Cambridge Capital LLC v. Ruby Has LLC, 20-cv-11118 (LJL)

• Decision Date: 30 September 2021
• Docket Number: 20-cv-11118 (LJL)
• Parties: CAMBRIDGE CAPITAL LLC, Plaintiff, v. RUBY HAS LLC, Defendant.
• Court: United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York

CAMBRIDGE CAPITAL LLC, Plaintiff, v. RUBY HAS LLC, Defendant.

No. 20-cv-11118 (LJL)

United States District Court, S.D. New York

September 30, 2021

OPINION AND ORDER

LEWIS J. LIMAN, UNITED STATES DISTRICT JUDGE.

Defendant/Counterclaim Plaintiff Ruby Has LLC (“Ruby Has”) moves pursuant to Federal Rule of Civil Procedure 12(b)(6), for an order dismissing Counts Two to Eight of the complaint and limiting the scope of Count One. Dkt. No. 10. Plaintiff/Counterclaim Defendant Cambridge Capital LLC (“Cambridge Capital”) moves, also pursuant to Federal Rule of Civil Procedure 12(b)(6), to dismiss the counterclaims filed against it. Dkt. No. 45.

For the following reasons, Ruby Has's motion to dismiss is granted in part and denied in part, and Cambridge Capital's motion to dismiss is granted in part and denied in part.

BACKGROUND

On Ruby Has's motion to dismiss, the Court accepts as true the allegations of the complaint, Dkt. No. 1 (“Complaint” or “Compl.”), and the documents incorporated by reference. On Cambridge Capital's motion to dismiss, the Court accepts as true the allegations of the amended counterclaims, Dkt. No. 41 (“Amended Counterclaims” or “Am Countercl.”), and the documents incorporated by reference.

I. The Complaint

A. The Parties

This case arises out of a failed deal. Cambridge Capital is a private equity firm that invests in supply chain companies including businesses in the transportation, distribution logistics, and supply chain technologies industries. Compl. ¶¶ 3, 23. Ruby Has is an ecommerce fulfillment company. Id. ¶¶ 2, 29. It was founded in 2011 and operates warehouses in the United States and Canada. Id. ¶ 2. Ruby Has stores inventory for its clients in those warehouses and picks, packs, and ships its clients' products as they are ordered online. Id. ¶ 29. According to the Complaint, prior to 2020, the company enjoyed only marginal success and had not generated significant cash flow. Id. ¶ 30. For this reason, it regularly solicited outside investors and repeatedly raised money in the form of equity, convertible notes, and equipment debt from outside lenders. Id.

B. The Letter of Intent

Cambridge Capital was one of the firms Ruby Has solicited for an investment.^[1] On June 6, 2020, Cambridge Capital and Ruby Has executed a six-page Letter of Intent (“LOI”) for Cambridge Capital to invest in Ruby Has in exchange for a majority interest in the company. Id. ¶¶ 4, 5, 45. The operative LOI with identical terms was re-executed effective June 25, 2020 Id. ¶¶ 4, 5, 46. The LOI is incorporated by reference to the Complaint. Because its terms are critical to the pending motions, the Court describes them at length and in detail.

The LOI set forth the parameters for Cambridge Capital to invest $40 million in Ruby Has in exchange for a 51% fully-diluted ownership interest in the company in the form of Series A convertible preferred units, which would bear interest and carry a liquidation preference. Id. ¶¶ 37-38. Of the total investment, $20 million would provide liquidity for existing shareholders while the remaining $20 million would be used as “growth capital” for Ruby Has. Id. Cambridge Capital would also provide continued advice and guidance to Ruby Has in exchange for an annual management fee of $900, 000 per year. Id.

The LOI, on Cambridge Capital letterhead, stated that Cambridge Capital was “pleased to submit a preliminary, non-binding Letter of Intent for a transaction to provide growth capital and liquidity to the Company and its shareholders.” Dkt. No. 12-1 (“LOI”) at 1. It described Cambridge Capital's proposal as being “subject to the following due diligence process, ” which it then described in detail. Id. at 3. It stated that Cambridge Capital “anticipated” that it “will complete the due diligence requirements outlined above within 90 days of the execution of th[e] Letter of Intent” and that it was Cambridge Capital's “intent to move forward to a closing as quickly as possible, without sacrificing the need to do the work properly.” Id. It added: “Final approval from the Investment Committee of Cambridge Capital will be required prior to completing the Potential Transaction.” Id. at 4.

The LOI also contained several relevant provisions under a section entitled “Other Considerations.” Id. at 4-5. The LOI contained an ordinary course covenant on the part of Ruby Has providing:

Business in the Ordinary Course

Until the execution and delivery of the share purchase agreement or such earlier date as negotiations may terminate, the Company will conduct its business only in the normal and ordinary course and in a manner consistent with good business practices. In such regard, the Company will (i) not engage in any transaction which would have a negative effect on the assets, business, financial condition, operations or prospects of the Company, and (ii) use its best efforts to preserve its business organization intact and to preserve its existing business relationships.

Id. at 4.

The LOI also provided the following with respect to expenses:

Expenses

The Company shall pay reasonable out-of-pocket fees and expenses of Cambridge Capital required to consummate the Potential Transaction, such as legal, tax, accounting, insurance and travel.

Id.

The LOI also contained a 90-day Exclusivity Period:

Exclusivity Period

From the date this letter is accepted until the 90th day thereafter, the Company shall not, and shall cause the Company, its officers, directors, employees and other agents not to (i) take any action to solicit or initiate any Investment or Acquisition Proposal (as hereinafter defined), or (ii) continue, initiate or engage in negotiations with, or disclose any nonpublic information, other than in the ordinary course of business, relating to the Company, or afford access to any other person or entity except Cambridge and its respective representatives. The term "Investment or Acquisition Proposal" means any offer, proposal or indication of interest with respect to (a) the acquisition of any assets (other than inventory in the ordinary course of business), operations or stock or units of the Company, or (b) a merger, consolidation or other business combination involving the acquisition of any of the assets or stock of the Company. To the extent anyone at the Company, directly or indirectly, receives any Investment or Acquisition Proposal, the Company will promptly advise such person, by written notice, of the terms of such Investment or Acquisition Proposal and will promptly advise Cambridge, orally and in writing, of all the terms of such Investment or Acquisition Proposal (including, without limitation, the identity of the person making the Investment or Acquisition Proposal and all economic terms of such Acquisition Proposal) and, if in writing, deliver a copy of such Investment or Acquisition Proposal to Cambridge.

In addition, if Cambridge Capital has completed its core due diligence and is proceeding in good faith toward a closing, then the parties agree to extend the Exclusivity to 120 days.

Id. The LOI's Exclusivity Period was extended on October 25, 2020 as reflected in the automatic extension in the LOI and confirmed in an email exchange between counsel for Cambridge Capital and Ruby Has on September 15, 2020. Compl. ¶ 44. Cambridge Capital alleges it was extended a second time “until closing by a subsequent agreement between the parties dated October 15, 2020.” Id. Another part of the Complaint states that the Exclusivity Period ran through October 25, 2020 “and was subsequently extended through December of 2020.” Id. ¶ 7.

There was also a provision on governing law:

Governing Law

This Letter of Intent, and any non-contractual obligations arising out of or in connection with it, shall be governed by and constructed in accordance with the laws of the state of Delaware. Likewise, the Definitive Agreement shall be governed by and construed in accordance with Delaware law.

LOI at 5.

Lastly, a section entitled “Non-Binding Agreement” stated as follows:

Non-Binding Agreement

This letter is not intended to be a binding contract (other than with respect to the section herein titled Exclusivity Period), and the parties understand that no obligation exists on behalf of either Cambridge to pay the Purchase Price or on behalf of the Company to sell the units prior to entering into the share purchase agreement. This letter is an expression of mutual intent to proceed with the drafting of the share purchase agreement and collateral documents contemplated hereby in accordance with the principles stated herein.

We are highly enthusiastic about the prospect of finalizing a transaction together, and we are confident that our proposal will result in an outcome that benefits the Company, its shareholders, its employees and its customers. We stand by to provide any clarification or answer any questions regarding our proposal.

Id. The LOI was signed by Benjamin Gordon as managing partner of Cambridge Capital and by Rafael Zakinov as CEO of Ruby Has. Id. at 6.

C. Due Diligence and Negotiation of Final Transaction Documents

Cambridge Capital conducted approximately twenty due diligence sessions with the Ruby Has management team from June to August 2020 spoke to three of Ruby Has's top customers and three of its top technology partners, and conducted four site visits to Ruby Has facilities in July, August, and October 2020. Compl. ¶ 48. Cambridge Capital also hired a third-party accounting firm to conduct financial due diligence, a law firm for legal diligence and definitive documentation drafting, an insurance due diligence specialist to conduct insurance due diligence and advise on a go-forward insurance policy improvement, and an investigative firm to perform background...