Melcher v. Fried

Decision Date04 December 2018
Docket NumberCase No. 16-cv-2440-BAS-BGS
CourtU.S. District Court — Southern District of California
PartiesCARL MELCHER, et al., Plaintiffs, v. LANCE FRIED, Defendant.

ORDER DENYING DEFENDANT LANCE FRIED'S MOTION FOR SUMMARY JUDGMENT

Before the Court is Defendant Lance Fried's ("Fried") motion for summary judgment on all federal and state law claims asserted in this action. (ECF No. 47.) Plaintiffs the Melcher Family Limited Partnership ("MFLP") and Carl Melcher ("Melcher") (together, "Plaintiffs") oppose (ECF No. 51) and Fried has replied in support (ECF No. 53). The Court finds the motion suitable for determination on the papers submitted and without oral argument. See Civ. L. R. 7.1 (d)(1). For the reasons herein, the Court denies Fried's motion.

OVERVIEW

This case arises from a repurchase agreement in which Face It Corporation ("Face It"), a company of which Fried was a founder as well as the Chief Executive Officer and Chairman of the Board of Directors, agreed to repurchase MFLP's shares of Face It stock. MFLP, of which Melcher is a limited partner, claims that Fried failed to disclose that Face It was in merger discussions with another company, Five9, Inc. ("Five9") at the time a Redemption Agreement was drafted and finalized. Five9 sent Fried a draft merger term sheet term a week before the repurchase was completed, the merger term sheet was finalized two days after the repurchase, and Face It merged into Five9 about a month later. Melcher contends that he would not have sold MFLP's shares if he had known about the Five9 merger discussions.

BACKGROUND1

MFLP is a California limited partnership, which invests in start-up companies. (ECF No. 51-1, Carl Melcher Decl. ("Melcher Decl.") ¶ 2.) Melcher utilized MFLP for estate planning purposes and he was over 65 years old when he caused MFLP to invest in Face It. (Id. ¶¶ 2-3.) At all relevant times, Fried, one of Face It's founders, was Face It's CEO and the Chairman of its Board of Directors (the "Board"). (ECF No. 55, Joint Statement of Undisputed Facts ("JSUF") ¶ 7; see also ECF No. 47-2, Lance Fried Decl. ("Fried Decl.") ¶ 2 ("During the times in question I was the [CEO] at Face It, acting at the direction of Face It's board.").

The Investment and Soured Relations. The tale of the present action dates to 2011 when MFLP invested some $3.1 million in Face It in exchange for Face It stock. (JSUF ¶ 1; Fried Decl. ¶ 3.) Because of the amount of Face It stock it now owned, MFLP was entitled to name representatives to two Board seats, to which it named Melcher and Kevin Hell. (Fried Decl. ¶ 3; ECF No. 47-3, Michelle Brown Decl. ("Brown Decl.") ¶ 2; cf. JSUF ¶¶ 4-5.) Euphoria from the investment soon wore off.

By early through mid-2013, Melcher had grown frustrated with Face It and Fried for "overly optimistic sales forecasts," deals that did not materialize, and his view that Face It's monthly costs far exceeded its revenues. (Melcher Decl. ¶ 4; FriedDecl. ¶ 6; ECF No. 51-2, John Melcher Decl. ("J.M. Decl.") ¶ 3.) Around April 17, 2013, Melcher and his son, John Melcher, an MFLP limited partner, met with Fried "to discuss Face It's poor performance" and outlined the "options" they believed Face It had: (1) shut down, (2) find an alternative investor or purchaser, or (3) merge with another company. (Melcher Decl. ¶ 6; Fried Decl. ¶ 6, Ex. C (memorandum of meeting); J.M. Decl. ¶¶ 1, 5.) Melcher did not believe Fried would accept a shutdown and he did not believe an alternative investor would come forward "given Face It's poor performance." (Melcher Decl. ¶ 6; J.M. Decl. ¶ 5.) Thus, he recommended to Fried that Face It consider a merger with another company called mBlast—a suggestion which Fried rejected. (Melcher Decl. ¶ 6; Fried Decl. ¶ 7.)

Initial Repurchase Discussions. Faced with a soured relationship and divergent views about Face It's direction, by July 2013, Melcher "was ready to walk away from Face It and [he] informed Fried on July 24, 2013 that MFLP was willing to be bought out for half of its $3,100,000 investment in Face It, to be paid in full by mid-August 2013." (Melcher Decl. ¶ 8; see also JSUF ¶ 2; Fried Decl. ¶ 16.) For his part, Fried "did not want a disgruntled investor in the mix, one that held approximately 30% of the stock, so I looked for ways to have MFLP bought out so the company could survive." (Fried Decl. ¶ 11.)

But Fried was "not clear" on Melcher's offer and indicated "it is extremely unlikely we will be able to raise anything substantial before August 13[,] 2013." (Fried Decl. ¶ 16 Ex. E; Brown Decl. ¶8 Ex. B.) Fried interpreted Melcher to have demanded $300,000 in cash with the remaining $1.2 million to come from "tax treatment" on MFLP's losses and then suggested a buyout date of October 13, 2013. (Fried Decl. ¶¶ 15-16 Ex. E.) Thereafter, Fried sent Melcher a draft agreement with a buyout date of August 13, 2014. (Fried Decl. ¶ 17, Ex. F; Brown Decl. ¶ 9 Ex. C.) Melcher avers that Fried effectively made a new repurchase proposal given the new buyout deadline, a proposal which Melcher rejected. (Melcher Decl. ¶ 9.)

Discussions appear to have stopped until August 13, 2013. Because Fried wasapparently "peppering" Melcher with emails, Gary Brenner, Melcher's attorney, informed Michelle Brown, Face It's attorney, that Melcher "no longer wishes to speak or communicate with [] Fried regarding this subject" and instructed that Fried should communicate only with Brenner about the repurchase. (Brown Decl. ¶ 11 Ex. D; Fried. Decl. ¶ 19.) Brenner then stated "MFLP's offer":

MFLP is willing to sell all or part of its currently held 13,901,344 common shares of Face It [] at the purchase price of $0.115 (i.e., 11.15 cents) per share—a fifty percent reduction of its original purchase price. All shares must be purchased and paid no later than December 31, 2013. Shares will only be sold for cash (or a cashier's check) for the entire amount of the sale. There will be no seller financing or no delayed payments.

(Brown Decl. ¶ 11 Ex. D; Melcher Decl. ¶ 10 (describing this as MFLP's "revised" offer).) On August 15, 2013, Brown sent Face It's acceptance of the offer's terms verbatim in an email which concluded "[t]his email . . . is intended to constitute a binding agreement." (Brown Decl. ¶ 11 Ex. E.) Later that day, Melcher resigned from the Board. (JSUF ¶ 4; Brown Decl. ¶ 12 Ex. F; Fried. Decl. ¶ 20 Ex. G.) Hell resigned the next day. (JSUF ¶ 5; Brown Decl. ¶ 12 Ex. F; Fried. Decl. ¶ 21 Ex. G.)

The Redemption Agreement and Closing. In the ensuing weeks, Brenner and Brown drafted the Redemption Agreement (the "Agreement"). (Brown Decl. ¶¶ 15-16; Melcher Decl. ¶ 12.) Upon Face It's demand, the Agreement included a release (the "Release"). (JSUF ¶ 9.) The Release provides that "except for those covenants, representations, and agreements by the Parties set forth in this Agreement," the parties and related parties, defined to include officers, are released from "any and all liability," including for unknown claims through a specific waiver of California Civil Code § 1542.2 (Fried Decl. Ex. I § 6.) Notwithstanding the Release, the Agreement provides for arbitration of "[a]ny controversy or claim arising out of or relating to this Agreement[.]" (Id. § 11.1.) Bearing a September 9, 2013 date, the Agreementconstitutes the agreement for Face It to repurchase all MFLP shares in exchange for MFLP's receipt of over $1.5 million. (Fried Decl. ¶ 24 Ex. I §§ 1-2.) Melcher, acting for MFLP, and Fried, acting for Face It, both signed the Agreement on September 12, 2013. (Id.; JSUF ¶ 6; Fried Decl. ¶ 24; Brown Decl. ¶ 16; Melcher Decl. ¶ 12.) That day, Face It sent MFLP the $1,549,999 payment for the stock. (JSUF ¶ 6; Brown Decl. ¶ 16; Fried Decl. ¶ 24.) The deal was consummated.

The Face It Merger into Five9. Contemporaneous with the tumult between Face It and MFLP was Face It's discussions with Five9. Through Fried, Face It's discussions with Five9 regarding "possible deals"—albeit not a merger—first occurred in spring 2013 and resulted in a Non-Disclosure Agreement (the "NDA"). (Fried Decl. ¶ 26 Ex. K.) Not much else came from these general deal discussions. But "[i]n the midst" of the MFLP discussions, Fried "look[ed] for ways to salvage the company" and Face It and Five9 "reinstituted" contact. (Id. ¶¶ 26, 28.) In late August 2013, Fried engaged "with Five9 about it becoming an investor, customer, or other form of partner." (Id. ¶ 28.)

Fried avers that "[a]fter Labor Day 2013," the talks "morph[ed]" into Five9 "potentially acquiring" Face It. (Id. ¶ 29.) On September 5, 2013, Five9 sent Face It "an unsigned, draft, non-binding term sheet" for the merger. (JSUF ¶ 10; see also Fried Decl. ¶ 30.) The draft term sheet reflected a complete buyout of Face It by Five9 for an amount equal to $12 million, with $2 million in cash and $10 million in Five9 shares. (ECF No. 64, Philip Tencer Decl. ("Tencer Decl.") ¶ 9 Ex. 8.) Face It and Five 9 signed a finalized merger term sheet on September 14, 2013, which upped the buyout price to $13.5 million with $3 million in cash and $10.5 million in Five9 shares. (JSUF ¶ 11; Fried Decl. ¶ 30 Ex. L.) Five9 acquired Face It on October 18, 2013. (JSUF ¶ 12.) Five9 paid about $2.9 million in cash and gave restricted Five9 shares internally valued at $10.5 million. (Fried Decl. ¶ 31.)

Central to this case is Plaintiffs' contention that Fried failed to disclose to the Five9 merger discussions and, more concretely, the draft term sheet's price tag whenrepurchasing MFLP's shares. Fried contends that he "did not believe there was any obligation to disclose this to Carl Melcher or MFLP" because Melcher and MFLP's other board designee had resigned and "Melcher did not hold any officer or employer titles." (Fried Decl. ¶ 29.) In Fried's view, "[a]t best MFLP was one of the many Face It stockholders[.]" (Id.) Melcher declares that at no time prior to repurchase did Face It or Fried ever disclose the Five9 merger talks. (Melcher Decl. ¶...

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