Master v. Riptide Worldwide, Inc.
| Decision Date | 17 December 2012 |
| Docket Number | 10 Civ. 4020 (CM) (JLC) |
| Parties | CAMOFI MASTER LDC and CAMHZN MASTER LDC, Plaintiffs, v. RIPTIDE WORLDWIDE, INC (f/k/a Shea Development Corp.), BRAVERA, INC. (n/k/a RTWW Business Services, Inc.), IP HOLDINGS OF NEVADA, INC., INFORMATION INTELLECT, INC., FRANCIS E. WILDE, MATRIX HOLDINGS, LLC, THOMAS E. WHEELER, E. JOSEPH VITETTA, JR., and RICHARD CONNELLY, Defendants. |
| Court | U.S. District Court — Southern District of New York |
REPORT AND RECOMMENDATION
Plaintiffs CAMOFI Master LDC ("CAMOFI") and CAMHZN Master LDC ("CAMHZN") (collectively, "Plaintiffs") bring this action against Defendants Riptide Worldwide, Inc. ("RTWW"), Bravera, Inc. ("Bravera"), IP Holdings of Nevada, Inc. ("IP Holdings"), Information Intellect, Inc. ("Information Intellect"), Matrix Holdings, LLC ("Matrix"), and Francis E. Wilde ("Wilde") (collectively, the "Defaulting Defendants"), as well as Thomas E. Wheeler ("Wheeler") and E. Joseph Vitetta, Jr. ("Vitetta") (collectively, with the Defaulting Defendants, "Defendants"). Plaintiffs assert claims for breach of contract, securities fraud, common law fraud, and fraudulent conveyance arising out of a 2007 loan and securities purchase agreement between Plaintiffs and RTWW. Each of the Defaulting Defendants has failed to answer or otherwise respond to the Complaint. The Court previously granted default judgment in the amount of $17,132,373.34 against RTWW, Bravera, IP Holdings, and Information Intellect on the breach of contract claims. Plaintiffs now move for default judgment against the Defaulting Defendants on the fraud and fraudulent conveyance claims, and for an award of damages in the amount of $19,965,937.29. As set forth below, I recommend the Court grant the motion for default judgment in part and deny it in part, and deny the request for damages without prejudice to renewal upon a more developed record.
It is well-settled that a defendant who fails to answer or otherwise oppose a complaint is "deemed to have admitted all well-pleaded allegations in the complaint pertaining to liability." Finkel v. Romanowicz, 577 F.3d 79, 81 n.1 (2d Cir. 2009) (citing Greyhound Exhibitgroup, Inc. v. E.L.U.L. Realty Corp., 973 F.2d 155, 158 (2d Cir. 1992)). Accordingly, the following facts, which are drawn from the Complaint and written instruments annexed thereto, see Fed. R. Civ. P. 10(c), are established for the purpose of determining liability of the Defaulting Defendants. Familiarity with the Court's prior Decision and Order Denying Defendants' Motion to Dismiss, Camofi Master LDC v. Riptide Worldwide, Inc., No. 10 Civ. 4020 (CM), 2011 WL 1197659 (S.D.N.Y. Mar. 25, 2011) (Dkt. No. 43) ("Camofi I"), and the November 9, 2011 Form of Default Judgment (Dkt. No. 55) is assumed.
Plaintiffs are two Cayman Islands limited duration companies. (Complaint dated May 14, 2010 ("Compl") ¶¶ 11-12 (Dkt. No. 1)). RTWW is a Nevada corporation whose stock trades on the Pink Sheets under the symbol "RTWW." (Compl. ¶ 13).1 Wilde is RTWW's ChiefExecutive Officer and Executive Chairman of the Board of Directors. (Compl. ¶ 17). Wheeler is RTWW's Executive Vice President of Mergers and Acquisitions and Vice Chairman of the Board of Directors, and previously served as RTWW's President. (Compl. ¶ 19). Vitetta is RTWW's Executive Vice President and Corporate Secretary, and previously was its Senior Vice President and Corporate Secretary. (Compl. ¶ 20). Bravera, Information Intellect, and IP Holdings (collectively, the "Subsidiary Defendants") are wholly-owned subsidiaries of RTWW. (Compl. ¶¶ 14-16). Matrix is a corporation alleged to be wholly-owned and controlled by Wilde. (Compl. ¶ 18).
In April 2007, RTWW contracted to purchase Bravera and Riptide Software, Inc., a custom software company, as part of a plan to transition RTWW's business into a global information technology and business process management company. (Compl. ¶ 27). To finance these acquisitions, RTWW commenced discussions with Plaintiffs regarding Plaintiffs' possible investment in RTWW. (Compl. ¶ 29). Thereafter, in July 2007, RTWW and Plaintiffs entered into a Securities Purchase Agreement ("SPA") under which Plaintiffs agreed to loan RTWW approximately $7.25 million, to be used solely for the purpose of acquiring Riptide Software and Bravera. (Compl. ¶ 32). In return, RTWW issued to Plaintiffs two senior secured notes in the aggregate amount of $7.25 million, shares of RTWW's common stock, and warrants entitling Plaintiffs to purchase additional shares of RTWW's common stock. (Compl. ¶¶ 31-32). As security for the loan, RTWW granted Plaintiffs a priority lien on all of the assets of RTWW andits subsidiaries (the "Collateral"). (Compl. ¶ 49). RTWW's subsidiaries each guaranteed the loan. (Compl. ¶¶ 46, 49).2
Under the Notes, RTWW was required to make quarterly interest payments commencing on October 1, 2007, and monthly interest and principal payments commencing on January 1, 2008. (Compl. ¶ 36; see also Notes at 5-6). However, RTWW defaulted on these payment obligations "almost immediately subsequent to execution of the Transaction Documents by failing to make any and all required principal and interest payments when due and payable as required by the Notes." (Compl. ¶ 65).3 Though the Notes matured on March 13, 2010, the onlypayment Plaintiffs have received under the Notes to date is two checks from Matrix dated October 30, 2008, in the aggregate amount of $750,000. (Compl. ¶ 71).
Plaintiffs allege that in the weeks leading up to the execution of the SPA, Defendants knowingly misrepresented the financial condition and business prospects of RTWW and its subsidiaries in order to induce Plaintiffs to enter the SPA. (Compl. ¶ 58). The Complaint identifies three misrepresentations in particular. First, in Section 3.1(aa) of the SPA, a section entitled "Solvency," RTWW allegedly represented to Plaintiffs that, after receipt of the loan from Plaintiffs and "application of [its] proceeds," the "fair saleable value of the assets of [RTWW and the RTWW Subsidiaries, as a whole] exceeds the amount that will be required to be paid on or in respect of [their] existing debts and other liabilities . . . as they mature." (Compl. ¶ 59; SPA § 3.1(aa)). Plaintiffs contend that this representation (the "solvency representation") was false because the value of the assets of RTWW and its subsidiaries on the date of the loan was "far less" than $7.25 million. (Compl. ¶ 60). Plaintiffs further state that Defendants knew that the solvency representation was false because RTWW failed to ensure that its pro forma balance sheet contain at least $3.5 million in cash, and failed to secure at least $4 million of additional equity in RTWW, both of which were closing conditions under the SPA. (Compl. ¶ 60).
Second, Plaintiffs contend that Defendants knowingly misrepresented and/or failed to disclose that certain "guaranteed" contracts between the RTWW subsidiaries and third parties "did not represent a fixed and determinable stream of income that could secure repayment of the Notes." (Compl. ¶ 61). Third, Plaintiffs allege that a 2007 Agreement and Plan of Mergerbetween RTWW and Riptide Software, presumably produced by RTWW to Plaintiffs during the due diligence period, falsely stated that RTWW would cause Riptide Software to pay approximately $800,000 of Riptide Software's outstanding tax liability with the Internal Revenue Service following completion of the merger, and that Riptide Software's former shareholders would reimburse Riptide Software out of funds received from RTWW on repayment of notes issued in connection with the merger. (Compl. ¶ 62). Plaintiffs assert that the merger agreement was knowingly false in this respect because, at the time the Transaction Documents were executed, RTWW lacked sufficient resources to pay off the notes held by Riptide Software's former shareholders, and Riptide Software lacked the resources to make the agreed-upon payment to the IRS. (Compl. ¶ 63). Ultimately, Riptide Software did not make the tax payment to the IRS and its tax liability grew to approximately $2 million, "greatly reducing [Riptide Software's] value." (Compl. ¶¶ 63-64).
Plaintiffs also allege that in 2008 and 2009, after RTWW defaulted on its payment obligations under the SPA, Defendants made false assurances regarding RTWW's readiness to make payments under the Notes. (Compl. ¶¶ 66-70). For example, on February 19, 2008, in response to two emails from Plaintiffs regarding past-due interest and principal payments, Richard Connelly, RTWW's former chief financial officer, allegedly stated that payment would be made following the completion of funding RTWW was seeking to secure. (Compl. ¶ 68).4 On March 2, 2008, Wilde sent Plaintiffs an email promising that RTWW was "receiving moneyinto the company this week to catch up" on payments; that RTWW was "in a position to close the sale" of one of its business units; and that the "majority of the proceeds . . . w[ould] be paid to [Plaintiffs] Monday or Tuesday, depending on when they hit our account." (Compl. ¶ 69). On March 31, 2008, Wilde sent Plaintiffs another email reporting that RTWW would close on a business transaction that week, and RTWW would be in a position to make a payment to Plaintiffs by the end of the week. (Compl. ¶ 70). However, no payments were made. (Id.).
On April 18, 2008, allegedly in reliance on these representations, Plaintiffs entered into a further agreement with RTWW under which they agreed to waive their SPA default remedies on the condition that RTWW did the following: (1) pay $2 million to Plaintiffs by April 25, 2008; (2) repay all outstanding principal and interest by scheduled...
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