MemoryTen, Inc. v. Silicon Mountain Holdings
| Decision Date | 16 March 2015 |
| Docket Number | No. 14 Civ. 635KPF.,14 Civ. 635KPF. |
| Citation | 92 F.Supp.3d 176 |
| Parties | MEMORYTEN, INC., Plaintiff, v. SILICON MOUNTAIN HOLDINGS, et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Jasmine Ng, Jeffrey George Jacobs, The Law Office of Jeffrey G. Jacobs, Irvine, CA, Steven Edward Armstrong, The Law Offices of Steven E. Armstrong, PLLC, New York, NY, for Plaintiff.
Stuart Komrower, Philip W. Danziger, Steven L. Klepper, Cole Schotz Meisel Forman & Leonard, P.A., Hackensack, NJ, for Defendants.
Plaintiff MemoryTen, Inc. (“MemoryTen”) brought this action against Defendants Silicon Mountain Holdings, Inc. (“Silicon”), Silicon Mountain Memory (“SMM”), WayTech, LLC (“WayTech”), and the LV Defendants (defined infra ). After proceeding for several years in the United States District Court for the District of Colorado, the case was transferred to this District. Plaintiff alleges breach of contract, unfair competition, and unjust enrichment—under theories of direct liability, alter-ego liability, and agency liability—and seeks damages and declaratory and injunctive relief. The LV Defendants move for summary judgment on all claims, and WayTech moves to dismiss the Complaint for failure to state a claim upon which relief can be granted. For the reasons set forth in this Opinion, both motions are granted.
This case arises from a series of transactions involving Silicon, a Colorado corporation that is involved in the sale of computer memory products. In 2007, Silicon acquired all outstanding and issued stock of a predecessor corporation, SMM, and its subsidiary, VCI Systems, Inc. (LV Def. 56.1 ¶ 14). As part of this transaction, Silicon also acquired the outstanding debt of SMM to certain of the LV Defendants; thereafter, it entered into a separate agreement with the LV Defendants that is described in more detail below. (Id. ).
The LV Defendants are a group of five companies that operate in tandem. (Compl. ¶ 9). The four investment companies beneath this umbrella are Laurus Master Fund, Ltd., a Cayman Islands corporation (id. at ¶ 5); Laurus Capital Management, LLC, a private investment adviser incorporated in Delaware that provides investment management for Laurus Master Fund (id. at ¶ 6); Valens Capital Management, LLC, a private investment adviser incorporated in Delaware (id. at ¶ 7); and Valens Investment Advisers, L.P., a limited partnership organized under the laws of Delaware (id. at ¶ 8). LV Administrative Services, Inc. is a Delaware corporation that acts as the administrative and collateral agent to the other four companies. (Id. at ¶ 4). All five companies are engaged in the same business, have the same ownership and management, and operate out of the same New York office. (Id. at ¶ 9).
Defendant WayTech is a Missouri limited liability company “in the business of selling computer equipment, software, and parts.” (Compl. ¶ 14). In 2011, WayTech purchased Silicon from the LV Defendants.
Plaintiff MemoryTen, a California corporation, “is a manufacturer, distributor and reseller of various computer components/modules, both domestically and internationally.” (Compl. ¶ 3).
On September 25, 2006, SMM entered into a “Security and Purchase Agreement” (Regan Decl. Ex. 2), by which a subset of the LV Defendants agreed to loan up to $8.5 million to SMM. (LV Def. 56.1 ¶ 14(a)). The Security and Purchase Agreement, among its other terms, granted the LV Defendants a first priority lien upon all of the assets of SMM. (Security and Purchase Agreement § 6(a)).
On August 28, 2007, Silicon acquired all issued and outstanding stock of SMM. (LV Def. 56.1 ¶ 14(b)). In connection with this transaction, Silicon entered into a Master Security Agreement, Joinder Agreement, and Guaranty (collectively, with the Security and Purchase Agreement, the “Loan Documents”) with the LV Defendants. (Id. ). The Master Security Agreement (Regan Decl. Ex. 3), which is governed by New York law (id. at ¶ 10), similarly granted the LV Defendants a first priority lien and security interest in all of the assets of Silicon (id. at ¶ 1). The Master Security Agreement provided that Silicon would “not, without the Purchasers' prior written consent, sell, exchange, lease or otherwise dispose of any Collateral” (id. at ¶ 3(g)), and that it would as well “keep its Collateral free and clear of all ... encumbrances of any kind and nature,” except for certain limited (and not relevant) exceptions (id. at ¶ 3(e)). It further provided that, in an Event of Default, the LV Defendants would have the remedies available to a secured party under the Uniform Commercial Code (the “UCC”) in effect in New York (id. at ¶ 5).2 As part of these transactions, the LV Defendants also gained substantial common stock (though never exceeding 9.99% of Silicon's total outstanding stock (Regan Decl. ¶ 8)), along with warrants to obtain additional common stock that were not exercised (LV Def. 56.1 Response ¶ 1).
Beginning in or around 2007, Silicon began purchasing products for resale from MemoryTen. (Pl. 56.1 ¶ 6). Silicon initially incurred an unpaid balance of $89,284, in satisfaction of which it gave MemoryTen 89,284 shares of common stock. (Id. ).
Through 2008, Silicon continued to purchase products from MemoryTen, incurring by August 2008 an unpaid balance of $500,000. (Id. at ¶ 8). Silicon and MemoryTen entered into discussions over how to settle this debt, eventually arriving at the Subscription Agreement , which was signed on August 12, 2008.3
The Subscription Agreement provided MemoryTen with two primary benefits. First, MemoryTen received $500,000 worth of common stock. (Subscription Agreement ¶¶ 1.1, 1.2, 2.1).4 Second—and more significantly for the purposes of this litigation—the Subscription Agreement provided MemoryTen a first option and right to acquire Silicon's Memory Component Distribution Business (the “Distribution Business”) under certain circumstances. (Id. at ¶¶ 8.1–8.4).
Under Paragraph 8.1, “[s]ubject to the rights of” the LV Defendants under the Loan Documents, MemoryTen would have “the first option and right to acquire all of the shares in [Silicon] from [Silicon] at a price mutually agreed upon by the parties by the process outlined in Paragraph 8.4.” (Subscription Agreement ¶ 8.1). These rights would be triggered if Silicon entered into a “Corporate Transaction” (defined as an acquisition, sale, or transfer of Silicon or substantially all of its assets), for an amount less than $6 million, pursuant to the approval of Silicon's Board of Directors and stockholders holding at least 50% of its voting stock. (Id. ). Paragraph 8.1 further provided that the LV Defendants would not “unreasonably withhold consent or approval, and [would] not unreasonably withhold any related waiver, under the [Loan] Documents.” (Id. ).
Under Paragraph 8.2, again “[s]ubject to the rights of” the LV Defendants under the Loan Documents, MemoryTen would have the first option and right to acquire the Distribution Business if Silicon were to offer it for sale. (Subscription Agreement ¶ 8.2). The sale would take place “at a price mutually agreed upon by the parties hereto by the process outlined in Paragraph 8.4,” and again the LV Defendants would not “unreasonably withhold consent or approval, and [would] not unreasonably withhold any related waiver, under the [Loan] Documents.” (Id. ).
Paragraph 8.4, again still “[s]ubject to the rights of” the LV Defendants under the Loan Documents, defined the Distribution Business and set forth three possible procedures by which the parties would arrive at a sale price for it. (Subscription Agreement ¶ 8.4). The price would be the highest of (i) the fair market value of the Distribution Business as determined by a third party; (ii) the highest and best offer selected as the winning bid or offer in a bankruptcy proceeding; or (iii) “the price mutually agreed to by the parties hereto and the [LV Defendants], and on other terms and conditions mutually agreed to by the parties hereto and the [LV Defendants] in good faith.” (Id. at ¶ 8.4(i)-(iii)).
The Subscription Agreement, which is governed by Colorado law (Subscription Agreement ¶ 10), additionally contained an integration clause stating that “[t]his Agreement constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties hereto with respect to the subject matter hereof.” (Id. at ¶ 12). It identified the LV Defendants as a third-party beneficiary (id. at ¶ 14), and was signed by MemoryTen, Silicon, and the LV Defendants.
Shortly after the Subscription Agreement was signed, during negotiations over a subsequent agreement, the LV Defendants stated in an email correspondence their understanding of the interplay between the Subscription Agreement and the Master Security Agreement:
Laurus will not provide a Waiver for any deal that allows MemoryTen to exercise [the purchase] option in an Event of Default as that would effectively give MemoryTen a first priority lien over all the assets of the Memory Components Division. From our perspective, in an Event of Default, MemoryTen would have the option but not the obligation to purchase the Memory Components Division for $5 million. If it doesn't believe that to be a worthwhile price then it can choose not to exercise that option and pursue other options.
. MemoryTen's chief executive has declared in this litigation that it was his understanding that MemoryTen's option to acquire the Distribution Business would not be eliminated by a foreclosure on Silicon by the LV Defendants and a consequent sale of its assets pursuant to the latters' rights under the UCC. (Olsen Decl. ¶¶ 8–10).
Between the signing of the Security and Purchase Agreement in ...
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...consider the parties' own extrinsic expressions of intent." Id. (internal quotation omitted); see also MemoryTen, Inc. v. Silicon Mountain Holdings , 92 F.Supp.3d 176, 185 (S.D.N.Y. 2015) (applying Colorado law and finding that, "[w]ithin the four corners of the text ... there is no ambigui......