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 asserted 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 moved to dismiss the first four counterclaims pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Counter-Def.'s Mot. Dismiss, Doc. 30. The Court denied the motion with respect to the unjust enrichment and quantum meruit claims, but granted the motion with respect to the declaratory judgment and breach of fiduciary duty claims, dismissing those claims without prejudice. Order, Doc. 44.
Counterclaimants now move for leave to file amended counterclaims. See Doc. 50. In addition to the surviving unjust enrichment and quantum meruit claims, Counterclaimants replead the declaratory judgment and breach of fiduciary duty claims. Proposed Second Amended Counterclaims ("2d Am. Countercl."), Doc. 51-1. Additionally, as an alternative to the breach of fiduciary duty claim, Counterclaimants plead that Denkin and Bianco aided and abetted Ellins's breach of fiduciary duty. Id. For the reasons set forth below, Counterclaimants' motion for leave to file amended counterclaims is GRANTED.
In February 2013, Counterclaim-Defendant Ellins reached out to Counterclaimant Herman with the idea to develop a business that would produce and sell legal cannabis products (the "Cannabis Business"). 2d Am. Countercl. ¶ 15. Although Ellins had some experience in the legal cannabis sector, he lacked the business experience necessary to launch the Cannabis Business. Id. ¶¶ 15-16. Ellins thus turned to Herman for financial expertise. Id. ¶ 16.
Herman expressed interest in raising money for the business. Id. ¶17. Furthermore, as the CEO and President of a public company (DCDC), Herman could provide a corporate vehicle to offer securities and raise capital for the Cannabis Business. Id.
In addition to Ellins and Herman, Counterclaimant Lukash and Counterclaim-Defendants Denkin and Bianco also became involved with the Business (collectively, the "Five Individuals"). Id. ¶ 18. Lukash had served as the Chief Executive Officer and Chief Operating Officer of various technology and software companies, and had prior experience in manufacturing, industrial design, marketing, business strategy, and financial reporting. Id. ¶ 19. The Five Individuals thus agreed that Lukash should serve as Chief Executive Officer and as the "public face" of the Cannabis Business to assist with fundraising and licensing. Id. Denkin, like Ellins, had prior experience in the legal cannabis sector, as well as in marketing and design, and could help develop a business plan and investor presentations to support the parties' efforts to raise money. Id. ¶ 20. Finally, Bianco had experience with mergers and acquisitions and could contribute funds to the Business. Id.
On July 31, 2013, the Five Individuals drafted a non-binding letter of intent ("LOI"), which memorialized the "structure to launch the Business as a public company." Id. ¶ 22. By its terms, the LOI described a "proposed transaction" whereby DCDC, GrowOpp LLC, and a company known as GrowBlox Holdings, Inc. would merge through the acquisition by DCDC of substantially all of the assets of GrowOpp LLC and GrowBlox Holdings, Inc. Am. Compl., Ex. H at 1. DCDC would then be renamed Growblox Holdings, Inc. ("Growblox Holdings"), and reincorporate in Delaware. 2d Am. Countercl. ¶ 22.
The LOI indicates that Growblox Holdings was to hold 60% of the company's shares, id. at 8, which Counterclaimants state was to be split evenly between the Five Individuals, 2d Am. Countercl. ¶ 22.
The LOI expired by its own terms, ninety days after signing, on October 29, 2013, without the proposed transaction having taken place.
From October 29, 2013 to early March 2014, the Five Individuals continued to work together to develop the Cannabis Business. Id. ¶ 30. Ellins and Denkin took the lead on the operations side of the Business, given their prior experience in the legal cannabis sector. Id. ¶ 28. This included work towards the development of the "GrowBLOX" product, a device intended to facilitate cannabis production. Id.
Lukash worked closely with Ellins, as well as an engineer and design consultant hired to assist in developing GrowBLOX, to transform the product from "a rudimentary prototype built out of wood to a commercially-marketable product complete with sophisticated technologies." Id. ¶ 29. Lukash made recommendations on the construction, design, packaging, and shipping of the product. Id. Lukash also, with the assistance of Herman, worked closely with Ellins, Denkin, and Bianco to create a business plan, create pro-forma financials, develop the corporate website, create investor presentations, and raise financing. Id. ¶ 30.
Herman, meanwhile, took "all necessary steps" to deliver a "clean" corporate shell, in the form of DCDC, which could be used to acquire the Cannabis Business. Id. ¶ 31. This would ensure that "DCDC was ready to serve as the public acquisition vehicle for the Cannabis Business." Id.
According to Counterclaimants, the Five Individuals "routinely consulted one another on all decisions affecting the Business" and "made important decisions affecting the Business jointly," such as changing the name of the Business and the style of the logo. Id. ¶ 34. Throughout the time that they worked together, the Five Individuals regularly kept in contact, participated in meetings and conference calls, and sent regular emails and texts to update each other on the status of their efforts. Id.
In addition to contributing their time and expertise, Herman and Lukash gave $25,000 to the Business, and "arranged for $75,000 of financing" from GCM and Strategic.
Counterclaimants state that the Five Individuals all understood that they would not be compensated for their time "unless and until the Business was profitable," and agreed to contribute funds to support the Business until they were able to raise sufficient funds from outside investors. Id. ¶ 35. Thus Herman and Lukash were not compensated for the time they spent working on the Cannabis Business, and "[t]hrough their expenditures, bore the risk of financial loss in the Five Individuals' venture." Id. ¶ 36.
By contributing their expertise, time, and money, Herman and Lukash ultimately helped develop a variety of valuable assets for the Business. Id. ¶ 37. These assets included the GrowBLOX product and associated drawings and renderings; business plans; investor presentations; a website; a logo and other digital artwork; various intellectual property including the "GrowBLOX" name; research relating to the cannabis market, the hydroponics market, and government regulation of cannabis; and "other concepts, plans, and know-how relating to cannabis and hydroponics," (collectively, "Business Assets"). Id.
Counterclaimants state that the Five Individuals repeatedly referred to themselves as partners in emails and conversations, and that "third parties understood them to be partners." Id. ¶ 38. The Five Individuals allegedly "presented themselves as jointly associated with GrowOpp and/or Tumbleweed Holdings," and Denkin created email accounts for each of the Five Individuals using the domain name @growopp.com.
After the LOI expired on October 29, 2013, the Five Individuals contemplated transferring the Business Assets to a "capitalized public company," with each individual receiving equity in the public company. Id ¶ 39. Consistent with this plan, counsel to GrowOpp prepared a "Confidential Private Placement Memorandum," dated December 15, 2013 (the "PPM"). See Fleming Aff., Doc. 35, Ex. 1 ("PPM"). The PPM describes a private placement offering of shares of Tumbleweed Holdings, Inc. ("Tumbleweed"), a Delaware corporation. Id. The PPM states that 13,714,350 shares of Tumbleweed stock were outstanding and owned in equal amounts by the Five Individuals. Id. at 00004057; see also 2d Am. Countercl. ¶ 39. According to Counterclaimants, the PPM also indicated that Tumbleweed owned all of the assets developed by the Cannabis Business.
The PPM also identifies Tumbleweed's "Executive Team," including Lukash as the company's Chief Executive Officer, Chief Operating Officer, and a Board Member; Denkin as the Vice President of Marketing and Sales; Bianco as the Business and Acquisition Advisor; and Ellins and Herman as Board Members of the corporation. Id. ¶ 40. Ellins and Denkin also sent investor presentations and business plans which, in sections entitled "Executive Leadership" and "Our Leadership Team," respectively, reiterated the individuals' roles at Tumbleweed described in the PPM. Id.
Tumbleweed Holdings, however, never became an operational entity, and notwithstanding the description in the PPM, no assets were transferred to Tumbleweed, no shares were issued, and no directors or officers were appointed. Id. ¶ 41. Counterclaimants explain that Tumbleweed was in fact "a proxy for the Partnership and its [a]ssets." Id. ¶ 42. More specifically, the Five Individuals allegedly understood that they had an equal stake in the Cannabis Business, which after the capital-raising process would result in equal ownership in whatever entity was ultimately utilized to launch the Business. Id. The description in the PPM thus reflected the plan at that time to transfer the Business Assets, of which they were equal owners, into a capitalized public company such as "Tumbleweed," in return for which each of the five partners would receive equal shares of Tumbleweed stock. Id.
Although the transaction described in the PPM never occurred, on December 30, 2013, approximately two weeks after the date of the PPM, Lukash wrote to Ellins, Denkin, and Bianco, stating that "[i]t has been [my and Herman's] understanding we were all equal interest holders (20% each)." Id. ¶ 46. Denkin, that same day, responded via email, "OK." Id. ¶ 46.
Herman and Lukash continued to dedicate their time and resources to develop the Cannabis Business through early March 2014. Id. ¶ 47. Unbeknownst to Herman and Lukash, however, by at least January 2014, Ellins, Denkin, and Bianco, had begun to negotiate a sale of the Business Assets to GrowBlox Sciences, then known as Signature. Id. ¶ 49. On March 13, 2014, Ellins entered into an Asset Assignment, Acquisition and Professional Association Agreement with GrowBlox Sciences (the "Asset Sale Agreement"), which was filed with the SEC on March 19, 2014. Id. ¶ 50. Pursuant to the Asset Sale Agreement, Ellins purported to sell most, if not all, of the assets that were developed by Herman and Lukash for the Cannabis Business, including trademarks, patents, business plans, investor presentations and histories, websites, drawings and digital artwork, and reports. Id. The Asset Sale Agreement stated that the assets sold included assets "conceived, owned in whole or in part, or developed by Mr. Ellins or his associates." Id. ¶ 51.
None of Ellins, Denkin, or Bianco ever informed Herman or Lukash of their plans to sell the Business Assets to GrowBlox Sciences. Id. ¶ 60. Rather, Herman and Lukash learned of the sale after GrowBlox Sciences filed an 8-K announcing the sale and annexing the Asset Sale Agreement. Id. Yet, Herman and Lukash had not given permission to Ellins, Denkin, or Bianco to sell the Business Assets. Id. ¶ 61. Furthermore, Herman and Lukash have never been compensated for their work for the Partnership or for developing the Business Assets that were sold to GrowBlox Sciences. Id.
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. Countercl., Doc. 11. Defendants filed Amended and Supplemental Counterclaims on November 19, 2014. Am. Countercl., Doc. 26. On June 2, 2014, this Court issued an Order granting in part and denying in part the motion to dismiss four of the five alleged Counterclaims, dismissing just the declaratory judgment and breach of fiduciary duty claims without prejudice. Order, Doc. 44.
On July 1, 2015, Counterclaimants filed a motion for leave to file Second Amended Counterclaims. Counterclaimants seek to replead the declaratory judgment and breach of fiduciary duty claims, and as an alternative to the breach of fiduciary duty claim, Counterclaimants seek to plead that Denkin and Bianco aided and abetted Ellins's breach of fiduciary duty. Doc. 52; 2d Am. Countercl., Doc. 51-1. On July 15, 2015, Counterclaim-Defendants filed an opposition to Counterclaimants' motion for leave to amend, Doc. 55, and on July 22, 2015, Counterclaimants filed a reply. Doc. 60.
Rule 15(a)(2) of the Federal Rules of Civil Procedure provides that a party may amend its pleading with leave of the Court, and that "[t]he court should freely give leave when justice so requires." Fed. R. Civ. P. 15(a)(2). The standard is generally a "permissive" one that is "consistent with [the Second Circuit's] strong preference for resolving disputes on the merits." Williams v. Citigroup Inc., 659 F.3d 208, 212-13 (2d Cir. 2011) (citation omitted). However, where an amendment to a pleading would be futile, a motion for such relief should be denied. Strougo v. Barclays PLC, No. 14 Civ. 5797 (SAS), 2015 WL 1883201, at *5 (S.D.N.Y. Apr. 24, 2015) (denying leave to amend other than to correct inaccuracies in original pleading where court determined that further amendment to securities fraud pleading would be futile because alleged misstatements were not actionable). Thus when an amendment would fail to withstand a motion to dismiss, the court "is justified in denying [the] amendment." Daniels v. Loizzo, 174 F.R.D. 295, 299 (S.D.N.Y. 1997).
"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 "[t]hreadbare 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, 378 (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 Proposed Second Amended Counterclaims cite and rely on two documents: (1) the July 31, 2013 LOI and (2) the December 15, 2013 PPM. See 2d Am. Countercl. ¶¶ 22-25, 39-46. The LOI and PPM are clearly referenced by the Proposed Second 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 seek a declaratory judgment stating that, "through their respective actions, a general partnership and/or joint venture was formed among Herman, Lukash, Ellins, Denkin, and Bianco, in which each individual owned an equal share." 2d Am. Countercl. ¶ 63. Counterclaimants also seek a declaratory judgment stating that Herman and Lukash have a collective forty percent ownership stake in the partnership and that the assets sold pursuant to the Asset Sale Agreement were rightful assets of the partnership. Id. at ¶¶ 69-70. Counterclaim-Defendants argue that Counterclaimants have not alleged sufficient facts to evidence the existence of a partnership and/or joint venture. Doc. 32 at 12-14.
"[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, 158 N.E. 77, 78 (N.Y. 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 (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 (1988) (internal quotation marks omitted)).
Under New York law,
The Proposed Second Amended Counterclaims refer to the existence of a joint venture interchangeably with the existence of a partnership. 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 Court finds that Counterclaimants have plausibly alleged the existence of a partnership amongst the Five Individuals.
First, Counterclaimants have clearly alleged that the Five Individuals each made contributions of "property, financial resources, effort, skill, or knowledge" to the Cannabis Business. Herman and Lukash worked with Ellins, Denkin, and Bianco to create a business plan, create pro-forma financials, develop the corporate website, create investor presentations, and raise financing. 2d Am. Countercl. ¶ 30.
Herman and Lukash also contributed over $25,000 to the Business.
The Court also finds that Counterclaimants have sufficiently alleged "the parties' intention to be partners." Counterclaimants allege that all five individuals agreed from the outset to each be 20% owners of the Cannabis Business and to share equally in its profits. 2d Am. Countercl. ¶ 27. Furthermore, Counterclaimants allege that throughout the time that they worked together, the Five Individuals repeatedly referred to themselves as partners, and third parties understood them to be partners. This understanding was allegedly confirmed in an email dated December 30, 2013, two months after the expiration of the LOI, when Lukash wrote to Ellins, Denkin, and Bianco, stating that "[i]t has been [my and Herman's] understanding we were all equal interest holders (20% each)." Id. ¶ 46. Denkin confirmed that Lukash's understanding was correct in an email later that day, by responding "OK." Id.
While Counterclaim-Defendants are correct to point out that simply "calling an organization a partnership does not make it one," Kidz Cloz, Inc. v. Officially for Kids, Inc., 320 F.Supp.2d 164, 174 (S.D.N.Y. 2004) (citation omitted), the Five Individuals' actions also evinced an intention to be partners. Denkin created email accounts for each of the Five Individuals using the domain name @growopp.com, with "GrowOpp" referring to the working name of the Cannabis Business.
Perhaps most significant are the LOI and PPM. Both documents demonstrate that the Five Individuals contemplated that they would transfer the assets of the Cannabis Business to a capitalized public company. Id. ¶ 39. In return, the Five Individuals would each receive an equal amount of equity in the resulting corporation. Id. Although neither transaction came to pass, the LOI and PPM indicate that the Five Individuals believed they were each entitled to an equal reward for the Business Assets, which they are alleged to have jointly developed and owned.
The Court thus finds that Counterclaimants' allegations in conjunction with the LOI and PPM sufficiently evince an intention by the Five Individuals to be partners.
The Court also finds that the Five Individuals' intention to split the equity they would receive upon transferring the Business Assets to a public company corroborates Counterclaimants' allegation that the parties undertook to share in the profits and losses of the Business. Id. ¶ 27. Cf. SCS Commc'ns, Inc. v. Herrick Co., 360 F.3d 329, 342 (2d Cir. 2004) (finding that where parties formed joint venture to acquire a business, the "sharing of profits and losses" was established by "[t]he anticipated equal ownership" of the to-be-acquired business); see also Brown v. Cara, 420 F.3d 148, 160 (2d Cir. 2005) (defendants' argument that "joint ownership is sufficient to demonstrate an agreement to share losses . . . would be compelling" if the parties' agreement contemplated equal ownership of a real estate development project); Burde v. C. I. R., 352 F.2d 995, 1002 (2d Cir. 1965) (finding parties' plan to develop and sell a product and then "divide the proceeds of sale into three equal parts" supported conclusion that they formed a partnership).
Herman and Lukash's agreement to share in the losses of the Cannabis Businesses is further demonstrated by the understanding that their contributions would only be compensated by the Business if and when it was profitable. 2d Am. Countercl. ¶ 35. Counterclaim-Defendants contend that "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." Cosy Goose Hellas v. Cosy Goose USA. Ltd., 581 F.Supp.2d 606, 620-21 (S.D.N.Y. 2008) (citing Dinaco, Inc. v. Time Warner, Inc., 346 F.3d 64, 68 (2d Cir. 2003)). Counterclaimants, however, don't merely allege that Herman and Lukash contributed their services without the expectation of pay. They also allege that Herman and Lukash contributed money to the Business, understanding that they would only recover their investment if the Business succeeded.
As to the final element of a partnership, the Court finds that Counterclaimants have sufficiently pleaded that the parties had "joint control and management of the business." Counterclaimants allege that the Five Individuals routinely consulted one another on "all decisions affecting the Business," including changing the name of the Business and the style of the logo. 2d Am. Countercl. ¶ 34. Counterclaimants also argue that joint control and management is reflected in the PPM and associated investor materials created by the Five Individuals, which indicate that the parties were all to serve on the executive board of the entity used to acquire the Business Assets.
For these reasons, the Court grants Counterclaimants' motion for leave to plead the declaratory judgment claim.
