DIALOG4 System Engr. v. Circuit Research Labs

• Decision Date: 31 March 2009
• Docket Number: Case No. CV 07-2534-PHX-MHM.
• Citation: 622 F.Supp.2d 814
• Parties: DIALOG4 SYSTEM ENGINEERING GMBH, Plaintiff, v. CIRCUIT RESEARCH LABS, INC.; Charles Brentlinger and Tammy Brentlinger, Defendants.
• Court: U.S. District Court — District of Arizona

622 F.Supp.2d 814

DIALOG4 SYSTEM ENGINEERING GMBH, Plaintiff, v. CIRCUIT RESEARCH LABS, INC.; Charles Brentlinger and Tammy Brentlinger, Defendants.

Case No. CV 07-2534-PHX-MHM.

United States District Court, D. Arizona.

March 31, 2009.

Brett L. Dunkelman, Osborn Maledon PA, Phoenix, AZ, for Plaintiff.

Donald A. Wall, Squire Sanders & Dempsey LLP, Phoenix, AZ, for Defendants.

ORDER

MARY H. MURGUIA, District Judge.

Currently pending before the Court is Plaintiff Dialog4 System Engineering GmbH's ("Dialgo4") May 30, 2008 Motion for Partial Summary Judgment. (Dkt #17). Defendants Circuit Research Labs, Inc. ("CRL"), Charles Brentlinger ("Brentlinger"), and Tammy Brentlinger filed a Response on July 2, 2008. (Dkt. #19). Plaintiff filed a Reply. (Dkt. #21). After reviewing the pleadings, the Court issues the following order.

I. BACKGROUND

In either late 2001 or January 2002, Dialog4, a German limited liability corporation, Berthold Burkhardtsmaier ("Burkhardtsmaier"), Dialog4's Managing Director, and Defendant CRL entered into an Asset Sale and Purchase Agreement ("ASPA"), whereby Dialog4 agreed to sell all or most of its business assets to CRL. (Plaintiff's Statement of Facts ("SOF") ¶ 3, Ex. 1; Defendants' Controverting Statement of Facts ("CSOF") ¶ 3). As consideration, CRL agreed to pay Dialog4 a purchase price of $2,000,000: $750,000 in cash installments and 1,250,000 shares of CRL's stock ("CRL stock"), then valued at $1.00 per share. (SOF ¶ 3, Ex. 1). At that same time, Dialog4, Burkhardtsmaier, and Defendant Brentlinger, CRL's Chief Executive Officer and Chairman of the Board (CSOF ¶ 3), entered into a Stock Purchase Agreement ("SPA"), whereby Brentlinger agreed to purchase CRL stock from Dialog4, upon written request from Dialog4 "at any time beginning twelve months after the purchase date and ending eighteen months after the purchase date." (SOF ¶ 4, Ex. 2). Burkhardtsmaier, became an employee of CRL at the time the ASPA and SPA were signed. (CSOF ¶ 4; Brentlinger Decl. ¶ 7 (CSOF, Ex. A)).

On January 18, 2002, the parties to the ASPA and SPA, including Dialog4, CRL, and Brentlinger, entered into an Amendment to the Existing Agreements and Closing Declaration ("First Amendment"). (SOF, Ex. 1, pp. 34-36). The First Amendment reiterated that the purchase price for Dialog4's assets was $750,000 plus 1,250,000 shares of CRL, payable in accordance with Article 4.2b of the ASPA. (Id., p. 34). The First Amendment also reiterated that the stock purchase price of the CRL stock purchased by Brentlinger pursuant to Paragraph 6 of the SPA was $1.00 per share plus 10 percent. (Id., p. 2).

On March 26, 2002, the parties entered into a Second Amendment to Existing Agreements and Closing Declaration ("Second Amendment"), which, among other things, required CRL to "immediately begin to register the Purchase Price Stock under the Securities Laws of the United States so that the Purchase Price Stock will be registered and legally saleable on U.S. securities markets at such time as Dialog4 may be entitled to sell such shares pursuant to the Agreements and the Amendment." (SOF, Ex. 1, p. 40). It also required CRL to "use its best efforts to cause such registration to become effective prior to any default by . . . CRL or [Brentlinger] which would permit the sale of the Purchase Price Stock by Dialog4." (Id.). Further, the Second Amendment stated that "[a]ll disputed arising in connection with this Second Agreement shall be finally settled" through arbitration. (Id., p. 41).

Sometime in Fall 2002, after closing on the ASPA and SPA, a dispute arose between the parties concerning alleged "misrepresentations during negotiations of the ASPA and SPA," and CRL ceased making installment payments to Dialog4 pursuant to the ASPA. (SOF ¶ 6; CSOF ¶ 9; Brentlinger Decl. ¶ 8). CRL also failed to register the CRL Stock pursuant to the Second Amendment. (SOF ¶ 6). Thereafter, on March 21, 2003, Dialog4 sent a timely, written request to Brentlinger that he purchase the CRL stock from Dialog4 pursuant to Paragraph 3 of the SPA. (SOF ¶ 5; CSOF ¶ 4). However, Brentlinger did not formally respond to Dialog4's request. (SOF ¶ 5; Brentlinger Decl. ¶ 9).

In April 2003, Dialog4 invoked the arbitration pursuant to the ASPA. (SOF ¶ 6). An evidentiary hearing was conducted in Germany on April 28, 2004, and on October 4, 2004, Dr. Klaus Sachs, the sole arbitrator, issued an Arbitration Award ("Award") (subsequently modified in a December 2, 2004 Addendum). (Id. ¶ 7, Ex. 4). In addition to various monetary awards, the Award ordered CRL to register the CRL stock with the SEC under the Securities Act of 1933. (Id. ¶ 8). However, Defendants did not fully comply with the Arbitration Award. (Brentlinger Decl. ¶ 12). As a result, Dialog4 subsequently initiated litigation in the District of Arizona, Dialog4 System Engineering GmbH v. CRL Systems, Inc., et al., No. CIV 05-0583-PHX-EHC, to confirm and enforce the Award. (Id. ¶ 10).

On April 15, 2005, Dialog4, CRL, and Brentlinger entered into a Settlement Agreement and Release ("SAR") to "resolve any and all disputes between [the parties], including but not limited to the claim asserted in the Arizona Litigation and in the Employment Litigation and the additional claims which could be asserted under the ASPA and the Stock Purchase Agreement." (SOF ¶ 11, Ex. 6). Paragraph 3 of the SAR requires CRL and Brentlinger to pay Dialog4 $965,000 in two installments. (SOF ¶ 12, Ex. 6 ¶ 3). In addition, Paragraph 4 of the SAR requires CRL to (1) "file with the [SEC] a registration statement," (2) "use its best efforts to have such registration statement declared effective as expeditiously as practicable," and (3) "keep such registration statement effective" for five years unless one of two specified events occurred. (Id. ¶ 4). Paragraph 1 of the SAR releases Defendants of liability "[u]pon full payment by Respondents in accordance with Paragraph 3 of this Agreement and the registration of the Shares pursuant to Paragraph 4 of this Agreement," and Paragraphs 8(d) and (e) provide that Dialog4 can seek enforcement of the ASPA or SPA if CRL and Brentlinger "are in default of any of their obligations under Paragraph 3 or Paragraph 4 of [the SAR]." (Id. ¶¶ 1, 8(d), 8(e)).

CRL made both installment payments, totaling $965,000, to Dialog4 pursuant to Paragraph 3 of the SAR. (SOF ¶ 12). CRL also registered the CRL stock with the SEC pursuant to Paragraph 4 of the SAR. (Id. ¶ 14). The registration became effective in late 2005. (Dkt. # 21, Ex. B). In order to maintain registration, CRL had to subsequently prepare and file quarterly, amended or supplemental prospectus materials with the SEC; they did so through November 14, 2006. (Id.; Brentlinger Decl. ¶ 14). CRL ceased filing its post-effective registration documentation and thus the CRL stock registration lapsed in early 2007. (SOF ¶ 14; Brentlinger Decl. ¶ 16). Neither of the two specified events in Paragraph 4 of the SAR occurred prior to the 2007 lapse of registration of the CRL stock. (SOF ¶ 13).

Dialog4 did not sell any of its CRL stock in 2006 or 2007 (except for approximately 10,000 shares in October 2007). (CSOF ¶ 17; Dkt. # 21, p. 9 n. 3). In a May 21, 2007 email to Burkhardtsmaier, Robert McMartin ("McMartin"), CRL's Chief Financial Officer and Executive Vice President, asked Burkhardtsmaier to "take the posting of [his] shares off [his] website" because Burkhardtsmaier was "using stale dated information and there is [a] black out period on [his] shares right now [and] it will not be lifted until we get the post effective amendment finished."¹ (CSOF Ex. E). Then, in a July 3, 2007 email to McMartin, Burkhardtsmaier wrote that "[t]he intention is to sell off the majority of the shares until the end of 2007." (CSOF, Ex. D). McMartin wrote back and again informed Burkhardtsmaier that he was "in a black out period and therefore prohibited from selling [his] shares." (Id.). Burkhardtsmaier responded: "No problem. The current share price is not attractive for any sales activities. What is the reason for the `black out period'? What has to be done to terminate this status." (Id.).

On October 10, 2007, Burkhardtsmaier wrote to Joseph Richardson ("Richardson") of Squire, Sanders & Dempsey, LLP, inquiring into "why we cannot sell the shares we want"; he also wrote that "[t]o [his] knowledge, CRL filled [sic] a statement (and is also paying for it) to allowing [sic] Dialog 4 to freely trade the CRL shares." (SOF, Ex. 7). Richardson responded the next day, explaining that "the [CRL] shares are not freely sellable" and "the registration statement is currently not in effect" because "[p]reparing a new up-to-date registration statement [to keep it effective would] cost CRL between $15,000 and $60,000" and "take approximately 6 to 8 weeks." (Id.).

Then, on November 14, 2007, Brett Dunkelman of Osborn Maledon, P.A., sent a letter on behalf of Dialog4, stating that Dialog4 considered Defendants' failure to maintain registration of the CRL stock a breach of Paragraph 4 of the SAR. (Dkt. #21, Ex. B). The letter acknowledged that CRL registered the stock in 2005 and filed amended or supplemental prospectus materials through November 14, 2006; but "[w]ithout informing Dialog4, CRL decided to cease filing such materials thereafter." (Id.). As such, the letter stated that "[u]nless CRL immediately resumes performing its obligations under Paragraph 4 and causes the registration to once again become effective within 30 days, Dialog4, at its discretion, will exercise any and all rights it may have under the [SAR], [ASPA], and [SPA]." (Id.). Dialog4 filed this lawsuit on December 14, 2007 (Dkt. #1).

Dialog4 filed its Motion for Partial Summary Judgment on May 30, 2008. (Dkt. # 17). CRL filed post-effective amendments to re-register the CRL stock that same day. (CSOF ¶ 22). The CRL stock is currently registered and freely tradeable at approximately $0.25 per share. (Id. ¶ 23).

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