Dye v. Commc'ns Ventures Iii, LP (In re Flashcom, Inc.)

• Decision Date: 04 December 2013
• Docket Number: Nos. SA CV 11–1883 FMO, ED CV 13–0114 FMO.,s. SA CV 11–1883 FMO, ED CV 13–0114 FMO.
• Citation: 503 B.R. 99
• Parties: In re FLASHCOM, INC. Carolyn A. Dye, Trustee, Appellant, v. Communications Ventures III, LP, et al., Appellees. David R. Weinstein, et al., Appellants, v. Communications Ventures III, LP, et al., Appellees.
• Court: U.S. District Court — Central District of California

503 B.R. 99

In re FLASHCOM, INC.

Carolyn A. Dye, Trustee, Appellant,

v.Communications Ventures III, LP, et al., Appellees.

David R. Weinstein, et al., Appellants,

v.Communications Ventures III, LP, et al., Appellees.

Nos. SA CV 11–1883 FMO, ED CV 13–0114 FMO.

United States District Court,

C.D. California.

Dec. 4, 2013.

David R. Weinstein, Bryan Cave LLP, Santa Monica, CA, Natalie B. Daghbandan, Bryan Cave LLP, Irvine, CA, for Appellant.

Amy Christine Quartarolo, Daniel Scott Schecter, Latham And Watkins LLP, Los Angeles, CA, Robert A. Franklin, Murray & Murray, Cupertino, CA, for Appellees.

ORDER Re: BANKRUPTCY APPEALS

FERNANDO M. OLGUIN, District Judge.

INTRODUCTION

Before the court are two related appeals from the bankruptcy matter, In re Flashcom, Inc., (bankruptcy court Case No. 8:00–bk–19215 RK, Adversary No. 8:02–ap–1620 RK; bankruptcy court Case No. 2:12–bk–16351 RK, Adversary No. 2:12–ap–1339 RK). In the first case, Flashcom, Inc.'s (“Flashcom” or “the debtor”) Trustee, Carolyn A. Dye (“Dye,” or “the Trustee”) challenges several of the bankruptcy court's pre-trial orders and findings at trial in favor of Communications Ventures III, LP; Communications Ventures III CEO & Entrepreneurs' Funds, LP; Mayfield IX; Mayfield Associates Funds IV; David Helfrich; the Estate of Todd Brooks; Richard Rasmus; and Kevin Fong, (collectively, “appellees”). ( See Dye's Opening Brief in Case No. SA CV 11–1883 (“Dye Opening Brief”), at 1–4). In the second case, the Trustee and her counsel, David R. Weinstein (“Weinstein”), appeal from the bankruptcy court's order imposing sanctions of $60,000 against them relating to a motion in limine they filed, which argued that the stipulated judgment rendered any trial unnecessary. ( See Weinstein and Dye's Opening Brief in Case No. ED CV 13–0114 (“Weinstein Opening Brief”), at 1–2).

These cases raise overlapping issues and the court finds it appropriate to consider the two appeals together. Further, having reviewed and considered all the briefing filed with respect to both cases, the court concludes that oral argument is not necessary to resolve the appeals. SeeFed.R.Civ.P. 78; Local Rule 7–15; Willis v. Pac. Mar. Ass'n, 244 F.3d 675, 684 n. 2 (9th Cir.2001).

STATEMENT OF FACTS

Flashcom was an internet service provider founded in the late 1990s by Andra Sachs (“Andra”) and Brad Sachs (“Brad”), which was involved in reselling DSL (digital subscriber line) service to consumers and business users. ( See Excerpts of Record,Case No. SA CV 11–1883 (“ER1”) at 11319–29 (Admitted Facts in Joint Pre–Trial Order (“AF”)) at ¶¶ 1, 4 & 5). The VC Funds ¹ made their initial investment in Flashcom in June 1999 by paying $15,000,000 to purchase Series A Preferred Stock. ( See id. at % 17). As a result, the VC Funds appointed partners to Flashcom's Board of Directors; ComVentures appointed David Helfrich and Mayfield appointed Todd Brooks and Kevin Fong (collectively, the “director defendants”). ( See id.). Flashcom's Board was comprised of five directors, i.e., the three director defendants plus Andra and Brad. ( See id. at ¶ 4, 5 & 17).

When the director defendants joined the Board, they began to have concerns about Andra's continuing involvement with Flashcom. ( See AF at ¶ 18). On July 27, 1999, the Board informed Andra that her management style could no longer be tolerated because it was hindering relations with customers, strategic partners, and vendors. ( See id. at ¶ 19). Accordingly, the Board determined that it was necessary to remove Andra from the management of Flashcom. ( See id.).

However, Andra refused to voluntarily remove herself from management absent a substantial payment. ( See AF at ¶ 19). Flashcom contemplated a second round of financing to raise funds, but because the financing had not yet begun, Flashcom was unable to pay the amount needed to remove Andra. ( See id.).

To end Andra's day-to-day involvement in Flashcom, Andra and the VC Funds executed a Loan and Pledge Agreement. ( See AF at ¶ 20; ER1 at 22572–99). Although structured as loans, the Loan and Pledge Agreement was an agreement under which the VC Funds would pay Andra $1,000,000 and, in the event Flashcom completed a Series B “Qualified Financing” by obtaining at least $30 million with venture capital and other institutional investors (“the Financing Condition”), the VC funds “and/or other investors in the Qualified Financing” would purchase Andra's stock for $9,000,000 as part of a “Unit Purchase,” which would consist of a combination of Andra's common stock and the Series B Preferred Stock. ( See AF at ¶¶ 20 & 27; ER1 at 22572). If Flashcom completed the Qualified Financing, but the other investors decided not to participate in the purchase of Andra's stock, the VC Funds were obligated to purchase Andra's stock themselves. ( See id.). In exchange, Andra would withdraw from Flashcom's operations. ( See AF at ¶ 20).

In connection with the anticipated Series B financing, Flashcom retained Thomas Weisel Partners (“TWP”) as its investment banker. ( See AF at ¶ 23). TWP assisted Flashcom in preparing a Private Placement Memorandum (“PPM”) by which Flashcom offered the Series B Preferred Stock. ( See id. at ¶¶ 22 & 24). In late 1999, TWP recommended that instead of marketing a “Unit Purchase,” Flashcom use a simpler approach whereby Series B investors would purchase only one security, the Series B Preferred Stock, and then Flashcom would pay Andra $9,000,000 with money it received from the Series B financing. ( See id. at ¶ 27). As such, pursuant to the PPM, Flashcom offered $40 million of Series B preferred stock, with the understanding that $9,000,000 of the proceeds would be used to purchase Andra's stock. ( See id. at ¶¶ 22 & 28).

To implement the Series B financing, Flashcom prepared a Series B Preferred Stock Purchase Agreement (the “Series B Agreement”). ( See id. at % 26; ER1 at 22819–95). In addition, to provide Flashcom with short-term working capital and to sustain its operations prior to the Series B financing, the VC Funds made a series of “Bridge Loans” to Flashcom, totaling approximately $9,000,000. ( See AF at ¶ 25).

By December 1999, Andra had threatened litigation against Flashcom, the VC Funds, the director defendants, Brad, and other representatives of Flashcom's Board and management. ( See AF at % 29). Andra's counsel had prepared and signed a complaint on her behalf asserting several claims, including breach of fiduciary duty and fraud, which was submitted to the news media but not filed in court. ( See id.; ER1 at 02501–12). Flashcom's Board and management were concerned that any threatened or actual litigation by Andra, irrespective of its merits, would prevent or impair the completion of the Series B financing. ( See Memorandum Decision Re: Third and Eighth Causes of Action of Plaintiff's Amended Complaint, filed on September 23, 2011 (“Court's Order of September 23, 2011”) at 13). For example, the lead Series B investor indicated that it would not go forward with investing in the Series B transaction unless all disputes between Andra and Flashcom were resolved and Andra provided a release of all claims against Flashcom, its directors and officers, and the VC Funds. ( See id.).

On or about February 11, 2000, the VC Funds, Andra, and Flashcom executed a Stock Purchase Agreement. ( See AF at ¶ 31; ER1 at 22708–17). Pursuant to this Agreement, Andra agreed to sell some of her common stock to the VC Funds in exchange for $1,000,000, and the sale was deemed accomplished by the payment already made by the VC Funds in connection with the Loan and Pledge Agreement. ( See AF at ¶ 31; ER1 at 22708). Also under the Agreement, Flashcom agreed to repurchase some of Andra's common stock for $9,000,000, conditioned on satisfaction of the Financing Condition for the Series B offering. ( See id.).

Concurrently with the Stock Purchase Agreement, Flashcom, the director defendants, the VC Funds, and Andra executed a Settlement Agreement and Release (the “Release”). ( See AF at ¶ 34; ER1 at 22680–96). In exchange for the $9,000,000 payment to Andra provided for in the Stock Purchase Agreement, Andra agreed to release all claims against Flashcom, Brad, and appellees. ( See AF at ¶ 34; ER1 at 22682). By virtue of the terms of the Series B Agreement, the Release, the Stock Purchase Agreement, and their respective exhibits, (1) the settlement with Andra was a condition to closing the Series B financing; (2) closing the Series B financing was a condition to the Stock Purchase Agreement and Flashcom's payment of $9,000,000 to Andra; and (3) effectuation of the Stock Purchase Agreement and payment of $9,000,000 by Flashcom to Andra was a condition to the settlement with Andra. ( See AF at ¶ 37).

By February 23, 2000, the Financing Condition was satisfied. ( See AF at ¶ 39). The Series B offering had originally contemplated raising only $40 million, but it was oversubscribed due to interest in Flashcom and instead raised $84 million. ( See Court's Order of September 23, 2011, at 15). Flashcom could have raised even more funds, but the Board decided to close the offering at $84 million to prevent dilution in advance of an anticipated initial public offering (“IPO”). ( See id.). Also on February 23, 2000, Flashcom repurchased Andra's stock and paid her $9,000,000 through a wire transfer. ( See AF at ¶¶ 40–41). After Flashcom paid Andra the $9,000,000, Andra never demanded paymentfrom the VC Funds, and they never offered to make payments on account of the Loan and Pledge Agreement. (See id. at ¶ ¶ 43–44). Thus, the Series B financing yielded $75 million for Flashcom following its payment to Andra.

Flashcom met with several investment banks about its anticipated IPO, (see ER1 at 03672), but by the time Flashcom filed a SEC Form S–1 registration statement with the Securities and Exchange Commission on May 12, 2000, the market in the telecom industry had changed dramatically. ( See id. at 19890). Flashcom's...