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

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 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, 

, 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, 

, 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


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 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, 

  59, 66 (App. Div. 1st Dep’t 2012); Global Minerals & Metals
43   Corp. v. Holme, 

, 215 (App. Div. 1st Dep’t
44   2006); see also Lazard Freres & Co. V. Protective Life Ins.
45   Co., 

(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

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 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.” 

¶ 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




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