Chassin Holdings Corp. v. Formula VC Ltd.

• Decision Date: 06 January 2017
• Docket Number: Case No. 15-cv-02294-EMC
• Court: U.S. District Court — Northern District of California
• Parties: CHASSIN HOLDINGS CORPORATION, Plaintiff, v. FORMULA VC LTD., et al., Defendants.

CHASSIN HOLDINGS CORPORATION, Plaintiff, v. FORMULA VC LTD., et al., Defendants.

Case No. 15-cv-02294-EMC

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA

January 6, 2017

ORDER GRANTING PLAINTIFF'S MOTION FOR DEFAULT JUDGMENT AGAINST DEFENDANT ANDREY KESSEL

Docket No. 84

I. INTRODUCTION

In this suit alleging fraud, claims against several defendants have been resolved. As to the remaining claim against Defendant Kessel, a default was entered. Pending before this Court is Plaintiff's motion for default judgment. Docket No. 84 (Motion). Plaintiff's four causes of action in the motion are: (1) fraud in the sale of securities under SEC Rule 10b-5; (2) deceit in violation of California Civil Code section 1709; (3) fraud in the sale of securities under California Corporations Code sections 25401, 25501, and 25504; and (4) breach of fiduciary duty. Plaintiff seeks $1,762,500 in compensatory damages, plus interest. The Court grants Plaintiff's motion.

II. BACKGROUND

A. Factual Background

Plaintiff Chassin Holdings Corporation is a British Virgin Islands business company, with its headquarters in Tortola, British Virgin Islands. Docket No. 34 (First Amended Complaint) at ¶ 15. Defendants Renata Akhunova and Andrey Kessel formed and managed Formula VC Ltd. (Formula VC), a Cayman Islands company with its principal place of business in California. Id. at ¶ 10. Formula VC is a general partner of Formula VC Fund I GP, L.P. (Formula GP), a Cayman Islands limited partnership with its principal place of business in California. Id. at ¶¶ 12-13. Formula GP, in turn, was the sole general partner of Formula LP. Id. at ¶ 1. At the hearing on December 15, 2016, Plaintiff clarified that, at all relevant times, Akhunova and Kessel managed Formula GP through their management of Formula VC as its managing partners. Akhunova and Kessel purportedly formed Formula VC and Formula GP, in order to raise capital from a group of investors to invest in a diverse portfolio of start-up companies. Id. at ¶ 1.

Between March 2012 and February 2013, Akhunova and Kessel met with Plaintiff's representatives to discuss a potential investment in Formula LP. Id. at ¶ 17. Throughout the negotiations, Kessel represented that: Formula LP would be an "exclusive, private club" for making investments in high-tech start-ups; it would raise approximately $60 million investment funds; and Kessel had the personal skill, ability, experiences, and industry connections to deliver on these promises. Id. at ¶¶ 19, 71, 95, 105.

Plaintiff alleges that it agreed to become a limited partner of Formula LP, relying on Kessel's representations. Id. at ¶ 23. Plaintiff made an initial aggregate capital commitment of $20 million. Id. On February 25, 2013, Plaintiff executed the Amended and Restated Limited Partnership Agreement for Formula VC Fund I, L.P. (the LP Agreement). Id.; Docket No. 34 Ex. A (LP Agreement). The LP Agreement states that the purpose of Formula LP is "to invest a diversified portfolio of investments with the primary focus on early technology ventures." Docket No. 34 Ex. A (LP Agreement) at § 3.1. The LP Agreement also restricts Formula LP in the investments it can make and requires it to "seek to diversify its investment portfolio by investing in at least twelve (12) Portfolio Companies." Id. at § 3.2.2. The management fee was expressed as 2.5% of all contributions. Id. at § 13.1.

Plaintiff argues that Kessel never intended to fulfill their promises but was only concerned with generating management fees and obtaining the prestige and profile of being venture capital fund managers for personal benefit. Docket No. 84 (Motion) at 2. Indeed, after Chassin became a limited partner of Formula LP, Akhunova and Kessel never obtained investments from any additional limited partners and never obtained additional capital commitments. Docket No. 34 (First Amended Complaint) at ¶ 21. Plaintiff further argues that Kessel misrepresented and misled Chassin regarding his ability to secure additional investments and limited partners. Id.; DocketNo. 72 Ex. A (Settlement and Release Agreement).

Akhunova and Kessel also failed to satisfy their contractual obligations to invest in a diversified portfolio of at least twelve companies. Docket No. 34 (First Amended Complaint) at ¶ 21. Of Plaintiff's total $3,250,000 investment in Formula LP, only $2,416,918.98 has purportedly been invested in only two companies. Id. at ¶¶ 2-3. On April 29, 2013, Formula LP purportedly made its first investment, in the amount of $550,000, in a stock offering by a Swiss technology company called Nektoon AG and doing business as Squirro (Squirro). Id. at ¶ 31. However, Plaintiff alleges that the bank records of Formula LP do not show any transfer to Squirro, but rather to Akhunova's Global Innovation Access entity. Id. Moreover, the current general partner of Formula LP, Nicola Smith, and Akhunova declared that the investment in Squirro had no or negligible value from the outset because Squirro never had a viable business plan and was a failing enterprise. See Docket No. 85 (Declaration of Nicola Smith) at ¶ 11; Docket No. 72 Ex. A (Settlement and Release Agreement) at ¶ 5(d). Plaintiff alleges that $225,000 of the purported investment in Squirro, if it was made, was made at a time when Kessel was a director of Squirro and knew that it was in a financially precarious position. Docket No. 84 (Motion) at 3.

Formula LP made its second investment, in the amount of more than $1.6 million, in 500 Startups II, L.P. (500 Startups), an independent fund that does what Akhunova and Kessel promised their fund would do: invest in companies for a fee of its own. Id. at ¶¶ 3, 32.

For their service, Akhunova and Kessel paid Formula GP excessive management fees in the amount of $750,000 and expenses reimbursements of tens of thousands of dollars in contravention of the LP Agreement. Id. at ¶¶ 3, 31, 35, 40-42. In addition, Akhunova and Kessel failed to implement appropriate controls for the management of Formula LP's cash. Id. at ¶ 4. Moreover, Akhunova and Kessel failed to satisfy Formula GP's obligation under the LP Agreement to report to the limited partners about the fund's financial affairs and asset values. Id. at ¶ 2. During Formula GP's management of Formula LP, Formula GP provided Plaintiff with only two quarterly statements and no other financial reporting. Id. at ¶ 50.

As a result of Defendants' mismanagement, Formula LP ran out of cash in early 2014, jeopardizing the value of its largest asset: the fund was unable to satisfy its capital call obligationsto 500 Startups, risking default under the terms of its investment agreement. Id. at ¶ 5.

After discussing the matter with Plaintiff, Akhunova and Kessel caused Formula GP to resign its position of general partner of Formula LP on April 24, 2015. IASO Ltd. (IASO) replaced Formula GP. Id. at ¶¶ 6, 69.

B. Procedural Background

On May 21, 2015, Plaintiff filed its original Complaint against Formula GP, Formula VC, Formula LP, and Akhunova. Docket No. 1. On June 22, 2015, Plaintiff voluntarily dismissed Formula LP. Docket No. 12. On December 8, 2015, Parties filed a Stipulation to Motion to Amend the Complaint and Permissive Joinder, in which Formula VC, Formula GP, and Akhunova consented to the entry of the amended complaint and the joinder of Kessel. Docket No. 31. The stipulation was granted on the same day. Docket No. 33.

On December 9, 2015, Plaintiff filed the First Amended Complaint, naming Formula GP, Formula VC, Akhunova, and Kessel as Defendants. Docket No. 34 (First Amended Complaint). It brought six causes of action: (1) fraud in the sale of securities under Securities and Exchange Commission Rule 10b-5; (2) breach of contract; (3) deceit; (4) fraud in the sale of securities under California Corporations Code section 25401; (5) breach of fiduciary duty; and (6) violation of California Business and Professions Code section 17200. Id. at ¶¶ 70-126. Plaintiff caused a copy of the First Amended Complaint, together with a summons, to be served upon Kessel on March 9, 2016, in accordance with the Hague Convention. Docket No. 46 (Certificate of Service of First Amended Complaint on Defendant Andrey Kessel).

On March 28, 2016, Kessel appeared in front of the Court through his counsel, Jessica Taran. Docket No. 42 (Notice of Appearance of Jessica Taran, Esq. on Behalf of Andrey Kessel). On the same day, Kessel moved to dismiss, arguing that the Court cannot exercise personal jurisdiction over him because he does not have sufficient contacts with California. Docket No. 39 at 3. In filing the motion to dismiss, Kessel did not challenge the adequacy of the service on him or the allegations in the First Amended Complaint. The Court denied the motion, finding personal jurisdiction over all claims asserted against Kessel. Docket No. 50.

Ten days after the denial order, Kessel fired Taran, and Taran subsequently sought towithdraw as counsel. Docket No. 53 (Jessica Taran's Notice of Motion and Motion to Withdraw as Counsel for Defendant Andrey Kessel). Taran attached, to her withdrawal motion, Kessel's letter terminating her. Docket No. 53 Ex. A. In the letter, Kessel wrote

I am satisfied on advice that under English law, which is where new proceedings would have to be brought in due course should the Claimant pursue its claims against me, that I would succeed on the merits. Moreover, I understand that in California the Frow rule would be applicable in the context of any application or motion that might be made for a default judgement, should I not take any action or participate further in the proceedings, and is likely to prevent the immediate entry of such judgement. More importantly, any default judgement against me, if at some stage obtained in California, is unlikely to be upheld or enforced here as under English law the California court has no jurisdiction.

Id.

Under Civil Rule 12(a)(4),¹ Kessel was required to file a response by May 6, 2016. Docket No....