contained in the complaint is inapplicable to legal conclusions.”[65] The analysis is a “context-specific task that requires the reviewing court to draw on its judicial experience and common sense.”[66] Well-pled facts which only infer the “mere possibility of misconduct” do not show that “the pleader is entitled to relief” under Rule 8(a)(2).[67] “When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement of relief.”[68]

         IV. Analysis

         A. Motion to Dismiss Defendants' Counterclaims (D.I. 33)

         1. Breach of Contract (Count I)

         In order to succeed on a breach of contract claim under Delaware law, defendants must plead: “(1) a contractual obligation; (2) a breach of that obligation by plaintiffs; and (3) resulting damage to defendants.”[69] In the instant case, plaintiffs contend defendants' breach of contract claim fails as a matter of law, because defendants cannot demonstrate the existence of an enforceable contractual obligation not to seek rescission.

         Plaintiffs maintain any provision that preemptively bars this action is an illegal waiver of their rights in violation of federal securities laws, and the agreements are unenforceable under Georgia securities statutes.[70] Further, any provision that bars an investor from exercising his or her statutory rights has been deemed illegal since the adoption of the Securities Act of 1933 and the Securities Exchange Act of 1934.

         Section 29 of the 1934 Securities Exchange Act “is not intended to protect substantive rights created by contract. It is designed to protect rights created by the Exchange Act, and it expressly forecloses contracting parties from ‘defin[ing] the boundaries of the[ir] transaction' in a way that relieves a party of the duties imposed by that Act.”[71]

         Section 29 further provides that: “every contract made in violation of any provision of this chapter or of any rule or regulation thereunder, . . . [or] the performance of which involves the violation of, or the continuance of any relationship or practice in violation of, any provision of this chapter or any rule or regulation thereunder, shall be void.” However, “Section 29 itself does not define a substantive violation of the securities laws; rather, it is the vehicle through which private parties may rescind contracts that were made or performed in violation of other substantive provisions.”[72]Although the word "void" is contained in the statute, the Supreme Court has read Section 29(b) to be "merely voidable at the option of the innocent party."[73]

         To void the Agreement under Section 29, plaintiffs must establish: “(1) the contract involved a prohibited transaction; (2) they are in contractual privity with defendants; and (3) plaintiff is in the class of persons that the securities acts were designed to protect.[74] Plaintiffs must demonstrate “a direct relationship between the violation at issue and the performance of the contract; i.e., the violation must be ‘inseparable from the performance of the contract' rather than ‘collateral or tangential to the contract.'”[75]

         Plaintiffs assert that they are entitled to rescind the Agreement under Section 29 of the Exchange Act based upon a violation of the Securities Act. The Agreements however, do not involve prohibited transactions. The Agreements are detailed outlines regarding nature and understanding of the investments, the investment goals, and binds the parties to act in furtherance of those goals.

         Defendants pleaded sufficient facts to establish a contractual obligation. Defendants claim plaintiffs breached the Stock Subscription Agreement and Stockholders Agreement when they invested based upon stated and agreed investment goals, liquidity needs, investment knowledge and understanding of the stock investments purchased. Defendants further claim, plaintiffs improperly demanded refunds of their investments contrary to the agreed terms of their investment and attempted to tender back their Vantage stock. Defendants further purport plaintiffs failed and refused to cooperate with Vantage in contravention of the terms of the Stockholders Agreement, and instead demanded redemption of their shares, threatened Vantage and others with legal action, and filed this lawsuit. As a result, defendants allege sufficient facts to show a breach of Section 5.10 of the Stockholders Agreement.

         2. Breach of Express Warranty (Count II)

         To succeed on a breach of express warranty claim, defendants must plead that a warranty existed, breach of the warranty, and resulting damages. An express warranty is created by: (1) an affirmation of fact or promise made by the seller (2) to the buyer (3) which relates to the goods and (4) becomes part of the basis of the bargain.[76]

         Defendants maintain plaintiffs breached their representations and warranties contained in the Stock Subscription Agreement. Defendants argue that plaintiffs knew at this time of their investments how they would be used, and understood they would be unable to liquidate or sell their stock. However, plaintiffs demanded redemption of their shares of Vantage stock, threatened legal action, and filed this action seeking rescission of their purchases of Vantage stock and return of their consideration, plus interest.

         Defendants further allege that they relied on each and every representation by plaintiffs when agreeing to issue Vantage stock and are entitled to damages as a result.

         Plaintiffs contend defendants are attempting to restate their breach of contract claim as breach of express warranty. As evident from the extent to which defendants explained the bases of their breach of express warranty claim, they satisfy the pleadings requirements of Rules 8 and 12(b)(6).

         3. Implied Covenant of Good Faith & Fair Dealing (Count III)

Under Delaware law, an implied duty of good faith and fair dealing is interwoven into every contract. When used in conjunction with an implied covenant, the term 'good faith' contemplates 'faithfulness to the scope, purpose, and terms of the parties' contract.' In order to plead successfully a breach of an implied covenant of good faith and fair dealing, the plaintiff must allege a specific implied contractual obligation, a breach of that obligation by the defendant, and resulting damage to the plaintiff.[77]

         A court focuses on "the parties' reasonable expectations at the time of contracting. However, the express terms of the contract, and not an implied covenant of good faith and fair dealing, will govern the parties' relations when the terms expressly address the issue . . . [T]he plaintiff must advance provisions of the agreement that support this finding in order to allege sufficiently a specific implied contractual obligation."[78]

When presented with an implied covenant claim, a court first must engage in the process of contract construction to determine whether there is a gap that needs to be filled. If a gap exists, the court must determine whether the implied covenant should be used to supply a term to fill the gap. Delaware courts will only imply contract terms when "the party asserting the implied covenant proves that the other party has acted arbitrarily or unreasonably, thereby frustrating the fruits of the bargain that the asserting party reasonably expected. Thus, parties are liable . . . when their conduct frustrates the 'overarching purpose' of the contract . . .[79]

         Defendants claim by entering into the Stockholders Agreement and the Stock Subscription Agreement, plaintiffs are subject to an implied covenant of good faith and fair dealing in their relationship with defendants. Therefore, plaintiffs are required to refrain from unreasonable and arbitrary conduct that prevents defendants from receiving the fruits of the bargain under the Agreements.

         Defendants have pled sufficient facts to assert claims for breach of implied covenant of good faith and fair dealing, by alleging facts that show plaintiffs' conduct frustrated the overarching purpose of the Agreements.

         4. Negligent ...

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