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NewSpring Mezzanine Capital II, L.P. v. Hayes

United States District Court, E.D. Pennsylvania

December 23, 2016

BAXTER MCLINDON HAYES, JR. et al., Defendants.


          Gerald Austin McHugh United States District Judge

         This case presents a tangled web of tort and contract claims arising out of a complex commercial transaction gone awry. Before me now are Motions for Summary Judgment on no fewer than 35 claims, crossclaims, and counterclaims. Having taken what appears to be a shotgun approach to litigating this matter, the parties now support their conflicting versions of events with contradictory evidence drawn from a massive record. The briefing in this case, while voluminous, is notable for its paucity of citation to controlling legal authority, particularly with respect to choice-of-law issues. In the absence of dispositive legal arguments, and confronted with what appear to be genuine disputes of material fact, I am hard-pressed to dispose of these claims on summary judgment. Although the weight of evidence in this case seems to favor the Plaintiff, a jury must resolve the bulk of the hotly contested disputes. For the reasons set forth below, of the 35 counts reviewed, 29 survive for trial.

         Because there is no issue of public importance in this case, I write solely for the benefit of the parties, and a recitation of the underlying facts of this case is omitted.[1]

         I. Standard of Review

         All parties have moved for summary judgment on numerous claims. Summary judgment is appropriate only where “there is no genuine dispute as to any material fact.” Fed.R.Civ.P. 56(a); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). The vehement disagreement between the parties about who said what to whom, and with what intent, makes this case particularly unsuited to resolution by summary judgment. Nonetheless, as to certain discrete issues, some parties have advanced legal arguments sufficient to foreclose relief under a claim or theory. In those places, summary judgment will be granted.

         When confronted with cross-motions for summary judgment, I “‘must rule on each party's motion on an individual and separate basis, determining, for each side, whether a judgment may be entered in accordance with the Rule 56 standard.'” Schlegel v. Life Ins. Co. of N. Am., 269 F.Supp.2d 612, 615 n.1 (E.D. Pa. 2003) (quoting Charles A. Wright et al., 10A Federal Practice and Procedure § 2720 (3d ed. 1998)). Accordingly, I will address each party's allegations against the other in turn.

         II. Motions for Summary Judgment on the Complaint

         NewSpring has moved affirmatively for summary judgment on the seventeen claims contained in its Complaint (ECF No. 1), contending that the evidence is so overwhelming that there is nothing for a jury to decide. Needless to say, it is a rare case where a party with the burden of proof prevails with such a motion, Shager v. Upjohn Co., 913 F.2d 398, 403 (7th Cir. 1990), so it is difficult to fathom why NewSpring considers such a motion a good use of judicial resources. Defendants in turn have also moved for summary judgment on thirteen of these seventeen claims (ECF 263, 266). Upon consideration of NewSpring's Motion (ECF No. 269), the Hayes Brothers' Motion (ECF No. 263), and the Baxter Parties' Motion (ECF No. 266) and responses and replies thereto (ECF Nos. 275, 277, 284 & 290), I conclude as follows:

         A. Counts I and II: Violations of the Securities Exchange Act of 1934

         These claims hinge on disputed material facts. Plaintiff alleges that Defendants made intentionally inaccurate representations about the financial health of Utilipath, LLC, in the course of their sale of a security-an ownership interest in Utilipath-to Plaintiff. Defendants state that no such misrepresentations were made. The parties have provided extensive evidence, largely in the form of emails between Plaintiff, Defendants, and various accountants and consultants involved in the transaction. This evidence is contradictory and unclear: some communications suggest that Defendants intentionally withheld or misrepresented information, while others suggest that Defendants were transparent in sharing objective information, failing only to share with Plaintiff their personal anxieties and family disputes about the company's strength. The evidence may favor NewSpring, but to the extent that Defendants can be precluded from arguing their interpretation of the facts.

         The Hayes Brothers argue that this claim cannot succeed as a matter of law, because the interest transferred to Newspring was not a security. However, whether the interest is a security depends upon the extent to which NewSpring intended to manage Utilipath. This is also a contested factual issue as to which each party has produced evidence, and therefore summary judgment as to these claims must be DENIED.

         B. Count III: Violation of Section 503 of the Pennsylvania Securities Act

         The facts underlying this claim (and numerous others) echo the facts underlying Counts I and II: Plaintiff alleges that Defendants aided and abetted Old Utilipath (which they owned and managed) in intentionally misrepresenting its financial health in order to sell Utilipath to Plaintiff. Defendants vehemently deny making any representations.

         Defendants contest Newspring's standing to bring this claim. Citing Penturelli v. Spector Cohen Gadon & Rosen, 640 F.Supp. 868, 871 (E.D. Pa. 1986), they claim that section 503 does not provide NewSpring a cause of action-that section 503's aiding and abetting claim is available only to a party which has already been found liable of securities fraud and which seeks indemnification from its aiders and abettors. I am persuaded by my colleague Judge DuBois that Penturelli cannot be reconciled with the plain language of the statute and is further called into question by the Third Circuit's decision in McCarter v. Michigan, 883 F.2d 196 (3d Cir. 1989). Fox Int'l Relations v. Fiserv Sec., Inc., 490 F.Supp.2d 590 (E.D. Pa. 2007). I therefore hold that a plaintiff other than someone already adjudged liable of securities fraud can bring an action against the aiders and abettors of the principal who committed the fraud.

         Defendants further argue that Plaintiff cannot bring an aiding and abetting claim without also bringing an underlying direct claim against the entity that Defendants allegedly aided and abetted. This argument contradicts the basic theory of aiding and abetting, which creates independent liability for those who materially help tortfeasors and criminals achieve their ends. Although Defendants claim that the statute “on its face” limits liability to those cases where suit is brought against the alleged principal, the statute appears to say nothing of the sort-indeed, it makes clear that aiders and abettors are “also liable jointly and severally with and to the same extent as such person.” 70 Pa. Stat. and Cons. Stat. Ann. § 1-503. Accordingly, Plaintiff may sue Defendants under section 503 of the Pennsylvania Securities Act. Nonetheless, whether Plaintiff can succeed on this claim is a question for the jury. Summary judgment as to this Count will be DENIED.

         C. Count IV: Violation of the Delaware Securities Act

         Defendants contend that the Delaware Securities Act does not govern the relationship between the parties. Plaintiff has offered nothing to the contrary. Summary judgment will be GRANTED and this claim will be dismissed.

         D. Counts V and VI: Unjust Enrichment Claims

         Plaintiff alleges that it unjustly enriched Defendants in two ways: (1) that it overpaid Defendants for Utilipath because Defendants misrepresented Utilipath's worth; and (2) that on the evening before closing, Individual Defendants arranged for $229, 445.73 to be transferred from Utilipath's accounts into three accounts of their own. Whether Defendants' enrichment was unjust is a question for the jury, to be determined by the evidence presented about each party's knowledge and intent.

         The Hayes Brothers claim that unjust enrichment is unavailable to Plaintiff as a remedy because the parties' relationship is governed by a contract. NewSpring correctly points out that this equitable theory is pleaded only in the alternative should the contract claim fail. The Hayes Brothers further argue that the claim is barred by an exclusive remedy clause. See Redemption Agreement § 5.7 (ECF 263, Ex. 9). Having reviewed the contract, I construe it as limited to Article V, and claims for indemnification, which this is not. In addition, even if this clause were applicable, as NewSpring points out, the contract contains a “carve-out” from that clause for “case[s] of fraud.” Id. The parties disagree-here and elsewhere-about whether the carve-out pertains to only fraud claims, or whether it pertains to claims, like this one, based upon alleged fraudulent behavior. I find the purported distinction between fraud claims and claims based on fraudulent conduct meaningless, and would therefore not dismiss this claim even if I were persuaded the exclusive remedy clause applied..[2]

         The Baxter Parties claim that NewSpring's unjust enrichment claim must fail because NewSpring did not actually pay the Baxter Parties-New Utilipath paid them with NewSpring's money. Unjust enrichment is an equitable doctrine and I am aware of no requirement that the enrichment be direct, rather than indirect. NewSpring clearly did in some respect “enrich” Defendants in this case, even though its money moved briefly through New Utilipath in the course of the transaction. Consequently, the Baxter Parties' argument does not foreclose a jury determination on this claim. Summary judgment will be DENIED.

         E. Counts VII and VIII: Violation of the Uniform Fraudulent Transfer Act

         NewSpring alleges that Defendants, in selling Old Utilipath to NewSpring and remitting payments to themselves on the day before closing, made securities transfers with the intent to defraud NewSpring and in furtherance of a fraudulent scheme. This claim rests on the same contested factual issues as NewSpring's other claims.

         Defendants argue that NewSpring has not stated these counts as proper claims, because it has not specified the jurisdiction governing the counts. I denied Defendant's Motion to Dismiss after concluding there was “no material difference between the potentially applicable laws.” (ECF No. 74, p.2). Defendants still have not established that the potentially governing statutes differ, and therefore this argument is insufficient to merit dismissal of NewSpring's claims. Summary judgment will be DENIED. If, however, NewSpring pursues this claim at trial, it must, no later than the Final Pretrial Conference, fully brief the controlling law.

         F. Count IX: ...

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