EDGARDO RAMOS, District Judge.
Plaintiff GrowBlox Sciences, Inc. ("Growblox Sciences") brings this action against GCM Administrative Services, LLC ("GCM"), Strategic Turnaround Equity Partners, LP ("Strategic"), Seth M. Lukash ("Lukash"), and Gary Herman ("Herman") (collectively, "Defendants"). See Am. Compl., Doc. 3. Plaintiff seeks a declaratory judgment as to whether Defendants have a right to convert certain debt instruments into shares of Growblox Sciences common stock,
Defendants, along with Digital Creative Development Corporation ("DCDC") (collectively, "Counterclaimants"), filed counterclaims against Plaintiff, GrowOpp LLC, Craig Ellins ("Ellins"), Todd Denkin ("Denkin"), Joseph J. Bianco ("Bianco") and Tumbleweed Holdings, Inc. ("Tumbleweed") (collectively, "Counterclaim-Defendants"). Am. Countercl., Doc. 26. Counterclaimants assert the following five causes of action: (1) declaratory relief that a general partnership was formed; (2) breach of fiduciary duty; (3) unjust enrichment; (4) quantum meruit; and (5) breach of contract. Id. Counterclaim-Defendants move to dismiss the first four counterclaims pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.
Starting in February 2013, Counterclaimants Herman and Lukash embarked on a business venture with Counterclaim-Defendants Ellins, Denkin, and Bianco with the end goal of creating a company that would grow and sell medicinal-grade marijuana in compliance with state and local laws. Am. Countercls. ¶ 13; see also Countercl.'s Mem. L. Opp., Doc. 36 at 6. Ellins, Denkin, and Bianco owned GrowOpp LLC, which Counterclaimants describe as "a thinly capitalized LLC with nominal assets, which they used for their nascent business." Id. at ¶ 15. Ellins and Denkin were responsible for developing the equipment and related products. Id. As Chairman of DCDC, Herman provided liquidity and a platform to raise capital and acquire businesses. Id. at ¶ 16. As a chief executive and chief operating officer of several technology and software companies, Lukash brought his expertise in manufacturing, industrial design, marketing, and business strategy to the venture. Id. at ¶¶ 17-18. Although the five parties had individual responsibilities, they also collaborated with one another. Id. at ¶ 22. Together, they developed a business plan, created pro-forma financials, built the corporate website, raised financing, and created investor presentations, among other business development projects. Id. at ¶ 17. They also regularly participated in meetings, conference calls, emails, and texts. Id. at ¶ 22. Counterclaimants allege that "they placed their trust and confidence in each other, rather than the various corporate vehicles through which they worked." Id.
It was not until several months later, on July 31, 2013, that the co-venturers drafted a non-binding letter of intent ("LOI") to "memorialize their plans and anticipated structure[.]" Id. at ¶ 23. By its terms, the LOI described the "proposed transaction" as the merger of DCDC, GrowOpp LLC, and a company known as GrowBlox Holdings, Inc., through the acquisition by DCDC of substantially all of the assets of GrowOpp LLC and GrowBlox Holdings, Inc. Am. Compl., Ex. H. As relevant to the instant motion, the LOI also contained a waiver of liability provision with respect to the parties and their representatives. Am. Compl., Ex. H at ¶ 6. The LOI was signed by Herman on behalf of DCDC, Denkin, on behalf of GrowOpp LLC, and Lukash as "Chief Executive Officer" on behalf of Growblox Holdings, Inc.
The LOI expired by its own terms, ninety days after signing, on October 29, 2013, without the proposed transaction having taken place. Id. at ¶ 28. Notwithstanding the expiration of the LOI, Denkin, Ellins, Bianco, Herman, and Lukash continued to work together in furtherance of their venture. Id. Counsel for the parties worked on the proposed transaction through February 2014. Id. According to Counterclaimants, the five individual parties all recognized that they were "working together toward their goals as a partnership" and their understanding was "memorialized" in a Private Placement Memorandum ("PPM") dated December 15, 2013. Id. at ¶¶ 31-32.
The PPM, which was drafted by GrowOpp LLC's counsel, id. at ¶ 32, includes information pertaining to a privately held Delaware corporation named Tumbleweed Holdings, Inc.
The parties continued to conduct meetings concerning the proposed transaction through early March 2014. Am. Countercls. ¶ 34. However, Counterclaimants allege that on March 13, 2014, Ellins, Denkin, and Bianco "abruptly" changed course and sold the "partnership assets" to Signature.
GrowBlox Sciences commenced this declaratory judgment action against GCM, Strategic, Lukash, and Herman on April 1, 2014. See Compl., Doc. 2. It filed an Amended Complaint on April 9, 2014. See Doc. 3. On May 9, 2014, Defendants filed their Answer, which included counterclaims brought by themselves, along with DCDC, against GrowBlox Sciences, GrowOpp LLC, Ellins, Denkin, Bianco and Tumbleweed. Countercls., Doc. 11. Defendants filed Amended and Supplemental Counterclaims on November 19, 2014. Am. Countercls., Doc. 26.
While Counterclaimants styled their claims as "third-party" claims against "third-party defendants," Counterclaim-Defendants correctly point out that this case does not involve third-party practice as defined by Rule 14 of the Federal Rules of Civil Procedure. See Countercl.-Defs.' Mem. L. Supp. Mot. Dismiss, Doc. 32 at 6 n.1. Rule 14 governs when a defendant may act as a third-party plaintiff by bringing a claim against an outside party. It only applies to claims against nonparties who are or may be liable to the third-party plaintiff for all or part of the claim against it. Fed. R. Civ. P. 14(a)(1). Here, Defendants are not claiming that Ellins, Denkin, Bianco, GrowOpp LLC and Tumbleweed may be liable for any claims asserted against them by GrowBlox Sciences, the Plaintiff in the underlying action. Moreover, the mere fact that Defendants have added DCDC as a counterclaimant does not make any of them third-party plaintiffs. The claims brought by Defendants and DCDC are covered by Rule 13, which governs compulsory and permissive counterclaims, along with the joinder of additional parties.
"A motion to dismiss a counterclaim is evaluated under the same standard as a motion to dismiss a complaint." Revonate Mfg., LLC v. Acer Am. Corp., No. 12 CIV. 6017 (KBF), 2013 WL 342922, at *2 (S.D.N.Y. Jan. 18, 2013) (citation omitted). When ruling on a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), the court must accept all factual allegations in the complaint as true and draw all reasonable inferences in the plaintiff's favor. Nielsen v. Rabin, 746 F.3d 58, 62 (2d Cir. 2014). The court is not required to credit "mere conclusory statements" or "threadbare recitals of the elements of a cause of action." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)); see also id. at 681 (citing Twombly, 550 U.S. at 551). "To survive a motion to dismiss, a complaint must contain sufficient factual matter . . . to `state a claim to relief that is plausible on its face.'" Id. at 678 (quoting Twombly, 550 U.S. at 570). A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. (citing Twombly, 550 U.S. at 556). More specifically, the plaintiff must allege sufficient facts to show "more than a sheer possibility that a defendant has acted unlawfully." Id. If the plaintiff has not "nudged [his] claims across the line from conceivable to plausible, [the] complaint must be dismissed." Twombly, 550 U.S. at 570; Iqbal, 556 U.S. at 680.
The question in a Rule 12 motion to dismiss "`is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims.'" Sikhs for Justice v. Nath, 893 F.Supp.2d 598, 615 (S.D.N.Y. 2012) (quoting Villager Pond, Inc. v. Town of Darien, 56 F.3d 375, 278 (2d Cir. 1995)). "[T]he purpose of Federal Rule of Civil Procedure 12(b)(6) `is to test, in a streamlined fashion, the formal sufficiency of the plaintiff's statement of a claim for relief without resolving a contest regarding its substantive merits,'" and without regard for the weight of the evidence that might be offered in support of Plaintiffs' claims. Halebian v. Berv, 644 F.3d 122, 130 (2d Cir. 2011) (quoting Global Network Commc'ns, Inc. v. City of New York, 458 F.3d 150, 155 (2d Cir. 2006)).
The Court may consider a document that is attached to the complaint, incorporated by reference or integral to the complaint, provided there is no dispute regarding its authenticity, accuracy or relevance. DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d Cir. 2010) (citations omitted). "To be incorporated by reference, the [c]omplaint must make a clear, definite and substantial reference to the documents." Mosdos Chofetz Chaim, Inc. v. Vill. of Wesley Hills, 815 F.Supp.2d 679, 691 (S.D.N.Y. 2011) (internal quotation marks and citation omitted). The Amended Counterclaims cite and rely on two documents: (1) the July 31, 2013 LOI, attached to Plaintiff's Amended Complaint; and (2) the December 15, 2013 PPM, which Counterclaimants submitted contemporaneously with the filing of their opposition papers. See Am. Countercls. ¶¶ 23-28, 32. Specifically, they state that these two documents "memorialized" the understanding between the parties regarding the structure of their business relationships. Id. at ¶¶ 23, 32. The LOI and PPM are clearly referenced by the Amended Counterclaims, are highly relevant to the question of whether the parties formed a partnership, and are therefore incorporated by reference. Thus, the Court will consider them in deciding the present motion. Counterclaimants also submitted a copy of GrowBlox Sciences' Form 8-K, of which the Court can take judicial notice. See Fleming Aff., Doc. 35 at Ex. 2.
Counterclaim-Defendants primarily argue that the LOI absolved the parties of any legal obligation to one another. They ground this claim in the LOI's waiver provision, which states in relevant part:
Am. Compl., Ex. H at ¶ 6 (emphases added). The LOI further provides that, upon its termination, all of its provisions would be deemed "null, void, and of no further force or effect." Id. at ¶ 7. However, the LOI carves out an exception for certain provisions, including the above waiver provision, which are intended to survive the termination of the LOI. Id. at ¶¶ 6-7.
Counterclaim-Defendants argue that Counterclaimants' claims are precluded by the LOI's waiver of liability because they arise out of and relate to the proposed transaction. See Counter-Def.'s Reply, Doc. 38 at 2-3. Specifically, they argue that the Counterclaimants' "attempt to forge a `joint venture' or `general partnership' from actions plainly undertaken under and only for the Letter of Intent flies in the face of the language of that document." Doc. 32 at 10. However, that argument can take Counterclaim-Defendants only so far, for several reasons. First, while they are undoubtedly correct that actions "plainly undertaken" during the life of the LOI cannot form the basis for a claim "arising out of or relating to the Proposed Transaction," they assume that the LOI continued to define the relationship between the parties after it had expired by its terms. It did not; at least not necessarily. Whether the parties continued to operate informally under the precise terms of the LOI, or whether they created a partnership or joint venture, or whether they proceeded under some other arrangement after the LOI expired is a matter of dispute.
Secondly, it bears noting that, contrary to Counterclaim-Defendants' suggestion, the LOI and the PPM describe two different transactions. The LOI assumed that the "proposed transaction" would consist of DCDC's acquisition of substantially all of GrowOpp LLC and GrowBlox Holdings, Inc.'s assets. Am. Compl., Ex. H at 1. The LOI's term sheet further states that the proposed transaction would be structured as a merger of the three entities, with DCDC as the surviving entity. Id. at 7. As part of the closing, DCDC would then change its name to GrowBlox Holdings, Inc. Id. In contrast, the PPM provides that, after Tumbleweed's private placement offering, a subsidiary of DCDC would merge into Tumbleweed, which in turn owns all of GrowOpp LLC's membership interests. Fleming, Ex. 1 at HER00004057-58. Pursuant to the merger, Tumbleweed, not DCDC, would emerge as the surviving corporation. Id. at 00004058.
Thus, while the end result is essentially the same—i.e., the merger of DCDC and GrowOpp LLC—the mechanism for arriving at that result is different. The PPM anticipates a different surviving entity and does not involve GrowBlox Holdings, Inc. Given these differences, together with the fact that the Court is required to construe all facts in the light most favorable to the Counterclaimants, the LOI is not clearly applicable to the efforts associated with the transaction described in the PPM nor does it preclude the creation of a new relationship. To the extent that Counterclaimants base their claims on conduct associated with the PPM, those claims are not precluded by the LOI's waiver provision based on the information currently before the Court. See Am. Compl., Ex. H at ¶ 7 ("The termination of this letter of intent will not relieve any of the parties of liability for such party's pre-termination breach of any of the provisions of this letter of intent or any other agreement between the parties.").
Counterclaimants also briefly argue that the LOI's waiver of liability provision only applies to the entities which were parties to the document, as opposed to any specific individuals. Doc. 36 at 3. Counterclaim-Defendants respond that the LOI additionally binds the entities' representatives, which would include Ellins, Denkin and Bianco.
The first amended counterclaim asks the Court to issue a declaratory judgment stating that, "through their respective actions, a general partnership was formed among Herman, Lukash, Ellins, Denkin, and Bianco, in which each individual owned an equal share." Am. Countercl. ¶ 43. It also seeks a declaratory judgment stating that Herman and Lukash have a collective forty percent ownership stake in the partnership and that the assets acquired by Signature constituted partnership property. Id. at ¶¶ 45-46. Counterclaim-Defendants argue, in part, that the Amended Counterclaims merely consist of conclusory allegations and therefore fail to state a claim. Doc. 32 at 13-14.
"[A] [p]artnership results from contract, express or implied." Ronis v. Carmine's Broadway Feast, Inc., No. 10 CIV. 3355 (TPG), 2012 WL 3929818, at *5 (S.D.N.Y. Sept. 7, 2012) (quoting Martin v. Peyton, 246 N.Y. 213, 217, 158 N.E. 77, 78 (1927)) (internal quotation marks omitted). A partnership contract can be either oral or written. Id. (citing Missan v. Schoenfeld, 95 A.D.2d 198, 208, 465 N.Y.S.2d 706, 712 (1983)). Even in the absence of an explicit agreement, the existence of a partnership may be implied from "the conduct, intention, and relationship between the parties." Id. (quoting Brodsky v. Stadlen, 138 A.D.2d 662, 663, 526 N.Y.S.2d 478, 479 (1988)) (internal quotation marks omitted). Under New York law,
Although the Amended Counterclaims only refer to the existence of a partnership, Counterclaimants' papers repeatedly refer to their arrangement as a joint venture. See Doc. 36 at 1, 4, 13. Under New York law, partnerships and joint ventures are virtually identical. Doc. 32 at 14 n.9. Indeed, a joint venture is viewed as a "partnership for a limited purpose," and is governed by the same legal rules as partnerships.
The Amended Counterclaims state that "it was commonly recognized between Herman, Lukash, Ellins, Denkin, and Bianco that they were working together toward their goals as a partnership, in which each was an equal owner, each had joint management and control, each contributed capital, and each was expected to bear any losses." Am. Countercls. ¶ 31. Counterclaimants thoroughly detail the labor and capital that they contributed to the undertaking. Id. at ¶¶ 17-21, 30.
Although Counterclaimants repeatedly refer to the "Tumbleweed Partnership" in their opposition papers, neither the Amended Counterclaims nor any of the attached documents make any reference to such an entity. First, "it is well settled that `calling an organization a partnership does not make it one." Ely, 2013 WL 411348, at *6 (quoting N. Am. Knitting Mills, Inc. v. Int'l Women's Apparel, Inc., No. 99 CIV. 4643 (LAP), 2000 WL 1290608, at *2 (S.D.N.Y. Sept. 12, 2000)). Second, the PPM does not purport to "memorialize" a partnership agreement at all, rather, it is wholly concerned with providing investment information about Tumbleweed Holdings, Inc., a corporate entity.
The Amended Counterclaims do not allege many of the traditional indicia of a partnership, such as joint liability for debts, shared access to its bank accounts, authority to sign checks on the partnership's behalf, or the filing of partnership tax returns. Scott v. Rosenthal, No. 97 CIV. 2143 (LLS), 2001 WL 282712, at *3 (S.D.N.Y. Mar. 22, 2001) (internal citations omitted). Besides Tumbleweed, there is no claim that the individual parties served as officers, directors, or stockholders of the same entity, or otherwise exercised joint control over its day-to-day operations. See id. (citing Bereck v. Meyer, 222 A.D.2d 243, 243, 635 N.Y.S.2d 15, 16 (1995)). The only element of a partnership that the Amended Counterclaims support with facts is their account of the labor and capital Herman and Lukash dedicated to the undertaking. However, the mere fact that an individual stands to lose the value of his or her services rendered in connection with a collaborative business effort does not transform that person into a partner or joint venturer without more. Cosy Goose Hellas v. Cosy Goose USA. Ltd., 581 F.Supp.2d 606, 620-21 (S.D.N.Y. 2008) ("[A] putative joint venturer who only stands to lose the value of his or her services rendered in connection with the venture does not submit himself or herself to the liabilities and losses of the venture and thus is not considered a joint venturer.") (citing Dinaco, Inc. v. Time Warner, Inc., 346 F.3d 64, 68 (2d Cir. 2003)).
In sum, the Amended Counterclaims do not state sufficient facts to establish that a partnership or joint venture existed. The PPM itself undercuts Counterclaimants' contention that they intended to form a partnership, as opposed to corporation. Although the Amended Counterclaims establish that the parties had a business relationship that involved working together to create a corporation, they do not plead sufficient facts to plausibly claim that a partnership agreement was ever reached.
Counterclaimants' second cause of action alleges that Counterclaim-Defendants breached their fiduciary duties of care and loyalty to the general partnership and to their partners when they transferred the partnership assets to Signature without informing or obtaining consent from Herman and Lukash. Am. Countercls. ¶ 49. Given that Counterclaimants have failed to adequately allege that a partnership existed, see supra Part. II.C, or otherwise establish the presence of a fiduciary relationship, their breach of fiduciary of duty claim must also be dismissed.
Counterclaim-Defendants contend that Counterclaimants' unjust enrichment and quantum meruit claims should be dismissed because they cannot simultaneously seek damages for those causes of action as well as for breach of fiduciary duty and breach of contract. Doc. 32 at 15, Doc. 38 at 7. Counterclaim-Defendants further argue that, since partnerships and joint ventures are terminable at will, Counterclaimants can only assert a claim for accounting in connection with the alleged partnership's termination. Doc. 32 at 15. Counterclaimants respond that they are entitled to pursue their unjust enrichment and quantum meruit claims regardless of whether the Amended Counterclaims adequately plead the existence of a partnership. Doc. 36 at 11.
As a preliminary matter, "[a]t the pleading stage, [a party] is not required to guess whether it will be successful on its contract, tort, or quasi-contract claims." St. John's Univ., New York v. Bolton, 757 F.Supp.2d 144, 183 (E.D.N.Y. 2010). The Federal Rules of Civil Procedure allow parties to "set out 2 or more statements of a claim or defense alternatively or hypothetically, either in a single count or defense or in separate ones." Fed. R. Civ. Pro. 8(d)(2). In the end, "[a] party may state as many separate claims or defenses as it has, regardless of consistency." Fed. R. Civ. Pro. 8(d)(3). The Second Circuit has gone as far as to state that "even where allegations are not specifically denominated as alternative claims `[Rule 8(d)] offers sufficient latitude to construe separate allegations in a complaint as alternative theories, at least when drawing all inferences in favor of the nonmoving party as we must do in reviewing orders granting motions to dismiss.'" St. John's Univ., 757 F. Supp. 2d at 183-84 (quoting Adler v. Pataki, 185 F.3d 35, 41 (2d Cir. 1999)). Therefore, Counterclaimants are permitted to simultaneously allege breach of fiduciary duty and breach of contract, while also bringing unjust enrichment and quantum meruit claims in the alternative.
In their opposing papers, Counterclaimants maintain that the unjust enrichment, quantum meruit, and breach of contract claims are separate and apart from the alleged partnership. Doc. 36 at 11. The breach of fiduciary duty claim is premised on the alleged transfer of partnership assets to Signature without the knowledge of Herman or Lukash. Am. Countercls. ¶ 49. The unjust enrichment and quantum meruit claims are based on Herman and Lukash's contributions to those assets. Id. at ¶¶ 55, 62. Finally, the breach of contract claim arises from GrowOpp LLC's alleged failure to comply with the terms of the promissory notes. Id. at ¶ 67. Even if the Court had not dismissed Counterclaimants' partnership-based claims, it would be premature for it to determine that the quasi-contractual claims are redundant and dismiss them on that basis alone.
Counterclaim-Defendants also invoke the LOI to argue that Counterclaimants' unjust enrichment and quantum meruit claims are precluded by the waiver of liability provision. Doc. 38 at 7. However, they raised this argument for the first time in their reply papers, thereby preventing Counterclaimants from offering a response. "Courts generally do not consider arguments raised for the first time in a reply brief." Bektic-Marrero v. Goldberg, 850 F.Supp.2d 418, 432 (S.D.N.Y. 2012) (quoting U.S. ex rel. Sasaki v. New York Univ. Med. Ctr., No. 05 CIV. 6163 (LMM) (HBP), 2012 WL 220219, at *7 n.5 (S.D.N.Y. Jan. 25, 2012)). The Court is particularly unwilling to consider this argument given the LOI's limited applicability. See Doc. 38 at 7. The Court has already determined that the LOI's waiver provision does not preclude claims brought by Herman, Lukash, Ellins, Denkin, and Bianco against one another, or claims brought pursuant to separate agreements.
For the reasons set forth above, Defendants' motion to dismiss is GRANTED in part and DENIED in part. Specifically, Counterclaimants' request for declaratory relief, along with their breach of fiduciary duty claim, is dismissed without prejudice. The claims for unjust enrichment and quantum meruit survive the instant motion.
