Feenix Payment Systems, LLC v. Blum ( 2024 )

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
FEENIX PAYMENT SYSTEMS, LLC, )
FVP OPPORTUNITY FUND GP, LLC, )
FVP OPPORTUNITY FUND II GP, LLC, )
FEENIX VENTURE PARTNERS )
OPPORTUNITY FUND, LP, FVP )
SMITHFIELD, LLC AND KEITH LEE, )
)
Plaintiffs, )
)
v. ) C.A. No. N21C-05-099 EMD CCLD
)
MICHAEL BLUM, )
)
Defendant. )
Submitted: February 26, 20241
Decided: May 29, 2024
DECISION AFTER TRIAL
Daniel A. Griffith, Esq., Whiteford, Taylor & Preston LLP, Wilmington, Delaware, Scott M. Hare,
Esq., Jordan N. Winslow, Esq., Whiteford, Taylor & Preston LLP, Pittsburgh, Pennsylvania.
Counsel for Plaintiffs Feenix Payment Systems, LLC, FVP Opportunity Fund GP, LLC, FVP
Opportunity Fund II GP, LLC, Feenix Venture Partners Opportunity Fund, LLP, FVP Smithfield,
LLC, and Keith Lee.
John A. Sensing, Esq., Jesse L. Noa, Esq., Andrew M. Moshos, Esq., Potter Anderson & Corroon,
Wilmington, Delaware, Andrew Moss, Esq., Kutner Rubinoff & Moss, LLP, Coconut Grove,
Florida, David B. Mishael, Esq., David B. Mishael, P.A., Coconut Grove, Florida. Counsel for
Defendant Michael Blum.
DAVIS, J.
I. INTRODUCTION
This is a breach of contract and defamation case assigned to the Complex Commercial
Litigation Division of this Court. Plaintiffs Feenix Payment Systems, LLC (the “Company”),
1
The parties finished post-trial briefing on January 23, 2024 (D.I. No. 165). Subsequently, Mr. Blum moved to
strike (the “Motion to Strike”) Feenix’s claim for disgorgement damages (D.I. No. 166). The parties completed
briefing on the Motion to Strike on February 26, 2024 (D.I. No. 170). The Court granted the Motion to Strike on
May 16, 2024 (D.I. No. 171).
FVP Opportunity Fund GP, LLC (“Fund I GP”), FVP Opportunity Fund II GP, LLC (“Fund II
GP”), Feenix Venture Partners Opportunity Fund, LLP (“Feenix Opp Fund”), FVP Smithfield,
LLC, and Keith Lee (collectively, “Feenix”)2 seek relief relating to allegedly defamatory
statements in a demand letter sent to their lenders. Feenix contends that Defendant Michael
Blum is the party responsible for those statements. Mr. Blum is a former business associate of
Feenix.3
The Complaint originally set out five separate claims for relief. These were: (i) Breaches
of Operating Agreement’s Restrictive Covenants (Count I); (ii) Breaches of Separation
Agreement’s Mutual Non-Disparagement Clause (Count II); (iii) Tortious Interference with
Business Expectation (Count III); (iv) Defamation (Count IV); and (v) Defamation Per Se
(Count V). After various pre-trial dispositive motions, as discussed below, the parties proceeded
to a bench trial on Count II. The trial took place on December 4, 2023 and December 5, 2023.
The parties then submitted post-trial briefing and proposed findings of fact and conclusions of
law.
II. PROCEDURAL BACKGROUND
Feenix filed the Complaint on May 11, 2021.4 As stated above, the Complaint originally
contained five causes of action.
Mr. Blum filed a motion to dismiss on July 16, 2021.5 Feenix opposed the motion to
dismiss. The Court heard argument on October 22, 2021 and then took the motion to dismiss
2
Complaint at ¶¶ 3–9 (hereinafter “Compl. at __”) (D.I. No. 1). FVP Smithfield, LLC and Mr. Lee are no longer
parties to this civil action. Prior to trial, the Court addressed a stipulation dismissing FVP Smithfield, LLC and Mr.
Lee as parties. In error, the Court did not enter the Joint Pretrial Stipulation and [Proposed] Order (hereinafter
“Pretrial Stipulation”) at the Pre-Trial Conference. To complete the docket, the Court so ordered the Pretrial
Stipulation on May 28, 2024 (D.I. No. 172).
3
Id. at ¶ 10.
4
D.I. No. 1.
5
D.I. No. 17.
2
under advisement.6 The Court issued an opinion on the motion to dismiss on January 25, 2022.7
The Court dismissed Counts III, IV and V. The Court allowed Counts I and II to proceed.
The parties engaged in discovery. On February 7, 2022, Mr. Blum moved for summary
judgment on Counts I and II.8 Feenix opposed summary judgment. After a hearing, the Court
granted Mr. Blum judgment on Count I.9 The Court denied the motion as to Count II.
Just prior to the trial, Mr. Blum again moved for summary judgment on Count II.10 Mr.
Blum argued that summary judgment should be granted because none of the alleged defamatory
language was directed at Feenix, Mr. Blum was the wrong party against whom to bring suit; and
Feenix had not sufficiently proved damages. The Court held a hearing on that motion for
summary judgment at the Pre-Trial Conference.11 On November 30, 2023, the Court held a
hearing and issued a bench ruling denying the motion.12
III. THE TRIAL
The Court held a bench trial (the “Trial”) on Count II on December 4, 2023 and
December 5, 2023.13 The Court then had both parties submit their closing arguments in written
form. The Court received the final post-trial brief on January 23, 2024.14
A. WITNESSES
During the Trial, the Court heard from and considered testimony from the following
witnesses: Keith Lee; Thomas Betts; and Michael Blum.15
6
D.I. No. 29.
7
Feenix Payment Systems, LLC v. Blum, 2022 WL 215026 (Del. Super. Jan. 25, 2022) (D.I. No. 31).
8
D.I. No. 33.
9
D.I. No. 31.
10
D.I. No. 136.
11
D.I. No. 156.
12
D.I. No. 158.
13
D.I. No. 160.
14
D.I. No. 165.
15
In addition, on December 1, 2023, the Court issued a ruling allowing Feenix to offer deposition admissions made
by Mr. Blum under Civil Rule 32.
3
All witnesses testified on direct and were available for cross-examination. The fact
witnesses in this civil action were Mr. Lee, Mr. Betts and Mr. Blum. No expert witnesses
testified.
Normally, the Court would list the witnesses in the order they testified and which party
called the witness; however, because the Trial was a bench trial, the Court took witnesses out of
order and, pursuant to Rule 611 of the Delaware Rules of Evidence, allowed examination of the
witness for both parties’ cases-in-chief.
B. CREDIBILITY OF WITNESSES
Here, the Court is the sole judge of each witness's credibility, including the parties.16 The
Court considers each witness' means of knowledge; strength of memory; opportunity to observe;
how reasonable or unreasonable the testimony is; whether it is consistent or inconsistent;
whether it has been contradicted; the witnesses' biases, prejudices, or interests; the witnesses'
manner or demeanor on the witness stand; and all circumstances that, according to the evidence,
could affect the credibility of the testimony.17
The Court finds that—based on their testimony at the Trial and the factors listed above,
Mr. Lee, Mr. Betts and Mr. Blum were credible witnesses. Given the bias of the witnesses, the
lack of any independent third-party witnesses (especially anyone from Atalaya) or experts, the
Court did not find that the witnesses provided much new information beyond that provided
during the dispositive motion phase of this civil action.
C. EXHIBITS
The parties each submitted a binder of exhibits to the Court prior to the Trail. Feenix
submitted Plaintiffs’ Exhibits A through J. Mr. Blum submitted Defendant’s Exhibits A through
16
See Superior Court Civil Pattern Jury Instruction 23.9.
17
Id.4
K. The only objection was to Plaintiffs’ Exhibit J. The Court allowed the admission of
Plaintiffs’ Exhibit J but limited its use.
D. FINDINGS OF FACT
1. The Parties and their Relationship
The Company is a Delaware limited liability company.18 The Company has its offices
and principal place of business in New York, New York.19
Fund I GP, is a Delaware limited liability company.20 Like the Company, Fund I GP has
its principal place of business in New York, New York.21
Fund II GP is a Delaware limited liability company with its principal place of business in
New York, New York.22
Feenix Opp Fund is a Delaware limited partnership, having its principal place of business
in New York, New York.23
The Company is the parent company of the Feenix entities.24 The Company is a holding
and operating company that provides credit card processing services for its investment entities or
opportunities.25
The Feenix entities are affiliates. Feenix Opp Fund is a private fund managed by Feenix
Venture Partners and sponsored by the Company.26 Feenix Venture Partners is a subsidiary of
18
Pretrial Stipulation, Part II at ¶ 1.
19
Id.20
Id. at ¶ 2.
21
Id.
22
Id. at ¶ 3.
23
Id. at ¶ 4.
24
Dec. 4 Tr. at 27:13-16.
25
Dec. 4 Tr. at 31:5-8.
26
Dec. 4 Tr. at 31:5-12.
5
the Company.27 The Fund I GP and Fund II GP are separate entities primarily owned and
sponsored by the partners of the Company.28
The Company and the other Feenix entities provided growth capital to small businesses.
According to Mr. Lee, Feenix employed investment strategies that funded small businesses with
private capital managed by Feenix Venture Partners with credit card processing provided by the
Company to get real-time data and transparency on the performance of their investments.29
Mr. Lee is the CEO and founder of the various Feenix entities, including the Company.30
Mr. Blum is a resident of Florida.31 Mr. Blum met Mr. Lee in the summer of 2017.32 At
that same time, Mr. Lee was establishing the Company and other Feenix entities, including FVP
Smithfield.33
According to testimony at the Trial, Mr. Lee invited Mr. Blum to join him at the
Company due to Mr. Blum’s real estate development and co-working experience.34 Mr. Blum
was to “spearhead” the Company’s efforts in the “co-working, co-management space.”35
In addition to Feenix, Mr. Blum was associated with PBM Partners, LLC (“PBM”).36
PBM engages in commercial real estate development. For all times relevant here, Mr. Blum has
been the managing member of PBM.37
27
Dec. 4 Tr. at 31:9-12.
28
Dec. 4 Tr. at 31:17-20.
29
Dec. 4 Tr. at 30:16-31-12.
30
Dec. 4 Tr. at 27:17-18.
31
Compl. ¶ 10; Answer and Affirmative Defenses ¶ 10.
32
Dec. 4 Tr. at 46:11-14.
33
Dec. 4 Tr. at 46:11-23; 47:1-3.
34
Dec. 4 Tr. at 46:8-17.
35
Dec. 4 Tr. at 47:8-17.
36
Dec. 5 Tr. at 32:16-17; Pretrial Stipulation, Part II ¶¶ 9-10.
37
Pretrial Stipulation, Part II ¶ 10.
6
2. Contract Documents
The Company and Mr. Blum, among others, are parties to an Amended and Restated
Limited Liability Company Agreement of the Company dated November 2, 2017, as further
amended by a Second Amended and Restated Limited Liability Company Agreement of the
Company dated October 31, 2018 (the “Operating Agreement”).38 The Operating Agreement
provides the following definitions:
“Affiliate” means with respect to any specified Person, (a) any Person that directly
or through one (1) or more intermediaries controls or is controlled by or is under
common control with the specified Person, or (b) any Person who is a general
partner, member, managing director, manager, officer, director or principal of the
specified Person. As used in this definition, the term “control” means the
possession, directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through ownership of voting
securities, by contract or otherwise.
“Companies” shall mean, collectively, the Company, each of its Subsidiaries and
each of Feenix Venture Partners Opportunity Fund, LP and Feenix Venture
Partners, LLC.
“Company” means Feenix Payment Systems, LLC, a Delaware limited liability
company.
“Person” means an individual, partnership, joint venture, association, corporation,
trust, estate, limited liability company, limited liability partnership, unincorporated
entity of any kind, governmental entity, or any other legal entity.39
Section 15.5 of the Operating Agreement provides, in relevant part, as follows:
15.5 Restrictive Covenants.
(a) Each of the Holders and each Board Member (collectively, the
“Restricted Parties”) recognizes and acknowledges that such Restricted Party will
be entrusted with or have access to confidential and proprietary information which
is the property of the Companies and/or third parties to which the Companies owe
a duty of confidentiality (whether pursuant to Applicable Law, by contract or
otherwise). Each Restricted Party therefore agrees that, at all times while such
Restricted Party is a Holder or Manager, and for a period of eighteen (18) months
38
Pretrial Stipulation, Part II ¶ 5; Pl. Ex. A; Pl. Ex. B; Dec. 5 Tr. at 7:13-8:12; Deposition Testimony of Michael
Blum at 79:21-80:3 (hereinafter “Blum Depo. at ___”).
39
Pl. Ex. B at 7, 9 and 13.
7
thereafter, such Restricted Party shall (i) not, without the prior written consent of
the Board of Managers, directly or indirectly, use, copy or duplicate, or disclose or
otherwise make available to any third party, any Confidential Information (as
defined below) other than in the performance of such Restricted Party’s duties with
respect to the Companies, (ii) take such protective measures as may be reasonably
necessary to preserve the secrecy and interest of the Companies (or, if applicable,
of a third party to which the Companies owes a duty of confidentiality) in the
Confidential Information and (iii) not, without the prior written consent of the
Board of Managers, utilize or convert Confidential Information for such Restricted
Party’s own benefit or gain, of whatever nature other than in performance of such
Restricted Party’s duties with respect to the Companies. As used herein, the term
“Confidential Information” shall mean trade secrets and other non-public
information, whether tangible or intangible, in any form or medium, relating to the
business or affairs of the Companies that is proprietary to the Companies (or
relating to the business or affairs of a third party to which the Companies owes a
duty of confidentiality) and which the Companies makes reasonable efforts to keep
confidential.
***
(d) At no time shall any current or prior Restricted Party make any
statement, or take any action whatsoever, to disparage, defame, sully, or
compromise the goodwill, name, brand, or reputation of any of the Companies or
their respective Affiliates (collectively, the “Company Goodwill”).40
Feenix Payment Systems, FVP Opportunity Fund GP, LLC, FVP Opportunity Fund II
GP, LLC and Blum are parties to a Membership Interest Redemption and Release Agreement
dated May 7, 2020 (the “Separation Agreement”).41 The Separation Agreement provides the
following definitions:
“Affiliate” means, with respect to any Person, any other Person who directly or
indirectly through one or more intermediaries, controls or is controlled by, or is
under common control with, such subject Person. The term “control” (including the
terms “controlled by” and “under common control with”) means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise.
“Company” means Feenix Payment Systems, LLC.
“Feenix Parties” means the Company and the Fund GPs.
40
Pl. Ex. B at § 15.5.
41
Pretrial Stipulation, Part II ¶ 6; Pl. Ex. C; Dec. 5 Tr. at 13:19 – 14:11; Blum Depo. at 83:16 – 84:10.
8
“Person” means an individual, partnership, joint venture, association, corporation,
trust, estate, limited liability company, limited liability partnership, unincorporated
entity of any kind, governmental entity, or any other legal entity.
“Companies” shall mean, collectively, the Company, each of its Subsidiaries and
each of Feenix Venture Partners Opportunity Fund, LP and Feenix Venture
Partners, LLC.
“Company Exculpated Party” is defined as “each of the Company, the Remaining
Members, the Fund GPs, and their respective officers, directors, shareholders,
members, managers, beneficial owners, trustees, partners, Affiliates, employees,
participants, and agents.”
“Redeemed Member” is defined as “Michael Blum, an individual.”42
Mr. Blum received a “Redemption Payment” of $172,829.32 in consideration for
executing the Separation Agreement. Specifically, Separation Agreement Section 2(c) states:
Subject to the terms and conditions of this Agreement, on the Closing Date: (i) The
Company shall: (a) make payment, by wire transfer of immediately available funds
to an account specified in writing by the Redeemed Member, an amount equal to:
U.S.$172,829.32, less any applicable Taxes required by law to be withheld (the
‘Redemption Payment’).43
The Separation Agreement obligated Mr. Blum to indemnify and hold harmless Feenix
for certain types of claims. Section 6(c) specifies:
The Redeemed Member shall indemnify and hold the Company and the Fund GPs
harmless from any and all Claims, arising out of or resulting from, directly or
indirectly, (i) any matter arising from or in connection with a breach by the
Redeemed Member of the Operating Agreement prior to the Effective Date that
constitutes fraud, willful misconduct, or a knowing violation of law by the
Redeemed Member; (ii) any breach by the Redeemed Member of any covenant or
obligation contained in this Agreement; and (iii) any breach or inaccuracy of any
representation, warranty, or covenant by the Redeemed Member contained in this
Agreement. Under no circumstances shall the amount of all indemnity payments
and costs payable hereunder by the Redeemed Member exceed the amount of the
Redemption Payment.44
42
Pl. Ex. C at 4-6.
43
Pl. Ex. C at § 2(c).
44
Pl. Ex. C § 6(c) (emphasis added).
9
The Separation Agreement Section 9(a) provided that the Restrictive Covenants in the
Operating Agreement survived the execution of the Separation Agreement:
The Parties expressly acknowledge that Section 15.5 of the Operating Agreement
and Section 15.5 of the operating agreements of the Fund GPs survive the execution
of this Agreement, with the sole exception being Subsection 15.5(e) of the
Operating Agreement, which is void and of no further force or effect.45
Mr. Blum, as a “Redeemed Member,” agreed not to make any statement, whether oral or
written, or to take any action to disparage or defame Feenix. Separation Agreement Section 11
sets out that:
At no time shall any Redeemed Member make any statement, whether orally or in
written form, or take any action whatsoever, to disparage or defame any of the
Companies, the Company Affiliates or any Company Exculpated Party (as such
terms are defined in the Company Operating Agreement). Likewise, the Feenix
Parties, and their respective current members, officers, employees, and agents, shall
not make any statement, whether orally or in written form, or take any action
whatsoever to disparage or defame the Redeemed Member, Redeemed Member
Exculpated Parties and Redeemed Member Releasors. Nothing in this paragraph or
this Agreement shall be deemed to preclude the Company, the Company’s
Affiliates, any Company Exculpated Party, Redeemed Member, Redeemed
Member Exculpated Parties and Redeemed Member Releasors from providing
truthful testimony or information pursuant to subpoena, court order, or similar legal
process, or from providing truthful information to governmental or regulatory
agencies.46
The Separation Agreement has a fee shifting provision, providing:
The substantially prevailing party in any action or proceeding relating to this
Agreement will be entitled to receive an award of, and to recover from the other
party or parties, any fees or expenses incurred by him, her or it (including, without
limitation, reasonable attorneys’ fees and disbursements) in connection with any
such action or proceeding.47
45
Pl. Ex. C § 9(a).
46
Pl. Ex. C § 11; see also Pretrial Stipulation, Part II ¶ 6 (stipulating that the Separation Agreement contains a
“Mutual Non-Disparagement” provision).
47
Pl. Ex. C § 13(f).
10
Separation Agreement Section 13(f) specifies that Delaware law applies to construe and enforce
the Separation Agreement.48
3. THE LEASE, LOAN AGREEMENT, AND SALE49
In December 2017, PBM Partners LLC and FVP Smithfield entered an office lease for
two properties in Pittsburgh, Pennsylvania (collectively, the “Building”).50 PBM was the
“Landlord” and FVP Smithfield was the “Tenant.”51 FVP Smithfield added valuable furniture,
fixtures, and equipment (“FF&E”) to the Building during its tenancy.52
In April 2019, Feenix Opp Fund and FVP Smithfield entered into a Loan Agreement with
Atalaya Capital Management (“Atalaya”)53 and their administrative agent, Midtown Madison
Management LLC (“Midtown”).54 As part of the Loan Agreement, Midtown filed a U.C.C.
Financing Statement against debtor FVP Smithfield.55 The lien covered all of FVP Smithfield
LLC’s assets, including the Building and the FF&E.56
Pursuant to the Loan Agreement, Midtown executed a notice of senior security interest in
the assets of FVP Smithfield LLC in August 2020.57 The notice advised PBM that “this letter
constitutes formal written notice to Landlord of Agent’s senior secured security interest in the
FVP Smithfield LLC’s assets. Landlord is hereby requested not to take any action against it, or
48
Id. (“This Agreement shall be construed and enforced in accordance with the laws of the State of Delaware,
without regard to conflicts of law principles”).
49
Feenix and Mr. Blum did not include any findings of fact concerning: (i) the lease between PBM Partners LLC
and FVP Smithfield; or (ii) the UCC Sale. These facts provide a context to the December 18 Letter (as defined
below). The Court does not consider these facts to be at issue or integral to the decision on Count II. Accordingly,
this Decision cites facts from Feenix Payment Systems, LLC v. Blum, 2022 WL 215026, at *2 (Del. Super. Jan. 25,
2022).
50
Id.51
Id.52
Id.53
Id.54
Id.55
Id.56
Id.57
Id.11
institute any proceeding with respect to, all or any part of the FVP Smithfield LLC’s assets.”58
Lenders’ attorneys sent the notice to Mr. Blum.59
In October 2020, Midtown issued a notice of private sale (the “UCC Sale”) for the
FF&E.60 The notice stated that the sale was being held to enforce the rights of the Secured
Party.61 Subsequently, Feenix Opp Fund purchased the FF&E for $250,000 in November
2020.62 Immediately thereafter, Feenix Opp Fund (through Mr. Lee) emailed Mr. Blum to advise
him of the sale.63
Despite having notice of the private sale, neither Mr. Blum nor anyone else on behalf of
PBM attended the UCC Sale.64
4. Atalaya Facility
Prior to December 2020, Atalaya Capital Management (“Atalaya”) was a secured lender
of FVPOF (the “Atalaya Facility”).65 Atalaya perfected its security interest under the Atalaya
Facility by recording a UCC-1 financing statement.66
The Atalaya Facility provided terms governing a technical default.67 FVPOF was unable
to make quarterly distributions to its investors while still indebted pursuant to the Atalaya
Facility.68
58
Id.59
Id.60
Id.61
Id.62
Id.63
Id.64
Dec. 5 Tr. at 36:3-12.
65
Pl. Ex. G.
66
Id.67
Pl. Ex. D at FEENIX_BLUM000341.
68
Id.; see also Dec. 4 Tr. at 81:16-82:1.
12
5. Refinancing Through PAAMCO
On or around December 16, 2020, FVPOF finalized the proposed terms for a new debt
facility (the “Refinanced Facility”) with Prisma Pelican Fund LLC (“PAAMCO”).69 The
Refinanced Facility contained terms that were substantially the same as the Atalaya Facility,
including the interest rate and the fee share percentage. 70
According to Feenix, the Refinanced Facility provided marked advantages to Plaintiffs,
including the removal of the technical default provision that was in the Atalaya Facility.71 Under
the Refinanced Facility, FVPOF would be able to make quarterly distributions to its investors.72
On December 16, 2020, Mr. Lee sent an email (the “December E-Mail”) to FVPOF’s
investors, seeking majority approval of the Refinanced Facility, which was scheduled to close by
Friday, December 18, 2020.73 Mr. Lee copied the December E-Mail to the members of FVPOF
including Jeffrey Blum.74
On December 17, 2020, Jeffrey Blum—Mr. Blum’s father—forwarded Mr. Lee’s
December 16, 2020 email to an email recipient identified as “Flopsea 1962 W.”75 “Flopsea 1962
W” is the email pseudonym for Mr. Blum.76
By December 18, 2020, the majority of investors voted in favor of the Refinance Facility,
and the signature pages were held in escrow pending closing, which occurred on December 21,
2020.77
69
Dec. 4 Tr. at 85:20 – 86:2.
70
Pl. Ex. D, at FEENIX_BLUM000341; Dec. 4 Tr. at 86:7-10.
71
Pl. Ex. D, at FEENIX_BLUM000341.
72
Pl. Ex. D, at FEENIX_BLUM000341; Dec. 4 Tr. at 86:17-20.
73
Pl. Ex. D, at FEENIX_BLUM000341; Dec. 4 Tr. at 85:20 – 86:2, 90:6-10.
74
Pl. Ex. E, at BLUM_4/18/23_0065; Dec. 4 Tr. at 89:13-23.
75
Pl. Ex. E, at BLUM_4/18/23_0065; Dec. 4 Tr. at 90:1-5.
76
Dec. 5 Tr. at21:3-6.
77
Pl. Ex. D, at FEENIX_BLUM000341; Dec. 4 Tr. at 86:21-87:8.
13
6. The December 18, 2020 Letter
Mr. Blum was already aware of the UCC Sale. First, Mr. Blum had seen the August 14,
2020 letter from Midtown.78 The August 14, 2020 letter gave notice to Mr. Blum of the senior
security interests in the assets of FVP Smithfield, including the FF&E later referenced in the
December 18, 2020 Letter.79 Mr. Blum knew the notice of the UCC Sale was October 30,
2020.80
Jeffrey Blum provided Mr. Blum with the December E-Mail on December 17, 2020.81
Mr. Blum provided the December E-Mail to Jacob Frenkel.82 Mr. Frenkel is an attorney who has
represented Mr. Blum.83 As relevant here, Mr. Blum retained Mr. Frenkel.84
On December 18, 2020, Mr. Frenkel sent a letter to Atalaya (the “December 18
Letter”).85 Mr. Blum reviewed the December 18 Letter and authorized Mr. Frenkel to send it.86
The December Letter contains allegations that Mr. Blum now concedes are “offensive.”87 The
December 18 Letter, in part, states:
I write in connection with what appears on paper to be Atalaya’s affiliate Midtown
Madison Management LLC / Midtown Management LLC . . . participating in a
possible sham $250,000 transaction and fraudulent claim of security interest to
defraud PBM.
I characterize the transaction as I do because it is unfathomable that Atalaya, if the
transaction in fact is a fraud as it appears, would put the fund and its investors at
risk by involving itself in such conduct.
Pursuant to a document captioned Bill of Sale and Assignment bearing the date
December 1, 2020, Atalaya supposedly sold the FF&E at the Leased Premises to
78
Blum Depo. at 44:6-22; Def. Ex. G; Dec. 5 Tr. at30:13-19.
79
Dec. 5 Tr. at32:2-5.
80
Pl. Ex. G; Def. Ex. D; Blum Depo. at 53:5-17; Dec. 5 Tr. at 32:20-33:10; 33:20-34:8.
81
Blum Depo. at 32:4-12; Dec. 5 Tr. at 20:22 – 21:2.
82
Blum Depo. at 32:2-8, 32:4-12; Dec. 5 Tr. at 23:4-8.
83
Blum Depo. at 33:7-11, 34:4-7; Dec. 5 Tr. at 17:7-9.
84
Blum Depo. at 33:7-11; Dec. 5 Tr. at 17:2-6.
85
Pretrial Stipulation, Part II ¶ 12; Dec. 5 Tr. at 23:12-19.
86
Blum Depo. at 38:11-24; Dec. 5 Tr. at 23:20 – 24:9.
87
Dec. 5 Tr. at 26:8-13.
14
Feenix Venture Partners Opportunity Fund, LP . . . for the sum of $250,000. The
named signatory on the Bill of Sale is that of Midtown identifiable on Atalaya’s
website as an Atalaya Partner. Regardless of the legal impropriety of selling FF&E
owned by another and for which that other party had in place a valid security
interest, Atalaya should have possession, custody and control of a record reflecting
receipt on or about December 1, 2020 of a payment of $250,000 from FVP. PBM’s
suspicion is no such transaction record exists at Atalaya.
And, with respect to the represented sale price of $250,000, the value of the entire
FF&E is substantially less than $250,000. This was not a bona fide purchase and
sale.
On August 14, 2020, prior to the sale, Holland & Knight, acting for [Lenders], sent
a letter to PBM purporting to describe a Loan and Security Agreement dated April
24, 2019 (the “Loan Agreement”) between Atalaya and [FVP] Smithfield (the
“August 14 Letter”). According to the August 14 Letter, [FVP] Smithfield granted
to Atalaya, through the Loan Agreement, a first priority security interest in all of
[FVP] Smithfield’s Assets. If such a transaction lacking credulity took place, then
it is between Atalaya and Holland & Knight as to why there was no UCC-1 filing.
What matters is that PBM holds a security interest in the FF&E as evidenced by the
Lease and [a 2020 Pennsylvania] UCC-1 filing, and the Lease predates Atalaya ‘s
alleged loan to [FVP] Smithfield by over a year. Thus, contrary to the assertions in
the August 14 Letter, Atalaya does not have a first priority security interest in the
[FVP] Smithfield FF&E. And, Atalaya and Holland & Knight would be equally
culpable for misrepresentations, given that Holland & Knight acted for and with the
actual authority of Atalaya.
Our suspicion is Lee solicited or induced Midtown and Atalaya’s participation in
this sham transaction and unlawful sale for the sole purpose of harassing PBM.
What is shocking, if our suspicion is correct, is the disproportionate legal and
regulatory consequence to Atalaya and Midtown of Atalaya, as well as Holland &
Knight, willingly joining Lee’s apparent scheme to defraud PBM. Holland &
Knight could not possibly have performed due diligence or complied with
Pennsylvania law to advance Lee’s scheme and harassment campaign against PBM.
If our analysis is correct, then Atalaya and its attorneys impaired PBM’s secured
property rights and lien, tortuously interfered with PBM’s contractual rights and
engaged in the tort equivalent of (at a minimum) wire fraud.88
The December Letter also contained the following statement:
Additionally, we have learned that today, December 18, 2020, [New Lender] is
scheduled to replace Atalaya as creditor for [Feenix Opp Fund]. Investors of PBM,
who also are limited partners in [Feenix Opp Fund], are questioning whether the
fund [Feenix Opp Find] had any legitimate business purpose in the first place for
88
Pl. Ex. F.
15
acquiring used office furniture for a grossly inflated price during a pandemic.
Indeed, according to a [Feenix Opp Fund] Summary of Terms for Debt Financing,
no equity is attributed to [FVP] Smithfield, notwithstanding that [Feenix Opp Fund]
purportedly paid $250,000 for the [FVP] Smithfield FF&E.89
Atalaya’s counsel responded by letter dated December 22, 2020. 90 Mr. Frenkel sent Mr.
Blum Atalya’s December 22, 2020 letter, including the April 24, 2019 UCC financing
statement.91 Mr. Frenkel and Atalaya’s counsel exchanged additional letters on December 22,
2020.92
Mr. Frenkel sent the December 18 Letter only to Atalaya.93 While the PAAMCO
transaction is mentioned in the December 18 Letter, the record does not demonstrate that any
term sheet with PAAMCO was included in this letter. Feenix sent the December 18 Letter to
PAAMCO.94
7. Lender Response and Escrow Demand
In December 2020, Feenix Venture Partners Opportunity Fund, LP refinanced the
Atalaya Facility which allowed for a payoff of the debt to Atalaya.95 Specifically, on December
21, 2020, Feenix Opp Fund closed on the refinance facility.96
Despite the refinancing and the availability of funds to pay off the Atalaya Facility,
Atalaya required a $50,000 holdback.97 Mr. Lee confirmed that the holdback reserve was a new
term, added in response to the December 18 Letter.98 From the $50,000 holdback, Atalaya
89
Id.90
Pl. Ex G; Pretrial Stipulation, Part II ¶ 15.
91
Blum Depo. at 43:5-12. Dec. 5 Tr. at 23:20-24:9.
92
Pl. Ex. H, I; Pretrial Stipulation, Part II ¶ 15.
93
Dec. 5 Tr. at 23:15.
94
Dec. 4 Tr. at 121:17-23.
95
Dec. 4 Tr. at 213:11-214:1.
96
Dec. 4 Tr. at 213:15-22.
97
Dec. 4 Tr. at 213:11-214:1; Def. Ex. J (payoff letter adding “Holdback Reserve (‘Reserve’): $50,000” as a new
term).
98
Dec. 4 Tr. at 118:10-16.
16
withheld sums that were attributed to legal fees payable to its law firm, Holland & Knight LLP.99
Feenix contends that the holdback was solely attributable to the December 18 Letter.
Although Plaintiffs were refunded a portion of the $50,000 holdback, a balance of
$11,673.18 was not refunded. 100 Again, Feenix contends that the unrefunded portion is
attributable to the December 18 Letter.101
IV. APPLICABLE LAW
The Court will be applying the following general legal principles:
A. GOVERNING SUBSTANTIVE LAW
Delaware law applies here. First, the Operating Agreement is governed by Delaware law.
Operating Agreement Section 19.2(b) provides, in relevant part, that the agreement “…will be
governed by and construed in accordance with the laws of the State of Delaware.” Moreover, the
Separation Agreement, Section 13(e), states that:
The parties irrevocably consent to jurisdiction and venue of the state and federal
courts located in Delaware in connection with any action relating to this Agreement
and agree that service of summons, complaint or other process in connection with
any such action may be made as set forth in Section 19.3 of the Operating
Agreement and that service so made will be as effective as if personally made in
the State of Delaware.
B. BREACH OF CONTRACT
Under Delaware law, to prove a breach of contract claim, a party must show: “(1) a
contractual obligation; (2) a breach of that obligation; and (3) resulting damages.”102 A party
harmed by a breach of contract is entitled to compensation that will place that party in the same
position that the party would have been in if the other party had performed under the contract.103
99
See generally Pl. Ex. J.
100
Dec. 4 Tr. at 214:7-215:18; Pl. Ex. J, at 00031.
101
Dec. 4 Tr. at 236:8-18.
102
Interim Healthcare, Inc. v. Spherion Corp., 884 A.2d 513, 548 (Del. Super. 2005).
103
See E.I. DuPont de Nemours and Co. v. Pressman, 679 A.2d 436, 445-46 (Del. 1996).
17
The standard remedy for breach of contract is based upon the reasonable expectations of
the contracting parties.104 Expectation damages are measured by determining “the amount of
money that would put the promisee in the same position as if the promisor had performed the
contract.”105 “Damages for a breach of contract must be proven with reasonable certainty.
Recovery is not available to the extent that the alleged damages are uncertain, contingent,
conjectural, or speculative.”106
C. BURDEN OF PROOF BY A PREPONDERANCE OF THE EVIDENCE
In a civil case, the burden of proof is by a preponderance of the evidence. Proof by a
preponderance of the evidence means proof that something is more likely than not. This means
that certain evidence, when compared to the evidence opposed to it, has the more convincing
force and makes the Court believe that something is more likely true than not. If the evidence on
any particular point is evenly balanced, the party having the burden of proof has not proved that
point by a preponderance of the evidence, and the Court must find against the party on that
point.107
In deciding whether any fact has been proved by a preponderance of the evidence, the
Court may consider the testimony of all witnesses regardless of who called them, and all exhibits
received into evidence regardless of who produced them.
In this particular case, Feenix carries the burden of proof by a preponderance of the
evidence on Count II.108
104
See Duncan v. Theratx, Inc., 775 A.2d 1019, 1022 (Del. 2001).
105
Id.106
Lee-Scott v. Shute, 2017 WL 1201158, at *7 (Del. Com. Pl. Jan. 30, 2017).
107
Superior Court Civil Pattern Jury Instruction 4.1.
108
See, e.g., Reynolds v. Reynolds, 237 A.2d 708, 711 (Del. 1967) (defining preponderance of the evidence); Oberly
v. Howard Hughes Medical Inst., 472 A.2d 366, 390 (Del. Ch, 1984) (same).
18
D. EVIDENCE EQUALLY BALANCED
If the evidence tends equally to suggest two inconsistent views, neither has been
established. That is, where the evidence shows that one or two things may have caused the
breach/damages: one for which a party was responsible and one for which a party was not. The
Court cannot find for the party carrying the burden of proof if it is just as likely that the
breach/damages was caused by one thing as by the other.109
V. DISCUSSION
A. MR. BLUM BREACHED THE SEPARATION AGREEMENT.
The Court finds that Feenix has carried its burden in proving that Mr. Blum breached the
Separation Agreement.
First, Feenix has demonstrated that Mr. Blum and Feenix were parties to valid
contracts—the Operating Agreement and the Separation Agreement. The Court notes that the
parties did not dispute these facts at the Trial.
In 2017, Mr. Blum entered into the Operating Agreement. The Operating Agreement
defined Mr. Blum as a “Restricted Party” who need to abide by various Restrictive Covenants.110
Under one Restrictive Covenant, Mr. Blum agreed not to:
[M]ake any statement, or take any action whatsoever, to disparage, defame, sully,
or compromise the goodwill, name, brand, or reputation of any of the Companies
or their respective Affiliates.111
Under another Restrictive Covenant, Mr. Blum agreed not to
[W]ithout the prior written consent of the Board of Managers, directly or indirectly,
use, copy or duplicate, or disclose or otherwise make available to any third party,
any Confidential Information (as defined below) other than in the performance of
such Restricted Party’s duties with respect to the Companies . . . [and] not, without
the prior written consent of the Board of Managers, utilize or convert Confidential
109
Superior Court Civil Pattern Jury Instruction 4.2.
110
Pl. Ex. B. Op. Agreement at §15.5(d).
111
Pl. Ex. B. Op. Agreement at §15.5(a).
19
Information for such Restricted Party’s own benefit or gain, of whatever nature
other than in the performance of such Restricted Party’s duties with respect to the
Companies.112
On May 7, 2020, Mr. Blum and Feenix entered into the Separation Agreement.113 The
Separation Agreement provided that the Restrictive Covenants in the Operating Agreement
survived the execution of the Separation Agreement.114 In the Separation Agreement, Mr. Blum
also agreed that:
At no time shall [Mr. Blum] make any statement, whether orally or in written form,
or take any action whatsoever, to disparage or defame any of the Companies, the
Company Affiliates or any Company Exculpated Party (as such terms are defined
in the Company Operating Agreement).115
Second, the Court finds that Mr. Blum breached the Separation Agreement. The
December 18 Letter makes allegations of frauds and/or “sham transactions.”116 The December
18 Letter specifically refers to FVP Smithfield, LLC (calling it “Feenix-Smithfield”) as one
participant.117 In addition, the December 18 Letter goes on to state:
Our suspicion is [Mr.] Lee solicited or induced [Mr.] Chan and Atalaya’s
participation in this sham transaction and unlawful sale for the sole purpose of
harassing PBM. What is shocking, if our suspicion is correct, is the
disproportionate legal and regulatory consequence to Atalaya and [Mr.] Chan of
Atalaya, as well as Holland & Knight, willingly joining [Mr.] Lee’s apparent
scheme to defraud PBM. Holland & Knight could not possibly have performed due
diligence or complied with Pennsylvania law to advance Lee’s scheme and
harassment campaign against PBM. If our analysis is correct, then Atalaya and its
attorneys impaired PBM’s secured property rights and lien, tortuously interfered
with PBM’s contractual rights and engaged in the tort equivalent of (at a minimum0
wire fraud.118
112
Pl. Ex. B. Op. Agreement at §15.5(a).
113
Pl. Ex. C. Separation Agreement.
114
Pl. Ex. C. Separation Agreement at §9.
115
Pl. Ex. C. Separation Agreement at §11.
116
Pl. Ex. F. December 18 Letter.
117
Pl. Ex. F. December 18 Letter at 1.
118
Pl. Ex. F. December 18 Letter at 3.
20
Mr. Blum hired the author, Mr. Frenkel, of the December 18 Letter.119 In addition, Mr.
Blum authorized the sending of the December 18 Letter.120 The Court finds that the December
18 Letter disparages FVP Smithfield, LLC and Mr. Lee by accusing them of engaging in a
“fraud,” a “sham transaction,” and a “scheme and harassment campaign.”121 Perhaps obviously,
accusing someone of committing such acts disparages them. Moreover, such comments would
be disparaging even if true and, here, there is no evidence that the comments are true. Mr. Blum
approved the disparaging characterizations of FVP Smithfield and Mr. Lee after contractually
agreeing not to “make any statement” disparaging Feenix, Feenix’s affiliates and/or Mr. Lee.
Mr. Blum, therefore, breached the Separation Agreement.
Third, the Court finds that Mr. Blum breached the Separation Agreement by disclosing to
Atalaya that Feenix intended to close a new financing arrangement with PAAMCO. Mr. Blum
agreed in the Operating Agreement and the Separation Agreement not to disclose “Confidential
Information.”122 Confidential Information is defined broadly and includes non-public
information relating to the business affairs of Feenix.123
Mr. Blum, within eighteen months after separation, came into proprietary information of
Feenix when Jeffery Blum forwarded information to him relating to the PAAMCO financing on
December 17, 2020. 124 Mr. Blum then made Mr. Frenkel aware of the transaction so that Mr.
Frenkel could include it in the December 18 Letter. Besides making outrageous accusations
against Atalaya, Atalaya’s counsel, Mr. Lee and Feenix, Mr. Frenkel gratuitously mentions the
119
Blum Depo. at 33:7-11; Dec. 5 Tr. at 17:2-6.
120
Blum Depo. at 38:11-24; Dec. 5 Tr. at 23:20-24:9.
121
Pl. Ex. F.
122
Pl. Ex. B. Op. Agreement at §15.5(a); Pl. Ex. C. Separation Agreement at §9.
123
Pl. Ex. B. Op. Agreement at §15.5(a).
124
Pl. Ex. E.
21
PAAMCO replacement financing even though the facility apparently has nothing to do with the
UCC Sale.125
The why is unclear but the reality is that Mr. Blum obtained and then authorized Mr.
Frankel to disclose Confidential Information of Feenix to Atalaya, a third party. Atalaya may
have known that Feenix was replacing Atalaya’s facility with a new facility with PAAMCO;
however, whether Atalaya knew of the PAAMCO financing is not relevant as to whether Mr.
Blum disclosed the information in breach of his obligations under the Operating Agreement and
Separation Agreement.
B. FEENIX HAS LARGELY FAILED TO PROVE DAMAGES RELATED TO THE BREACHES.
Feenix seeks a wide range of damages for Mr. Blum’s breaches of the Operating
Agreement and the Separation Agreement. Specifically, Feenix seeks damages related to: (i)
Atalaya’s holdback and charge to an escrow; (ii) actual damages; and (iii) general and
reputational damages.126 The Court finds that Feenix has failed to carry its burden as to damages
with the exception of $11,212.50 in reimbursement costs to Atalaya in connection with the
December 18 Letter.127 The Court finds all other requests for damages too speculative and
otherwise not supported by evidence adduced at the Trial.
In Delaware, “[d]amages for a breach of contract must be proven with reasonable
certainty. Recovery is not available to the extent that the alleged damages are uncertain,
contingent, conjectural, or speculative.”128 The record is bereft of evidence on damages other
than the Atalaya charge against the escrow. Mr. Lee testified on damages, but his testimony was
125
Pl. Ex. F. December 18 Letter at 3.
126
As noted above, Feenix also sought disgorgement damages; however, the Court granted the Motion to Strike as to
these types of damages (D.I. No. 171).
127
Pl. Ex. J. Legal Bills of Holland & Knight. The Court does not consider Pl Ex. J for the truth of the matter
asserted. Instead, Mr. Lee testified that he allowed Atalaya to charge the escrow in the amount of $11,212.50. Pl.
Ex. J, therefore, is being used for purposes other than admissible hearsay such as the “effect on listener,” etc.
128
Lee-Scott v. Shute, 2017 WL 1201158, at *7 (Del. Com. Pl. Jan. 30, 2017).
22
general and not supported by other evidence or expert testimony. For example, Mr. Lee talked
about Feenix’s reputational damage in the community and the inability to transact additional
business with Atalaya. However, Mr. Lee could not quantify the damage and no one from
Atataya testified on why it no longer did business with Feenix. Without more, the Court would
only be speculating as to Feenix’s claims for actual, general, and reputational damages.
Feenix did not meet its burden on damages except as to the Atalaya reimbursement.129
The Court, when acting as the fact finder, cannot award damages based on mere speculation or
conjecture when a plaintiff fails to adequately prove damages.130 Moreover, the Court notes that
the mere breach of a contract is insufficient for a damages award if the Court has no basis to
make a responsible estimate of damages.
C. THE COURT FINDS THAT NEITHER FEENIX NOR MR. BLUM ARE ENTITLED TO
ATTORNEYS’ FEES AND COSTS.
The Separation Agreement contains the following provision:
The substantially prevailing party in any action or proceeding relating to this
Agreement will be entitled to receive an award of, and to recover from the other
party or parties, any fees or expenses incurred by him, her or it (including, without
limitation, reasonable attorneys’ fees and disbursements) in connection with any
such action or proceeding.131
While each party has been “successful” in this civil action, the Court finds that neither party is a
“substantially prevailing party.”
Feenix contends it is the substantially prevailing party because it proved that Mr. Blum
breached the Operating Agreement and the Separation Agreement. Mr. Blum argues he is the
prevailing party because Feenix was successful only on Count II and with limited damages.
129
See eCommerce Indus. v. MWA Intel, Inc., 2013 WL 5621678, at *19 (Del. Ch. Sept. 30, 2013) (damages are a
necessary element of a breach of contract claim and require proof by a preponderance of the evidence).
130
Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 2020 WL 948513, at *20 (Del. Ch. Feb.
27, 2020).
131
Pl. Ex. C. Separation Agreement at §13(f) (emphasis added).
23
Mr. Blum refers the Court to Dreisbach v. Walton132 to support his position. In
Dreisbach, the Court noted that plaintiffs’ success “was limited in both the monetary amount
recovered and in the number of claims on which Plaintiffs prevailed.”133 The Dreisbach court
explained that an award of less than 7% of the alleged damages “does not quantify as substantial
success.”134 After reviewing the law, the Dreisbach court noted that the decision to award fees
under a contract provision is not a mathematics exercise but, rather, a review of the success
obtained.135
Using the guidance set out in Dreisbach, the Court finds that neither Feenix nor Mr.
Blum can claim they substantially prevailed. Feenix has demonstrated that Mr. Blum breached
the Operating Agreement and the Separation Agreement, but the damage award is limited. Mr.
Blum has successfully fought off a majority of the claims but, nonetheless, breached clear and
unambiguous contractual obligations without any real justification. Under these realities, the
Court finds that no one has “substantially prevailed,” especially in a manner that would reward
them with an entitlement of attorneys’ fees and costs.
VI. CONCLUSION
The Court awards judgment in favor of Feenix on Count II. The amount of damages is
$11,212.50 plus applicable prejudgment interest. Feenix may also seek additional recovery
under Civil Rule 54.
Dated: May 29, 2024
Wilmington, Delaware
/s/ Eric M. Davis
Eric M. Davis, Judge
cc: File&ServeXpress
132
2014 WL 5426868 (Del. Super. Oct. 27, 2014).
133
Id., at *7.
134
Id.
135
Id., at *6.
24