875 F.Supp.2d 297 (S.D.N.Y. 2012), 12 Civ. 772 (SAS), Recurrent Capital Bridge Fund I, LLC v. ISR Systems and Sensors Corp.

Docket Nº12 Civ. 772 (SAS).
Citation875 F.Supp.2d 297
Opinion JudgeSHIRA A. SCHEINDLIN, District Judge:
Party NameRECURRENT CAPITAL BRIDGE FUND I, LLC, Cragmont Capital LLC and Ethan Einwohner, Plaintiffs, v. ISR SYSTEMS AND SENSORS CORP., EMX Group, Inc., EMX; International, Inc., EMX International LLC, James M. Herrmann, Robert V. Gibbs and Timothy Arion, Defendants.
AttorneyMatthew J. Press, Esq., Law Office of Matthew J. Press, New York, NY, for Plaintiffs. Scott S. Flynn, Esq., McElroy, Deutsch, Mulvaney & Carpenter LLP, Morristown, NJ, for Defendants.
Case DateJune 25, 2012
CourtUnited States District Courts, 2nd Circuit, Southern District of New York

Page 297

875 F.Supp.2d 297 (S.D.N.Y. 2012)

RECURRENT CAPITAL BRIDGE FUND I, LLC, Cragmont Capital LLC and Ethan Einwohner, Plaintiffs,

v.

ISR SYSTEMS AND SENSORS CORP., EMX Group, Inc., EMX; International, Inc., EMX International LLC, James M. Herrmann, Robert V. Gibbs and Timothy Arion, Defendants.

No. 12 Civ. 772 (SAS).

United States District Court, S.D. New York.

June 25, 2012

Page 298

[Copyrighted Material Omitted]

Page 299

[Copyrighted Material Omitted]

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Matthew J. Press, Esq., Law Office of Matthew J. Press, New York, NY, for Plaintiffs.

Scott S. Flynn, Esq., McElroy, Deutsch, Mulvaney & Carpenter LLP, Morristown, NJ, for Defendants.

OPINION AND ORDER

SHIRA A. SCHEINDLIN, District Judge:

I. INTRODUCTION

Three investors, Recurrent Capital Bridge Fund (" Recurrent" ), Cragmont Capital LLC (" Cragmont" ), and individual investor Ethan Einwohner bring several causes of action under contract, tort, and equity against defendants in connection with the transfer of assets from an entity in which these investors held shares to an entity in which they did not. Plaintiffs allege that James Herrmann, Robert Gibbs, and Timothy Arion together formed EMX International LLC (" EMX-II" ) to circumvent plaintiffs' rights as shareholders in ISR Systems and Sensors Corp. (" ISR" ) and its successors. Plaintiffs claim that defendants fraudulently conveyed ISR's valuable assets— especially its corporate opportunity to purchase EMX Inc.— to a series of shell companies for no consideration, in breach of contract, and in breach of their fiduciary duties to plaintiffs as joint shareholders in ISR. Arion and EMX-II each move to dismiss the claims against them pursuant to Rule 12(b)(2) of the Federal Rules of Civil Procedure for lack of personal jurisdiction.1 Herrmann, Gibbs, Arion, ISR, EMX Group, EMX International Inc. (" EMX-I" ), and EMX-II (collectively, " defendants" ) move to dismiss the claims against them under the doctrine of forum non conveniens or, alternatively, to transfer this action to the Middle District of Florida under section 1404(a) of Title 28 of the United States Code. For the reasons set forth below, defendants' motions are denied in their entirety.

II. BACKGROUND2

In February of 2007, Herrmann founded ISR,3 a Delaware corporation with its principal

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place of business in Florida, for the purpose of acquiring three defense technology companies: EMX Inc., Wave Technologies Inc. (" Wave" ), and SensArray Infrared Corp. (" SensArray" ).4 In pursuit of those ends, ISR hired Highland Global Partners, Inc. (" Highland" ), a New York corporation with its principal place of business in New York, to help raise the necessary financing for the acquisitions and to structure the planned transactions.5 Arion was personally involved 6 in Highland's work throughout this period.7 On behalf of ISR, a senior officer at Highland approached Recurrent, a Delaware Limited Liability Company with its principal place of business in New York, with an opportunity to invest in the new company.8 ISR decided to make a private offering of its common stock to certain investors (" Bridge Offering" ).9 In April 2008, Highland proposed that Recurrent participate in the Bridge Offering and Recurrent agreed.10 Pursuant to that agreement, Einwohner, in his position as a Recurrent officer, purchased 187,500 " Bridge Shares" of ISR's common stock in exchange for a $250,000 Bridge Loan pursuant to a duly executed Subscription Agreement.11 Herrmann owned 25.1% of ISR's common stock prior to obtaining the bridge financing and planned to retain 12.86% after dilution from the Bridge Offering, which was expected to raise fifteen to eighteen million dollars.12 Arion stood to benefit from the Bridge Offering in three ways: ISR would pay him $2,661,889.00 out of the funds it raised in the Bridge Offering for EMX Inc., which he owned in full; he had an agreement to earn an annual salary of $100,000 with ISR that would only be paid upon the success of their financing efforts; and his interest in ISR would substantially increase in value if the company could raise the necessary capital and complete the proposed transactions.13 Arion owned 7.5% of ISR's common stock prior to obtaining the bridge financing and planned to retain 4.13% after dilution from the Bridge Offering.14

The Subscription Agreement included a forum selection clause providing that it " shall be governed by and construed under the laws of the State of New York," which extended to " [a]ny legal suit, action or

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proceeding arising out of or relating to this Subscription Agreement." 15 The clause further mandated that parties to the contract " waive any objection ... to the venue" of the Southern District of New York, and " irrevocably consent to jurisdiction" in the Southern District.16

ISR represented to Einwohner and Recurrent that it had entered into binding agreements with EMX Inc., Wave, and SensArray to acquire one hundred percent of their outstanding capital stock.17 However, at the time the Chief Executive Officer of SensArray died in November 2008, ISR encountered a serious cashflow problem.18 ISR subsequently defaulted on the Bridge Loan the following month.19

After the default, Herrmann and Highland reassured Recurrent and Einwohner that they were working to salvage the deal to acquire the two remaining companies, EMX Inc. and Wave.20 But instead, in May 2010, Herrmann and Arion formed a new entity, EMX Group, Inc. (" EMX Group" ), a Florida corporation with its principal place of business in Florida, located in the same office as ISR.21 Herrmann also brought in Robert Gibbs as his new partner in EMX Group.22 Shortly thereafter, EMX Group acquired ISR's corporate opportunities for no consideration, including the opportunity to purchase EMX Inc.23 Herrmann subsequently obtained a written commitment from Arion 24 to sell one hundred percent of EMX Inc. to EMX Group.25

Gibbs told Recurrent and Einwohner that they could still salvage their original investment in ISR by helping EMX Group acquire EMX Inc.26 In return for their help, Gibbs and Herrmann promised a five and ten percent equity interest in the resultant company to Recurrent and Einwohner, respectively.27 In reliance on those representations, between May and December 2010, Einwohner invested substantial time and effort into supporting EMX Group's attempts to acquire EMX Inc.28 He received no compensation for his efforts except the promised equity interest.29 Those efforts included meeting with EMX Group's new underwriter, Anderson & Strudwick, Inc., a Virginia-based investment bank.30 Einwohner also met with EMX Group's new counsel, Stephen Hazard of McElroy, Deutsch, Mulvaney & Carpenter LLP (" McElroy Deutsch" ), a New Jersey-based law firm.31 Throughout this period, Gibbs and Herrmann repeatedly

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reiterated their promise to Recurrent and Einwohner of future equity interests in EMX Group or its successor.32

EMX Group had no officers, directors, or shareholders, and was wholly uncapitalized.33 Einwohner, through his personal investment company Cragmont, a Delaware limited liability company with its principal place of business in New York, extended a small loan to EMX Group. In exchange, EMX Group promised Cragmont thirty thousand shares of its common stock and the possibility of additional shares as payment for interest on the loan. 34 As of December 2011, the Cragmont loan remained unpaid and Cragmont had received none of the promised shares.35

In October of 2010, Herrmann, Gibbs, and Arion created EMX-I, a Delaware corporation with its principal place of business in Florida, through which they hoped to finally complete the acquisition of EMX Inc.36 EMX-I was located at the same address as EMX Group and ISR.37 Though EMX-I had no tangible assets, it acquired the rights, resources, and corporate opportunities of EMX Group for no consideration, including the opportunity to purchase EMX Inc.38 Subsequently, Gibbs proposed a draft term sheet for the acquisition of EMX Inc.39 The term sheet provided for Einwohner to receive his promised ten percent interest and Recurrent its five percent interest in the new company.40 Shortly thereafter, Herrmann, Gibbs, and Arion ceased all contact with Recurrent and Einwohner.41

In January of 2011, Herrmann, Gibbs, and Arion formed yet another company, EMX-II, a Delaware corporation with its principal place of business in Florida. 42 EMX-II shares an address with Herrmann.43 EMX-II acquired the rights and resources of EMX-I, including the opportunity to purchase EMX Inc., for no consideration.44 The following July, using Anderson & Strudwick as its underwriters and McElroy Deutsch as its counsel, EMX-II actually acquired EMX Inc., relying at least in part on the analysis and efforts made by Einwohner on behalf of EMX Group.45

On January 31, 2012, plaintiffs brought the instant action seeking to: enforce the terms of the Subscription Agreement; enforce the terms of the Cragmont Note; recover damages arising out of defendants' alleged breaches of fiduciary duties, misappropriation of corporate opportunity, and fraudulent conveyance; and recover restitution for defendants' unjust enrichment.

III. LEGAL STANDARDS

A. Rule 12(b)(2) Motion to Dismiss

When a federal district court sits in diversity, " personal jurisdiction is determined by the law of the state in which the

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district court sits." 46 A court may rely solely on pleadings and affidavits to determine jurisdiction, in which case the plaintiff " need only make a prima facie showing that the court possesses personal jurisdiction over the defendant." 47 The court must credit plaintiffs' factual averments as true.48 " [A]ll allegations are construed in the light most...

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