Cordts-Auth v. Crunk, LLC

• Decision Date: 27 September 2011
• Docket Number: Case No. 09–CV–8017 (KMK).
• Parties: Renate CORDTS–AUTH, individually and as a member in Crunk, LLC, suing on behalf of herself and all others similarly situated, Plaintiff, v. CRUNK, LLC, d/b/a Crunk Juice LLC and/or Crunk Energy Drink, Solvi Brands, LLC, Catherine F. Halstead, Samuel S. Holdsworth, Loeb & Loeb, LLP, Robert B. Lachenauer, Catherine F. Halstead Revocable Trust, Peter A. Halstead Revocable Trust, Tia Tippet Laurent Trust, Oliver Nicolas Laurent Trust, 2003 Irrevocable S Corporation Trust Agreement of Eliza Finkelstein Dated January 1, 2003, 2003 Irrevocable S Corporation Trust Agreement of Jennifer Finkelstein Dated January 3, 2003, Matthew Frank, Mark Frank, Alexandra Frank, Russell Frank, Bison Holdings Corp., Tedric Holdsworth, Lydia Holdsworth, Eric Holdsworth, Ariel Holdsworth, William Mayher, Douglas Lachance, Pamela Putney, Sarah Malm, Karen Malm, Garfield Smith, and Tom Mahlke, Defendants.
• Court: U.S. District Court — Southern District of New York

815 F.Supp.2d 778

Renate CORDTS–AUTH, individually and as a member in Crunk, LLC, suing on behalf of herself and all others similarly situated, Plaintiff,

v.CRUNK, LLC, d/b/a Crunk Juice LLC and/or Crunk Energy Drink, Solvi Brands, LLC, Catherine F. Halstead, Samuel S. Holdsworth, Loeb & Loeb, LLP, Robert B. Lachenauer, Catherine F. Halstead Revocable Trust, Peter A. Halstead Revocable Trust, Tia Tippet Laurent Trust, Oliver Nicolas Laurent Trust, 2003 Irrevocable S Corporation Trust Agreement of Eliza Finkelstein Dated January 1, 2003, 2003 Irrevocable S Corporation Trust Agreement of Jennifer Finkelstein Dated January 3, 2003, Matthew Frank, Mark Frank, Alexandra Frank, Russell Frank, Bison Holdings Corp., Tedric Holdsworth, Lydia Holdsworth, Eric Holdsworth, Ariel Holdsworth, William Mayher, Douglas Lachance, Pamela Putney, Sarah Malm, Karen Malm, Garfield Smith, and Tom Mahlke, Defendants.

Case No. 09–CV–8017 (KMK).

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

Sept. 27, 2011.

Austin Reis Graff, Esq., Christopher G. Kirby, Esq., The Scher Law Firm, LLP, Carle Place, NY, for Plaintiff.

Danielle Lauren Rose, Esq., Steven Gary Kobre, Esq., Scott Kurtis McCulloch, Esq., Kobre & Kim LLP, New York, NT, for the Crunk Defendants.

Claire L. Huene, Esq., Joel M. Miller, Esq., Miller & Wrubel, P.C., New York, NY, for the Loeb Defendants.

OPINION AND ORDER

KENNETH M. KARAS, District Judge.

Renate Cordts–Auth (“Plaintiff”) brings this action against Crunk, LLC (“Crunk”), Solvi Brands, LLC (“Solvi”), Catherine Halstead (“Halstead”), Samuel Holdsworth (“Holdsworth”), and about twenty investors in Solvi (collectively, “the Crunk Defendants”), as well as against Loeb & Loeb, LLP (“Loeb”) and Robert Lachenauer (“Lachenauer”) (collectively, “the Loeb Defendants”) (collectively, “Defendants”), seeking a declaratory judgment that Plaintiff was a member of Crunk and demanding access to records and an accounting in connection with the sale of Crunk to Solvi. Plaintiff also asserts derivative claims for breach of fiduciary duty, tortious interference, and legal malpractice, and a direct claim for breach of contract. The Crunk Defendants move to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), arguing that Plaintiff lacks standing to bring derivative claims on behalf of Crunk, and that Plaintiff's other claims fail as a matter of law. The Loeb Defendants, against whom only claims for breach of fiduciary duty and legal malpractice are asserted, contend that the Court lacks subject matter jurisdiction over this matter and separately move to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(1).¹ Plaintiff moves to amend the Amended Complaint, seeking to add a cause of action for constructive trust against the Crunk Defendants. For the reasons stated herein, Defendants' motions are granted and Plaintiff's motion is denied.

I. Background

A. Facts

The Court assumes the following facts, as alleged in the Amended Complaint, to be true for purposes of the instant motion. Crunk, the manufacturer of a line of “high energy” soft drinks known as “Crunk Energy Drink,” was created in 2003 by Sidney E. Frank (“Frank”), who, at the time, was founder and CEO of Sidney Frank Importing Company (“SFIC”). (Am. Compl. ¶¶ 36–37.) Frank had previously achieved success in marketing Grey Goose Vodka (“Grey Goose”) and Jagermeister liqueur. ( Id. ¶ 37.) In or about 2004, Frank made a capital contribution of approximately $6.6 million to Crunk. ( Id. ¶ 38.) The money used for this investment was obtained through a personal loan to Frank from SFIC, which was subsequently repaid in full. ( Id. ¶ 39.) In or about March 2004, the Limited Liability Company Agreement of Crunk, LLC (the “Original Crunk Operating Agreement”) was amended to reflect Frank's capital contribution. ( Id. ¶ 40; see also id. Ex. B (Amended and Restated Limited Liability Company Agreement of Crunk, LLC (the “Amended Crunk Operating Agreement” or the “Crunk Operating Agreement”)).)

In or about April 2004, the Amended Crunk Operating Agreement was amended once more to reflect the addition of several “Performance Unit Holders.” ( Id. ¶ 41; see also id. Ex. C (Amendment to Amended Crunk Operating Agreement).) “Performance Units” are defined in the Amended Crunk Operating Agreement as “compensation for services where [Crunk] desires that the grantee's interest be limited to the post-grant date appreciation of the Company as contrasted with the grant date fair market value that would otherwise then be realized by the Company in an arms' length sale and, hence, that such grantee receive only a ‘profits' interest for Federal income tax purposes.” (Am. Compl. Ex. B § 3.3(a).) In other words, upon granting a Performance Unit, an appraisal of the company's value is conducted, and in the event of the company's sale, a holder of a Performance Unit receives only a share of the net proceeds that are greater than that appraisal value (the “Grant Floor Value”). ( See id. Ex. B § 3.3(b).) Therefore, where a sale nets proceeds that are less than the Grant Floor Value, a Performance Unit holder receives no compensation, because Performance Units are only a “profits interest.” The Grant Floor Value associated with Plaintiff's Performance Units was $2 million, meaning that Plaintiff could profit from a Crunk sale only if such sale netted greater than $2 million, or alternatively if Crunk was sold in gross for more than $8.66 million—that is, a value greater than Frank's initial contribution of $6.66, which would need to be repaid upon any sale, plus $2 million.

Plaintiff was employed with SFIC for approximately 18 years as a “key employee ... overseeing all aspects of administration.” ² ( Id. ¶ 45.) Plaintiff also assisted Frank in the operation of a number of other entities, including Crunk. ( Id. ¶ 46.) In short, Plaintiff alleges, she was a highly-valued asset to Frank, and accordingly, in or about March 2005, Plaintiff entered into a Performance Unit Grant Agreement with Crunk, pursuant to which she was granted 384,615 Performance Units as consideration for her services to Crunk. ( Id. ¶¶ 47–50; see also id. Ex. D.) On March 10, 2005, under the terms of the Performance Unit Grant Agreement, the Amended Crunk Operating Agreement was amended once more to reflect the addition of Plaintiff as a Performance Unit holder. ( Id. ¶ 51; see also id. Ex. E (Second Amendment to Amended Crunk Operating Agreement (“Crunk Operating Agreement”)).) ³ Plaintiff thereafter performed services as an employee of Crunk. ( Id. ¶ 53.)

Sidney Frank died on January 10, 2006, leaving the administration of SFIC and Crunk to his daughter, Defendant Halstead. ( Id. ¶¶ 55, 58.) Specifically, Halstead became chairwoman of SFIC and manager and principal executive of Crunk. ( Id. ¶¶ 56–57.) Halstead's husband, Peter Halstead, began serving as principal advisor to Crunk's management personnel, including Plaintiff. ( Id. ¶ 59.) In or about March 2006, Peter Halstead allegedly informed Plaintiff of his wife's intent to devalue Crunk's Performance Units and to issue new units, to restructure Crunk and re-launch the company with new investors, and to defraud Crunk's existing investors. ( Id. ¶¶ 60–63.) Following Plaintiff's objection to these actions, on February 9, 2007, she was allegedly removed from her positions at SFIC and Crunk, without notice, by Defendant Halstead. ( Id. ¶ ¶ 64–66.) On March 9, 2007, Plaintiff, SFIC, and Crunk entered into a separation agreement (the “Separation Agreement”) wherein Plaintiff agreed to resign from her positions at SFIC and Crunk and to receive $2,000,000 in consideration. ( Id. ¶¶ 67–69; see also id. Ex. F (the Separation Agreement).) Plaintiff alleges she retained ownership of her Performance Units. ( Id. ¶ 70.)

Halstead allegedly pursued a course of intentionally devaluing Crunk “in order to render it insolvent, thereby extinguishing the rights of existing performance unit holders, like [ ] Plaintiff.” ( Id. ¶ 71.) In a letter written by Halstead and addressed to Plaintiff, dated March 29, 2007 ( id. Ex. G), Halstead claimed that in 2006, Crunk lost approximately $1,500,000 and that Crunk was projected to lose its remaining cash investments during the upcoming fiscal year. ( Id. ¶¶ 72–73.) In the letter, Halstead stated that Crunk had been sold, as of February 28, 2007, to Defendant Solvi for approximately $550,000. ( Id. ¶ 75; id. Ex. G (describing the “Crunk sale”).) In the letter, Halstead informed Plaintiff that she would receive no proceeds from the Crunk sale, as the Performance Units were “profits-only” interests, meaning that Plaintiff would receive a share of the net proceeds only: (1) after the initial investors were returned the amount of their contributions; and (2) if the value of the remaining proceeds exceeded $2 million, the Grant Floor Value of Plaintiff's Performance Units. ( Id. ¶¶ 76–77; id. Ex. G.) As Sidney Frank was the only initial investor in Crunk, Halstead stood to receive the proceeds from the Crunk sale as Frank's heir. ( Id. ¶¶ 78–79.) Following Crunk's sale, Halstead dissolved Crunk on or about May 18, 2007. ( Id. ¶ 81; see also id. Ex. H.)

Plaintiff claims that Defendant Solvi, which was formed on or about January 31, 2007, was created for the “sole purpose” of purchasing Crunk and distributing its products. ( Id. ¶¶ 83–84.) Halstead served as manager of Solvi, and Defendant Holdsworth was chairman of Solvi's board of directors. ( Id. ¶¶ 85–86.) Plaintiff alleges that Holdsworth had actual and constructive knowledge of Halstead's intent to devalue Crunk and to re-launch Crunk with new investors, and that Holdsworth facilitated and profited from the Crunk sale. ( Id. ¶¶ 112–18.) In or about February 2007, Solvi “purportedly” received $2,460,000 in capital contributions, from various investors named here as Defendants, as consideration for the purchase of “Common Units” of Solvi. ( Id. ¶¶ 87–111.) Solvi allegedly never received the...