Int'l Confections Co. v. Z Capital Grp.

• Decision Date: 28 March 2022
• Docket Number: 2:18-cv-1108
• Court: U.S. District Court — Southern District of Ohio
• Parties: INTERNATIONAL CONFECTION COMPANY, LLC, Plaintiff, v. Z CAPITAL GROUP, LLC, et al., Defendants.

INTERNATIONAL CONFECTION COMPANY, LLC, Plaintiff,
v.
Z CAPITAL GROUP, LLC, et al., Defendants.

No. 2:18-cv-1108

United States District Court, S.D. Ohio, Eastern Division

March 28, 2022

Chelsey M. Vascura Magistrate Judge

OPINION AND ORDER

EDMUND A. SARGUS, JR. UNITED STATES DISTRICT JUDGE

This matter is before the Court on Defendants Z Capital Group, LLC (“Z Capital Group”) and Z Capital Partners, LLC's (“Z Capital Partners”) (collectively, “Z Capital” or “Defendants”) Motion for Summary Judgment. (ECF No. 35.) For the reasons stated herein, Defendants' Motion is GRANTED. (Id.)

I. BACKGROUND

A. The Parties

1. Z Capital

Defendants are both Delaware limited liability companies that principally operate in Illinois. Together, they form an “alternative asset manager”-Z Capital- which primarily invests in two specific asset classes: private equity and credit. (Pl.'s Dep. of Matthew Kane, ECF No. 36-1.) As a private equity investor, Z Capital's ultimate objective is investing in entities that it will sell at a profit. (Id. at 52:2-4.) To make those investments, it must raise a specific amount of capital, which it solicits from outside investors (i.e., “Limited Partners”). (Pl.'s Ex. A, ECF No. 36-1.) All of the money that Z Capital raises for a specific investment project is “pooled” within

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a Delaware limited partnership known as a “Fund.” (Id.) Each Fund that Z Capital raises is managed by a “designated” general partner entity that Z Capital controls. (Id.; Kane Dep. at 38:23-39:11.)

Whenever Z Capital uses its funds to make an investment, it does not have them do so directly. (Kane Dep. at 25-32.) Rather, it will often create various business entities (e.g., holding companies) that fall underneath the Fund. (Id.) Those entities effectively act as “intermediaries” which funnel the Fund's capital into its intended investments-e.g., its “portfolio” companies. (Id.) One of those portfolio companies is non-party Mrs. Fields Famous Brands, LLC (“Mrs. Fields Famous Brands”), which owns and controls both Mrs. Fields Confections, LLC (“MF Confections”) and Mrs. Fields Franchising, LLC (“MF Franchising”). (Kane Dep. 22:15-25:7, 44:12-15; Kane Aff. at ¶ 8.)

2. ICC

Plaintiff International Confections Company, LLC (“ICC”) is an Ohio limited liability company that was formed to acquire non-party Maxfield Candy Company (“Maxfield Candy”), a Utah corporation. (Dep. of Michael Ryan, Ex. A, ECF No. 35-1.) ICC's sole member is Michael Ryan, who resides in, and is a citizen of, Ohio. (Id.; ECF No. 35-3.) As of today, ICC remains “open” as an entity, but is inactive as a business. (Ryan Dep. 5:3-7.)

B. The 2013 Licensing Agreement and Consent to Collateral Assignment

In April of 2013, ICC purchased Maxfield Candy, which had a pre-existing licensing agreement with MF Franchising. (Ryan Dep. 10:10-15.) The next month, ICC and MF Franchising entered into a licensing agreement of their own (the “Licensing Agreement”). (Pl.'s Ex. A, ECF No. 1-1.) The Licensing Agreement, in relevant part, granted ICC “the irrevocable exclusive right and license to use” MF Franchising's trademarks, trade names, service marks, and

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recipes to manufacture, market, and sell certain “Royalty Bearing” candy products (“Royalty Bearing Products”) through “Designated Distribution Channels” in a specified “Territory” until December 31, 2030. (Id. at PageID #13, 23.) In exchange, ICC would, inter alia, “remit” to MF Franchising the “accrued and unpaid royalties” of the Royalty Bearing Products it sold on a specified schedule, pay interest on any overdue royalty payments, and periodically provide MF Franchising with a certified report of its net sales. (Id. at PageID #14-17; ECF No. 35 at PageID #254.) Pursuant to subsection 17(b)(ii) of the Licensing Agreement, MF Franchising reserved the right to terminate the Agreement if ICC failed to perform

any material term or condition of this Agreement . . . and such default continues unremedied for thirty (30) days after the date on which ICC receives written notice of default unless such remedy cannot be accomplished in such time period and ICC has commenced diligent efforts within such time period and continues such effort until the remedy is complete

(Pl.'s Ex. A, ECF No. 1-1 at PageID #23.)

When ICC purchased Maxfield Candy, it pledged its rights and interest in the Licensing Agreement as collateral. (Pl.'s Ex. B, ECF No. 1-2.) Accordingly, on June 26, 2013, MF Franchising consented to and acknowledged Maxfield Candy's “collateral right, title, and interest in” the Licensing Agreement (the “Consent to Collateral Assignment”). (Id. at PageID #44.) Therein, MF Franchising promised to provide Maxfield Candy with a copy of any notice of default or termination that it sent to ICC. (Id. at PageID #47.) It also agreed to provide Maxfield Candy at least thirty days to cure any default on ICC's behalf. (Id. at PageID #46.)

C. MF Franchising's Termination of the 2013 Licensing Agreement

On August 26, 2014, MF Franchising notified ICC that it was in default of various obligations under the Licensing Agreement (the “Notice of Default”). (Def.'s Ex. E, ECF No. 35-5.) According to the notice, ICC failed to timely provide MF Franchising with (i) the payment of certain royalties; (ii) the payment of interest on certain royalty payments that ICC had already

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made; (iii) certified reports on ICC's net sales; (iv) a summary of the consumer complaints it had received “regarding the quality of the Royalty Bearing Products[;]” (v) a certificate of insurance; and (vi) “representative samples of all Royalty Bearing Products being sold” by ICC. (Id.) The notice stated that ICC's “[f]ailure to cure any or all of these defaults within the times provided by the Agreement shall result in the termination of the [Licensing] Agreement.” (Id.)

On September 26, MF Franchising notified ICC that it had not cured several of the defaults listed in the Notice of Default within the thirty-day period provided in the Licensing Agreement (the “Notice of Termination”). (Def.'s Ex. F, ECF No. 35-6.) Accordingly, MF Franchising terminated the Licensing Agreement in full. (Id.)

D. MF Confections' 2014 Purchase of ICC's Assets

Before MF Franchising terminated the Licensing Agreement, ICC secured several lines of credit from various banks, including the Utah-based Transportation Alliance Bank (“TAB Bank”). After the Agreement was terminated, TAB Bank sued ICC in Utah state court (the “Utah State Court”) for breaching their loan agreement and related payment guarantee. Transp. All. Bank v. Int. Confections Co.¸ LLC, 2017 UT 55, ¶ 2, 423 P.3d 1171, 1172. Several of ICC's other creditors caught wind of this lawsuit and subsequently intervened. Id. at ¶ 3.

On November 13, 2014, the Utah State Court appointed Kent Goates (the “Receiver”) to “immediately have and take possession, custody, and control of the business and all of the assets of [ICC ]” as a receiver. (Def.'s Ex. D, ECF No. 35-4.) TAB Bank settled its claims against ICC thereafter. Transp. All. Bank, 2017 UT 55, at ¶ 5. ICC's other intervening creditors, however, did not. Id. Accordingly, the receivership remained open. Id. at ¶ 6. Around that time, the Utah State Court permitted the Receiver to “sell, transfer, and liquidate” ICC's assets on its behalf. (Def.'s Ex. D, ECF No. 35-4.)

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On December 17, 2014, MF Confections purchased ICC's assets from the Receiver for the sum of $2.15 million (the “Purchase Agreement”). (Id.) One of the individuals who negotiated the purchase on MF Confections' behalf was Z Capital's general counsel, Matthew Kane. (Kane Aff. at ¶ 17.) ICC's sole member, Michael Ryan, did not participate in the discussions. (Ryan Dep. 42:24-43:11.)

The Purchase Agreement, in relevant part, contained the following release provision:

Release of Claims. Effective upon the Closing of the sale that is the subject of this Agreement, Seller [the receiver] on his own behalf and on behalf of [ICC] waives and releases any and all claims he or [ICC] may have against [MF Confections] and its employees, officers, directors, members, affiliates, and agents except for claims arising under this Agreement.

(the “Release Provision”) (Def.'s Ex. D, ECF No. 35-4.) The Purchasing Agreement did not define MF Confections' “affiliates.” (Id.) It did, however, state that all of its contents would be “governed by and construed and enforced with the internal laws of the State of Utah” (the “Choice-of-Law Provision”). (Id.)

On December 18, 2014, the Receiver filed an expedited motion to have the sale of ICC's assets approved by the Utah State Court. Transp. All. Bank, 2017 UT 55, at ¶ 11. The court agreed to hold a hearing and permitted ICC to object to the sale until December 22, 2014. Id. at ¶ 8. No. objection came. Id. Thus, on December 23, 2014, the Purchase Agreement was court approved. (Id.; Def.'s Ex. Z-1, ECF No. 7-2.)

E. Procedural History

After the asset sale was approved, ICC sued MF Franchising in the Federal District Court for the District of Utah for unlawfully terminating the Licensing Agreement. Transp. All. Bank, 2017 UT 55, at ¶ 10. Shortly thereafter, however, ICC dismissed its complaint voluntarily, opting instead to reopen litigation in the same state court that approved the Purchase Agreement. Id. at ¶ 11. There, ICC unsuccessfully moved to “reactive the case and allow [ICC] to file objections” to

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the Receiver's expedited motion to have the Purchase Agreement court approved. Id. After its motion was denied, ICC appealed to the Utah Supreme Court, which affirmed on the basis of mootness. Id. at ¶¶ 13, 23.

On September 25, 2018, ICC filed the instant action against Z Capital in this Court, accusing Z Capital of tortiously interfering with the Licensing Agreement and Consent to Collateral Assignment by “instructing” MF Franchising “to falsely declare a default.”...