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Health and Body Store, LLC and Hotheadz International, Inc v. Justbrand Limited

September 11, 2012


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

Memorandum Opinion

Currently before the Court is the motion for a preliminary injunction filed by Plaintiffs HotHeadz International, Inc. ("HotHeadz") and Health and Body Store, LLC ("HBS"). Plaintiffs seek an order precluding Defendants Justin Silverman and Brandon Singer from independently operating two websites (the Websites) that Defendants had developed, and which the parties had previously used to conduct an Internet business. Specifically, Plaintiffs seek an Order giving "control of the two Websites back to the commonly owned company, Health and Body Store, LLC." (N.T. 11/3/2011, p. 7.)

Following a preliminary injunction hearing held on November 3-4, 2011, we denied Plaintiffs' motion, finding that Plaintiffs had failed to show a likelihood of success on the merits. (Doc. No. 17.) Our ruling was premised upon the undisputed fact that the parties never consummated an operating agreement regarding the essential terms of a joint venture. Based upon the absence of an agreement, we found that no relationship existed between the parties that would be sufficient to give rise to a fiduciary duty. We further concluded that, because the unsuccessful negotiations regarding a potential operating agreement primarily concerned the transfer of the Websites at issue, Plaintiffs had failed to establish a likelihood that they were entitled to control of the Websites.

The United States Court of Appeals for the Third Circuit vacated this ruling, finding that Defendant JustBrand, Ltd. ("JustBrand"), a limited liability company owned by Defendants Silverman and Singer, had jointly formed HBS with Plaintiff, HotHeadz. The Third Circuit thus found that Defendant JustBrand owed a fiduciary duty to Plaintiffs HotHeadz and HBS. Health and Body Store, LLC v. JustBrand Ltd., No. 11-4132 (3d Cir. May 11, 2012). This ruling was premised on the fact that HBS had filed a certificate of organization with the Commonwealth of Pennsylvania, that Silverman acknowledged that JustBrand was formed to hold their interest in HBS, and that certain tax documents reflect JustBrand's membership in HBS. Id., slip op. at 13-14. The case was remanded for our consideration as to whether Defendants breached their fiduciary duties by excluding HotHeadz and HBS from the Websites, and whether injunctive relief was therefore necessary.

After further consideration of this matter, we conclude that Defendants likely breached their fiduciary duties by excluding HotHeadz from access to the Websites, and that irreparable harm would likely result from this continued exclusion. We thus find that return of the Websites to HBS is necessary to preserve the status quo pending final resolution of this case. However, given the absence of an operating agreement governing the partners' rights and obligations, and the dissension between the parties, the Court finds it necessary to appoint an Interim Receiver to settle disputes which may arise regarding the management of the business, pending final resolution of this matter.

I. Background

Although much of the necessary factual background is set forth in the Third Circuit's May 11, 2012 Opinion, and this Court's ruling issued from the bench on November 8, 2011, several facts are worth highlighting.

Defendants Singer and Silverman, while employed by HotHeadz, began operating the Websites as a side business in 2007. At that time, HotHeadz was managed by Singer's father, Bruce Singer, and Defendants operated this side business with the full knowledge and consent of HotHeadz management. (N.T. 11/3/2011, pp. 30, 34-35.) Indeed, HotHeadz sold Defendants the majority of the products they used in their Internet business. (N.T. 11/4/2011, p. 96.) Silverman registered the domain names and ("Domain Names"), and he and Singer began operating online stores selling winter apparel and health products. (Id., pp. 94-96.) The Defendants operated the Websites on their own, and expended significant effort to develop these Websites. Defendants independently created and managed content, paid for strategic online advertising, processed orders, shipped goods, and handled customer service. (Id., pp. 94-96, 138-143.)

In March 2008, Jeffery Zelenko, who had known Bruce Singer since childhood and was Defendant Singer's godfather, took over as Chief Executive Officer of HotHeadz. (N.T. 11/3/2011, pp. 32-34.) Zelenko testified that he initially allowed Defendants' side business to continue, but, as part of an effort to "change the culture of the company," he intended to discuss the situation with Defendants. (Id., pp. 30-39.) Towards the end of 2008, Zelenko approached Defendants and told them that they could either leave HotHeadz and run the Websites on their own, or "work out some sort of a deal" to operate the Websites jointly with HotHeadz. (Id., p. 40.) Defendants chose the latter option, and began preliminary discussions regarding a joint venture.

In 2009, HotHeadz's management drafted, and sent to Defendants, two versions of a "Letter of intent to form [a] Partnership for Internet Division Between [HotHeadz] and Brandon Singer and Justin Silverman" (collectively "Letters of Intent"). (Def. Tr. Br. Ex. 5.) The Letters of Intent acknowledged Defendants' ownership of the Websites, and provided for their transfer to the partnership for "no financial consideration." (Id.) Defendants never signed the Letters of Intent or agreed to their terms.

Nonetheless, Defendants began operating the website business together with HotHeadz in the latter part of 2009. (N.T. 11/4/2011, p. 54.) In January 2010, through the filing of a certificate of organization, HotHeadz formed HBS as a limited liability company to operate the Internet business with the Defendants. (Id., p. 103.) Although there was still no operating agreement between the parties, and no certificate of ownership interest was ever filed, Defendants and HotHeadz operated the website business through HBS from early 2010 until October 2011. During that time, the Domain Names remained registered to Silverman, and revenue from the Websites was deposited into a bank account registered by HBS and accessible only to HotHeadz. (N.T. 11/3/2011, pp. 152-153.) Defendants continued to manage the content, layout and advertising of the Websites, and HotHeadz shipped customer orders from its warehouse, including HotHeadz products which it sold to HBS at cost. HotHeadz also provided its existing employees, part-time, to handle customer service and accounting for the business. (N.T. 11/3/2011, pp. 160-66; N.T. 11/4/2011, pp. 159, 182; Donato Decl. ¶ 22, Pl. Tr. Br. Ex. 1.)

Sometime in August 2011, HotHeadz, through its Chief Operating Officer, Charles Donato, informed the Defendants that it intended to charge HBS "management fees" for its contribution to the joint partnership. (N.T. 11/4/2011, pp. 158-59, 180-82.) Specifically, HotHeadz planned to charge HBS $240,000 for 2010, and $360,000 for 2011. (Id.) These amounts were unilaterally selected by HotHeadz without any input from its partners, and the "management fee" amount of $240,000 for 2010 was selected even though total revenue from the Websites for 2010 totaled only $358,000. No itemized basis for these charges was ever provided to Defendants by HotHeadz. (Id.)

Around the same time, HotHeadz drafted an operating agreement. Donato testified that he gave Silverman the draft agreement for review, but never received any response. (N.T. 11/3/2011, pp. 184.) Silverman denied ever seeing the draft agreement, and testified that Donato told him the agreement was "one-sided" and would include a dilution clause.*fn1 (N.T. 11/4/2011, p. 157.) Donato did not dispute this, and testified that he told Defendants that they might find the proposed operating agreement to be "somewhat one-sided." (N.T. 11/3/2011, p. 189.) According to Silverman, Donato also requested that the Domain Names be transferred to HBS prior to finalizing the operating agreement. (Id., pp. 154-155.)

The Domain Names were never transferred, and the operating agreement was never signed. (N.T. 11/3/2011, pp. 130-133.) Because of the exorbitant management fees proposed by HotHeadz, what they understood to be a "one sided" draft operating agreement, and HotHeadz's insistence that the Domain Names be transferred without any formal operating agreement, Defendants lost trust in their business partner and began planning to leave HotHeadz and operate the Websites independently.*fn2 (See N.T. 11/4/2011, pp. 128, 164.) Defendants purchased inventory on their personal credit, had it shipped directly to Silverman's home, and began making arrangements with vendors other than HotHeadz for inventory purposes. On October 11, 2011, Defendants resigned, and changed the passwords associated with the Websites and the accounts used to collect payments from customers. (See id., pp. 75-82.) Since that time, Defendants have operated the Websites independently. Defendants assert ...

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