Miracle Ventures I, LP v. Spear
| Decision Date | 01 November 2022 |
| Docket Number | 21 Civ. 8941 (LGS) |
| Parties | MIRACLE VENTURES I, LP, Plaintiff, v. CATHERINE SPEAR, ET AL., Defendants. |
| Court | U.S. District Court — Southern District of New York |
MIRACLE VENTURES I, LP, Plaintiff,
v.
CATHERINE SPEAR, ET AL., Defendants.
No. 21 Civ. 8941 (LGS)
United States District Court, S.D. New York
November 1, 2022
OPINION AND ORDER
LORNA G. SCHOFIELD, DISTRICT JUDGE:
Plaintiff Miracle Ventures I, LP, brings this action against Defendants FIGS Inc. (“FIGS”), Catherine Spear and Heather Hasson alleging fraud and breach of fiduciary duty. Defendants move to dismiss the Amended Complaint (the “Complaint”). For the reasons stated below, the motion is granted.
I. BACKGROUND
The following facts are taken from the Complaint and the stock purchase agreement (“SPA”) between Plaintiff, FIGS, and the Tull Family Trust (“Tull”). The SPA is incorporated by reference in, and integral to, the Complaint. See In re Synchrony Fin. Servs. Litig., 988 F.3d 157, 171 (2d Cir. 2021) (“[A]t the motion to dismiss stage, courts ‘may consider . . . documents incorporated into the complaint by reference . . . and documents possessed by or known to the plaintiff and upon which it relied in bringing the suit.'”). Except as otherwise noted, the allegations of the Complaint are assumed to be true for purposes of this motion. See R.M. Bacon, LLC v. Saint-Gobain Performance Plastics Corp., 959 F.3d 509, 512 (2d Cir. 2020).
A. The Facts Underlying Plaintiff's Claims
Defendant FIGS is a healthcare apparel and lifestyle brand. Defendants Spear and Hasson were at all relevant times officers and directors of FIGS. Plaintiff is a former
shareholder of FIGS. On April 27, 2017, Spear emailed Plaintiff soliciting the sale of Plaintiff's shares in FIGS. Spear told Plaintiff that the price offered was “a significant premium.” The same day, Plaintiff asked Spear for an update on FIGS's business. Spear responded the next day that “[t]he business is doing OK.” Plaintiff asked Spear for financial metrics, and Spear responded with one page showing disappointing revenues below projections, a substantial loss and a layoff of the sales team, among other issues. Defendants did not provide Plaintiff with the company's full financial statements, and specifically did not provide FIGS's balance sheet, income statement or cash flows for the twelve months ending December 31, 2016.
On June 6, 2017, Plaintiff entered into the SPA, selling 137,852 shares of FIGS common stock to Tull for a price of $1.81 per share or $249,491.45 in total. As of June 17, 2017, Tull or an affiliate of Tull had entered into an arrangement to invest approximately $65 million in FIGS (the “Tull Investment”). An investment of that size into what was then a small, thinly-capitalized company constituted a significant change in FIGS's financial condition, greatly increasing its prospects for growth and its liquidity, increasing the value of its shares, and making it more attractive for a public offering. Defendants did not disclose to Plaintiff that FIGS was undertaking a new round of financing or that it was in discussions with Tull concerning a major investment. Plaintiff learned about the Tull Investment from a November 4, 2020, news report.
B. The Parties' SPA
The SPA between Plaintiff, FIGS and Tull contained the following relevant representations. Among the “Representations and Warranties of the Selling Stockholders [i.e., Plaintiff],” paragraph 2.7, titled “Sophisticated Seller,” states in relevant part:
The Selling Stockholder [Plaintiff] (a) is a sophisticated investor familiar with transactions similar to those contemplated by this Agreement, (b) has adequate
information concerning the business and financial condition of the Company [FIGS] to make an informed decision regarding the sale of the Subject Shares, (c) has independently and without reliance upon the Purchaser [Tull] or [FIGS] (except with respect to the representations and warranties contained in Sections 3 and 4, respectively), and based on such information and the advice of such advisors as [Plaintiff] has deemed appropriate, made its own analysis and decision to enter into this Agreement....[Plaintiff] further acknowledges that (w) [Tull] currently may have, and later may come into possession of, information with respect to [FIGS] that is not known to [Plaintiff] and that may be material to a decision to sell the Subject Shares (“Excluded Information”), (x) [Plaintiff] has determined to sell the Subject Shares notwithstanding any lack of knowledge of the Excluded Information, (y) the value of the Subject Shares may significantly appreciate or depreciate over time and by agreeing to sell the Subject Shares to [Tull] pursuant to this Agreement, [Plaintiff] is giving up the opportunity to sell the Subject Shares at a higher price in the future
The “Representations and Warranties of the Company,” paragraph 4.3, states that FIGS “delivered to the Purchaser its unaudited balance sheet as of December 31, 2016 and unaudited statement of income and cash flows for the twelve months ending December 31, 2016.”
The SPA also includes (1) a standard merger clause stating that the “Agreement reflects the entire agreement among the parties with respect to the matters set forth herein;” (2) a broad, general release of claims among Plaintiff and FIGS and related entities and (3) a choice-of-law provision stating that the “Agreement shall be construed in accordance with and governed by the internal laws of the State of Delaware.”
II. STANDARD
On a motion to dismiss, a court accepts as true all well-pleaded factual allegations and draws all reasonable inferences in favor of the non-moving party but does not consider “conclusory allegations or legal conclusions couched as factual allegations.” Dixon v. von Blanckensee, 994 F.3d 95, 101 (2d Cir. 2021) (internal quotation marks omitted). To withstand a motion to dismiss, “a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Kaplan v. Lebanese Canadian Bank, SAL, 999 F.3d 842, 854
(2d Cir. 2021) (internal quotation marks omitted) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Iqbal, 556 U.S. at 678; accord Dane v. UnitedHealthcare Ins. Co., 974 F.3d 183, 189 (2d Cir. 2020). It is not enough for a complaint to allege facts that are consistent with liability; it must “nudge[]” claims “across the line from conceivable to plausible.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007); accord Bensch v. Estate of Umar, 2 F.4th 70, 80 (2d Cir. 2021). To survive dismissal, “plaintiffs must provide the grounds upon which [their] claim rests through factual allegations sufficient to raise a right to relief above the speculative level.” Rich v. Fox News Network, LLC, 939 F.3d 112, 121 (2d Cir. 2019) (alteration in original) (internal quotation marks omitted).
To allege fraud, “a party must state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b). To comply with this rule “a plaintiff must: (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.” Synchrony, 988 F.3d at 167 (internal quotation marks omitted). The adequacy of particularized allegations under Rule 9(b) is “case- and context-specific.” United States ex rel. Chorches v. Am. Med. Response, Inc., 865 F.3d 71, 81 (2d Cir. 2017) (internal quotation marks omitted).
III. DISCUSSION
A. Fraud Claim Against FIGS
The Complaint asserts a fraud claim against FIGS in connection with the stock purchase transaction. That transaction is governed by the SPA to which Plaintiff and FIGS were parties. The fraud claim is based on alleged material omissions when FIGS induced Plaintiff to sell its
shares. FIGS asserts that the claim is barred by the SPA's anti-reliance clause. FIGS is correct, and the fraud claim is dismissed.
1. Choice of Law
Delaware law governs the fraud claim because the SPA contains a Delaware choice of law provision. “A federal court sitting in diversity applies the choice-of-law rules of the forum state.” Kinsey v. New York Times Co., 991 F.3d 171, 176 (2d Cir. 2021) (internal quotation marks omitted). New York courts “generally enforce choice-of-law clauses.” Deutsche Bank Nat'l Tr. Co. v. Barclays Bank PLC, 140 N.E.3d 511, 519 (N.Y. 2019).
The SPA's choice-of-law clause states, “this Agreement shall be construed in accordance with and governed by the internal laws of the State of Delaware without giving effect to any choice of law or rule that would cause the application of the laws of any [other] jurisdiction . . . to the rights and duties of the parties.” Neither party invokes a public policy or other reason that their choice of Delaware law should not be enforced. Cf., e.g., Petroleos de Venezuela S.A. v. MUFG Union Bank, N.A., No. 20-3858, 2022 WL 7296519, at *12 (2d Cir. Oct. 13, 2022). Delaware law therefore applies without the need “to determine whether there is an actual conflict between the laws of the jurisdictions involved.” Fireman's Fund Ins. Co. v. Great Am. Ins. Co. of N.Y., 822 F.3d 620, 641 (2d Cir. 2016) (quoting In re Allstate Ins. Co. (Stolarz), 613 N.E.2d 936, 937 (N.Y. 1993)).
2. Nondisclosure and the Anti-Reliance Clause
The gravamen of the fraud claim is that FIGS persuaded Plaintiff to sell its shares without disclosing that FIGS was engaged in discussions with Tull that it would provide new financing and that, as of June 2017, Tull had entered into an arrangement to invest approximately $65 million in FIGS, resulting in a significant change to FIGS' financial condition. The fraud claim
is dismissed because Plaintiff expressly disclaimed reliance on any misrepresentations or omissions by FIGS except the representations and warranties expressly set forth in...
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