New Earthshell Corp. v. Jobookit Holdings Ltd. ( 2015 )

15-920-cv; 15-1659-cv
New Earthshell Corp. v. Jobookit Holdings Ltd.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED
ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE
PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A
DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN
ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST
SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.
1 At a stated term of the United States Court of Appeals
2 for the Second Circuit, held at the Thurgood Marshall United
3 States Courthouse, 40 Foley Square, in the City of New York,
4 on the 30th day of December, two thousand fifteen.
5
6 PRESENT: DENNIS JACOBS,
7 PIERRE N. LEVAL,
8 GUIDO CALABRESI,
9 Circuit Judges.
10
11 - - - - - - - - - - - - - - - - - - - -X
12 NEW EARTHSHELL CORP.,
13 Plaintiff-Appellant,
14
15 -v.- 15-920-cv; 15-1659-cv
16
17 JOBOOKIT HOLDINGS LTD, VIUMBE LLC,
18 RAFI SHKOLNIK,
19 Defendants-Appellees.
20 - - - - - - - - - - - - - - - - - - - -X
21
22 FOR APPELLANT: NIKOLAS S. KOMYATI (Lawrence D.
23 Ross, on the brief), Bressler,
24 Amery & Ross, P.C., New York,
25 NY.
26
27 FOR APPELLEE: A. Jeff Ifrah, Ifrah PLLC,
28 Washington, DC.
1
1
2 Appeal from a judgment of the United States District
3 Court for the Southern District of New York (Furman, J.).
4
5 UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED
6 AND DECREED that the judgment of the district court be, and
7 is hereby, VACATED, and the case REMANDED for further
8 proceedings.
9
10 New Earthshell Corp. appeals from the judgment of the
11 United States District Court for the Southern District of
12 New York (Furman, J.) dismissing its complaint against
13 Jobookit Holdings Ltd. (“Jobookit”), Rafi Shkolnik
14 (Jobookit’s CEO), and Viumbe, LLC, for breach of contract,
15 fraud, and breach of the implied covenant of good faith and
16 fair dealing. We assume the parties’ familiarity with the
17 underlying facts, the procedural history, and the issues
18 presented for review.
19
20 This appeal arises from a series of corporate
21 transactions concerning Viumbe, a digital media company that
22 earns revenue by selling advertising on its websites. New
23 Earthshell was in negotiations to sell Viumbe to Jobookit
24 for $2.5 million, of which $1 million would be paid up front
25 and the remaining $1.5 million would be a loan, the terms of
26 which were set forth in a Loan Agreement. This loan would
27 be secured by “Collateral,” defined as “[a]ll of the present
28 and future property and assets of [Viumbe],” including
29 Viumbe’s “[d]eposit accounts and accounts receivable” and
30 “all other contract rights or rights to the payment of
31 money.”
32
33 As negotiations continued, Digital Group Ybrant
34 (“Ybrant”) agreed to buy a $1 million equity stake in
35 Jobookit on the condition that Jobookit hire Ybrant to
36 manage Viumbe’s websites. Jobookit told New Earthshell that
37 Ybrant’s compensation for managing Viumbe’s websites would
38 be 35% of Viumbe’s revenues, which, according to New
39 Earthshell, would be in line with industry norms. In fact,
40 according to the allegations of the complaint, Jobookit’s
41 representation was false. Jobookit agreed that Ybrant would
42 be paid 70% of Viumbe’s revenues until Ybrant had received
43 $1 million, at which point it would receive 50% until two
44 years from the date of the agreement, and 35% thereafter.
45 New Earthshell alleges that it relied on the
46 misrepresentation when it entered into the agreement.
47
2
1 New Earthshell brought suit against Jobookit,
2 Jobookit’s CEO, and Viumbe for breach of contract, fraud,
3 and breach of the implied covenant of good faith and fair
4 dealing based on Jobookit’s agreement with Ybrant and
5 Jobookit’s statements about it. The district court dismissed
6 all three claims. The court reasoned that New Earthshell
7 (i)had not plausibly pled reasonable reliance on Jobookit’s
8 fraudulent misrepresentation because New Earthshell failed
9 to demand to see the actual documents Jobookit was
10 negotiating with Ybrant, (ii) had not plausibly alleged
11 breach of contract because Viumbe’s revenues are not
12 “Collateral,” and (iii)could not maintain a claim for breach
13 of the implied covenant because New Earthshell’s pleading
14 failed to allege a breach that Jobookit was not complying
15 with the terms of its contract. The district court also
16 awarded Jobookit its attorney’s fees because the agreement
17 provided that the losing party would pay the prevailing
18 party’s attorney’s fees in any litigation related to the
19 Viumbe sale.
20
21 We review the grant of a motion to dismiss de novo,
22 accept as true all factual allegations, and draw all
23 reasonable inferences in favor of the plaintiff. Fink v.
24 Time Warner Cable, 714 F.3d 739, 740-41 (2d Cir. 2013). We
25 typically review a district court’s award of attorney’s fees
26 for abuse of discretion, but when the fee award turns on the
27 proper interpretation of a contract, we review it de novo.
28 Carco Grp., Inc. v. Maconachy, 718 F.3d 72, 79-80 (2d Cir.
29 2013). We conclude that the District Court erred in
30 dismissing the claims.
31
32 1. The District Court dismissed the contract claim
33 because, according to its interpretation of terms of
34 Jobookit’s contract with Ybrant, the payments Viumbe was to
35 make to Ybrant of 70% of Viumbe’s revenues did not impair
36 New Earthshell’s collateral because “revenues” were not
37 within the definition of “Collateral” in the Loan Agreement
38 between New Earthshell and Jobookit. This conclusion was
39 based on a misinterpretation of what Jobookit contracted to
40 have Viumbe pay to Ybrant. In exchange for Ybrant’s
41 services, Viumbe was to pay it a percentage of the
42 advertising revenues it “actually received in connection
43 with operation of [its] Websites.” The revenues Viumbe
44 “actually received” would, upon receipt, become its money.
45 Jobookit contracted that Viumbe would pay a (large) portion
46 of that money to Ybrant, potentially permitting Ybrant to
3
1 recover its $1 million investment before New Earthshell was
2 repaid for its loan.
3
4 The definition of “Collateral” in the Loan Agreement
5 between New Earthshell and Jobookit included, among other
6 things, “present and future property and assets,” “[d]eposit
7 accounts and accounts receivable,” and “all proceeds of . .
8 . any and all of the above” (i.e., proceeds from Viumbe’s
9 other assets). Each of these terms encompassed Viumbe’s
10 money. Though the term “revenues” does not appear in the
11 definition of “Collateral,” it is clear that all of Viumbe’s
12 money, including money it derived from its advertising
13 revenues, fall within the scope of the definition of
14 “Collateral.” The payments Viumbe would make to Ybrant were
15 of money, which was part of the “Collateral,”
16 notwithstanding that the amount of money was to be set by
17 reference to the amount of its revenues.
18
19 The rest of the Agreement does not render this
20 provision ambiguous. The district court mistakenly concluded
21 that, if Viumbe’s revenues were Collateral, Jobookit’s
22 obligation to preserve that Collateral would prevent Viumbe
23 from paying ordinary business expenditures. But the Loan
24 Agreement explicitly allows Viumbe’s assets to be used in
25 the ordinary course of its business. Joint App’x at 93-94,
26 ¶¶ 7.1, 7.5, 8.1.
27
28 2. The district court dismissed New Earthshell’s fraud
29 claim because it concluded New Earthshell failed to plead
30 reasonable reliance on Jobookit’s alleged
31 misrepresentations. It reasoned that, as a sophisticated
32 party, New Earthshell should have insisted on documentation
33 of the terms of Jobookit’s deal with Ybrant, and that its
34 failure to do so would preclude a jury from finding
35 reasonable reliance.
36
37 New York courts have sometimes precluded sophisticated
38 parties that failed to exercise reasonable diligence in
39 verifying material representations that were within their
40 power to verify from claiming reasonable reliance on those
41 representations. See HSH Nordbank AG v. UBS AG, 941 N.Y.S.2d
42 59, 66 (App. Div. 1st Dep’t 2012); Global Minerals & Metals
43 Corp. v. Holme, 824 N.Y.S.2d 210, 215 (App. Div. 1st Dep’t
44 2006); see also Lazard Freres & Co. V. Protective Life Ins.
45 Co., 108 F.3d 1531 (2d Cir. 1997). The district court over-
46 read these cases; they do not stand for the proposition that
47 business corporations may never rely on the representations
4
1 of a counter-party as to facts the plaintiff has no reason
2 to doubt or suspect, so long as more certain means of
3 verification are available.
4
5 Furthermore, New Earthshell discharged any duty to
6 protect itself by inserting appropriate contract language.
7 The Loan Agreement authorized Viumbe to contract for
8 management services like Ybrant’s “in the ordinary course of
9 [its] business.” Joint App’x at 93 ¶ 7.1. It also required
10 Viumbe and Jobookit to “use commercially reasonable efforts
11 to preserve the condition of the Collateral,” Joint App’x at
12 94 ¶ 8.1, and forbade them from “wast[ing] or destroy[ing]
13 the Collateral or any part thereof.” Id. at 93 ¶ 7.4. These
14 provisions prohibit Viumbe from licensing its websites in
15 transactions that depart from the ordinary course of
16 business. In its complaint, New Earthshell alleges that the
17 35/65 revenue split represented by Ybrant was consistent
18 with its historical business practices, but that the 70%
19 deal actually struck was not.
20
21 3. In light of our vacatur of the dismissal of New
22 Earthshell’s claims, we also vacate the dismissal of New
23 Earthshell’s breach of the implied covenant claim and the
24 award of attorney’s fees.
25
26 We therefore VACATE the judgment of the district court
27 and REMAND for further proceedings.
28
29 FOR THE COURT:
30 CATHERINE O’HAGAN WOLFE, CLERK
31
5