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James Mackay and Celebrity Foods, Inc v. William F. Donovan and Spine Pain Management

July 1, 2011

JAMES MACKAY AND CELEBRITY FOODS, INC., PLAINTIFFS,
v.
WILLIAM F. DONOVAN AND SPINE PAIN MANAGEMENT, INC. DEFENDANTS.



The opinion of the court was delivered by: Rufe, J.

MEMORANDUM OPINION AND ORDER

Plaintiffs James MacKay and Celebrity Foods, Inc. ("MacKay") filed suit against Defendant Spine Pain Management, Inc. ("SPM" or "Versa Card") and its president and CEO William Donovan, alleging they failed to comply with terms of an out-of-court Mutual Release and Settlement Agreement ("Settlement Agreement") entered into by the parties in 2008. After Plaintiff's breach of contract claims survived a motion to dismiss, SPM filed an answer and counterclaim. Now before the Court is Counterdefendants' Motion for Judgment on the Pleadings, seeking to dismiss SPM's counterclaims.

Background

On April 28, 2008, Versa Card (the predecessor to SPM) entered into a Stock Purchase Agreement to purchase all outstanding shares of First Versatile Smartcard Solutions Corporation ("FVS") from MacKay Group Ltd. ("MGL"). Plaintiff James MacKay, president of MGL and Celebrity Foods, was a significant shareholder of Versa Card. Later that year, the parties wished to rescind the Stock Purchase Agreement because the acquisition did not meet the expectations of Versa Card and was damaging to its business. The parties rescinded the sale, without litigation, by entering into a Mutual Release and Settlement Agreement on December 30, 2008. *fn1 Under the terms of the Settlement Agreement, Versa Card returned all of the capital stock in FVS to MGL, and James MacKay tendered to Versa Card 16,925,334 of his shares in Versa Card and retained 408,000 shares. *fn2 Celebrity Foods retained 100,000 shares in Versa Card. Those retained shares were subject to an SEC-mandated restricted trading period, which expired on March 9, 2009.

With the execution of the Settlement Agreement, Versa Card exited the credit card business and disposed of the assets of FVS. By November 2009, Versa Card had changed its name to Spinal Pain Management, Inc. and was operating as a medical pain management company.

After the expiration of the SEC restricted trading period on March 9, 2009, Plaintiffs made known their desire to sell their remaining shares in Versa Card/SPM. Plaintiffs filed this lawsuit on January 19, 2010, alleging that Defendants were prohibiting them from trading their shares in SPM via a Stop Transfer Resolution, in violation of the terms of the Settlement Agreement.

SPM filed a counterclaim, alleging that it had entered into the Stock Purchase Agreement and acquired the FVS shares in April 2008 based upon Mackay's fraudulent misrepresentations regarding the business plan, contracts, assets, financing and employees of FVS. After the acquisition, it learned that FVS was actually worthless. Accordingly, Count I of SPM's counterclaim alleges that Counterdefendants entered into a scheme to fraudulently induce SPM to acquire FVS. Counterdefendants are alleged to have knowingly and intentionally misrepresented the value, assets, and viability of FVS, by providing business plans and balance sheets from another business, Recharge Plus, under FVS's name. SPM purchased the FVS stock in reliance on the misrepresentations, and alleges that it consequently sustained damage to its business and reputation, lost the confidence of its shareholders, and had difficulty securing financing.

SPM's second count alleges violations of the Securities and Exchange Act (SEA). Specifically, SPM alleges that Counterdefendants made misrepresentations in Securities and Exchange Commission (SEC) filings regarding Versa Card and FVS, in violation of Section 10(b) of the SEA and Rule 10b-5, in order to entice investors to purchase stock.

Finally, in Count III, SPM alleges that Counterdefendants breached their fiduciary duties to investors while they were directors of the company by making false representations and promises to investors and by using resources of the corporation for personal expenses. *fn3

Counterdefendants have filed this Motion for Judgment on the Pleadings, arguing that when SPM (then Versa Card) discovered that the acquisition of FVS was not advantageous, it rescinded the sale by way of the Settlement Agreement. That Settlement Agreement includes a general release and covenant not to sue.

On this Motion for Judgment on the Pleadings, the Court must determine whether the terms of the Release are broad enough to preclude all three counterclaims. If so, the Court must address SPM's arguments that the Release is ambiguous or was induced by fraud. Standard of Review

Federal Rule of Civil Procedure 12(c) allows a motion for judgment on the pleadings after pleadings are closed. Judgment on the pleadings is appropriate when the "movant clearly establishes that no material issue of fact remains to be resolved and that he is entitled to judgment as a matter of law." *fn4 As in a motion to dismiss under Federal Rule 12(b)(6), courts must view the facts and inferences presented in the pleadings in the light most favorable to the non-moving party. *fn5 The Court may consider indisputably authentic documents attached to the pleadings if they are integral to the claims. *fn6 Discussion

Scope of the Contractual Releases of Claims

A contractual release from litigation is an affirmative defense to a claim against any party to that release. *fn7 That defense is generally asserted by motion for judgment on the pleadings or summary judgment. *fn8 If the movant clearly establishes that there are no material issues of fact, a contractual release from a claim can be a complete defense to the pleadings. *fn9 Releases are construed pursuant to the traditional principles of contract law, and a release that is not obtained by fraud, duress, or mutual mistake is binding between the parties. *fn10 "The fundamental rule in interpreting a contract is to ascertain and give effect to the intent of the contracting parties. . . . The intent of the ...

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