Revive Investing LLC v. FBC Holdings S.A.R.L.
| Decision Date | 26 February 2021 |
| Docket Number | 20-cv-618 (ALC) (GWG) |
| Parties | REVIVE INVESTING LLC, Plaintiff, v. FBC HOLDINGS S.A.R.L., Defendant, and SHERE 3D CORP., Nominal Defendant. |
| Court | U.S. District Court — Southern District of New York |
On January 23, 2020, Plaintiff Revive Investing LLC ("Plaintiff" or "Revive") brought this suit against FBC Holdings S.A.R.L. ("Defendant" or "FBC") and Sphere 3D Corp. ("Nominal Defendant" or "Sphere") pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), 15 U.S.C. § 78p(b), alleging that Defendant violated Section 16(b) when it sold and purchased certain stocks between February and May 2018. FBC eventually moved for summary judgment. This motion was referred to United States Magistrate Judge Gabriel W. Gorenstein, who issued a Report & Recommendation (the "R&R"), recommending that the Court grant FBC's motion for summary judgment.1 Revive subsequently filed objections to the R&R (the "Objections") and FBC filed a response to Revive's Objections. For the reasons set forth below, the Court ADOPTS the R&R in its entirety.
The Court assumes familiarity with the background and procedural history as set forth in the R&R and briefly recounts facts relevant to the present Objections.
Revive is a shareholder of Sphere, which in turn is partially owned by FBC (10% beneficial owner). FBC lent Sphere $19.5 million through an 8% Senior Secured Convertible Debenture in December 2014. See 8% Senior Secured Convertible Debenture, Rappaport Decl., Ex. I. This Senior Secured Convertible Debenture was amended twice: once on April 6, 2016, see Second Amendment to 8% Senior Secured Convertible Debenture, Rappaport Decl., Ex. J. ("Second Amendment"); and again on March 30, 2018, see Third Amendment to 8% Senior Secured Convertible Debenture, Rappaport Decl., Ex. K ("Third Amendment").
The Third Amendment required both payment of interest and the payment of an extension fee in installments on dates set out in the Third Amendment. Id. §§ 2.2, 2.3. The interest consisted of interest that had already accrued as well as interest on the Third Amendment. Id. § 2.3. The Third Amendment provided that "at its option," Sphere could pay both the extension fee and interest with shares of common stock instead of cash. Id. §§ 2.2, 2.3. Payment under the Third Amendment was due on May 31, 2018. Id. § 1.1(a).
FBC reported acquisitions of Sphere stock through this manner four times between March through May 2018. April 3, 2018 Statement of Changes in Beneficial Ownership of Securities, Rappaport Decl., Ex. M; April 18, 2018 Statement of Changes in Beneficial Ownership of Securities, Rappaport Decl., Ex. N; May 1, 2018 Statement of Changes in Beneficial Ownership of Securities, Rappaport Decl., Ex. O; May 17, 2018 Statement of Changes in Beneficial Ownership of Securities, Rappaport Decl., Ex. P. FBC had also reported multiple sales of Sphere stock in February 2018. February 23, 2018 Statement of Changes inBeneficial Ownership of Securities, Rappaport Decl., Ex. L. Revive alleges that these transactions constituted violations of Section 16(b)'s short-swing profit rule, Amended Complaint, ECF No. 20, ¶¶ 29-43 ("Am. Compl."), which provides that "corporate insiders," including 10% beneficial owners of stock, who engage in the purchase and sale, or sale and purchase, of the corporation's stock within a six-month period must disgorge any profit to the corporation. 15 U.S.C. § 78p(b).
In April 2018, Miriam Tauber and David Lopez, counsel for two Sphere shareholders (respectively), contacted Sphere demanding that Sphere investigate these alleged short-swing trades by FBC. Tauber Decl. ¶ 2; Lopez Decl. ¶ 2; Rappaport Decl., Exs. C, G. Daniel Doherty, counsel for Revive, also contacted Sphere in April 2018. Doherty Decl. ¶ 3; id., Ex. B. After receiving these letters, Sphere conducted an investigation into the alleged short-swing transactions. Rappaport Decl., Ex. E ("Sphere Letter"). At the end of its investigation, Sphere notified Ms. Tauber (who was also "serving as point person" for the demand letter sent by Mr. Lopez) that it had decided against pursuing litigation for the alleged short-swing profits. Id. at 3. It cited possible defenses by FBC, the costs of litigation, and the amount of money at issue as the reasons for deciding not to pursue litigation. Id. at 2-3. Sphere advised Ms. Tauber that she should contact FBC's counsel directly if she still intended to pursue litigation. Id. at 3. Ms. Tauber subsequently engaged with FBC's counsel directly regarding their demands. Tauber Decl. ¶ 5; Lopez Decl. ¶ 5.
After more than three months of settlement negotiations, in November 2018, FBC, Sphere, Ms. Tauber, and Mr. Lopez entered into a settlement agreement ("Settlement Agreement"). Rappaport Decl. ¶¶ 2-4; Tauber Decl. ¶¶ 5-6; Lopez Decl. ¶¶ 5-6; see also Settlement Agreement, Rappaport Decl., Ex. B ("Settlement Agreement"). The SettlementAgreement purported to settle Sphere's alleged short-swing profit claim against FBC for $300,000, Settlement Agreement at 1-2, which was paid by forgiving $300,000 of Sphere's debt owed on the loan. Pulick Decl. ¶¶ 4, 6-7; Acknowledgment Letter, Pulick Decl., Ex. A § 1. In the Settlement Agreement, Sphere released FBC "from . . . all liability and damages . . . arising from the Transactions identified in the Shareholder demands, or other Transactions through which [FBC] received [Sphere] shares in connection with the pay-down of loan debt, reported by [FBC] through the date of [the] Agreement" on behalf of itself and all its shareholders (the "Release"). Settlement Agreement ¶ 3.2
Revive brought the instant action after Sphere failed to respond to its initial demand letter as well as a subsequent demand letter. Doherty Decl. ¶¶ 3, 5, 7.
After significant briefing from the parties, including the parties' initial summary judgment briefing, ECF Nos. 34, 40, 42, and subsequent supplemental briefing requested by Judge Gorenstein, ECF Nos. 46-49, 52-53, Judge Gorenstein issued an R&R recommending that this Court grant FBC's motion for summary judgment on January 7, 2021. ECF No. 54. Judge Gorenstein concluded that (1) the Release applied to all the alleged short-swing transactions because the Release covered all "Transactions through which [FBC] received Sphere 3D shares in connection with the pay-down of loan debt," and thus covered shares used to pay interest and extension fees, R&R at 9-11 (emphasis added); (2) that "any evaluation of a settlement under Section 16(b) must seek to determine if it is fair, reasonable and adequate," R&R at 15; and (3) that under that standard and applying the factors laid out in City of Detroit v. Grinnell Corp., 495 F.2d 448, 463 (2d Cir. 1974), the settlement was fair, reasonable and adequate and thus, it barredRevive's 16(b) claim, R&R at 21. Specifically, Judge Gorenstein found that "the settlement was the product of arms-length negotiations between FBC and experienced Section 16(b) counsel," R&R at 17, and that the settlement amount was justified by FBC's "debt exception defense," R&R at 18.
Revive filed Objections to Judge Gorenstein's R&R on January 21, 2021. ECF No. 55. They objected to Judge Gorenstein's R&R on two grounds: (1) that Judge Gorenstein misconstrued a letter agreement between FBC and Sphere as "forgiving $300,000 of Sphere's debt owed on the loan," and that FBC "should be required to prove what benefit the Letter Agreement provided to Sphere []" before being credited with "disgorging $300,000" in the Settlement Agreement, Objections at 3-5; and (2) that Judge Gorenstein misapplied the "independence" requirement of the "prior debt" exemption, id. at 5-7.
FBC responded to Revive's Objections on February 4, 2021. ECF No. 56 ("Objections Resp."). They argued that Revive's Objections lacked merit because the Settlement Agreement provided consideration in the amount of $300,000, Objections Resp. at 4-7; and because contrary to Plaintiff's assertion regarding the "independence" requirement, the "Debt Previously Contracted Exemption" was a "credible and dispositive defense[]" which "warrants enforcement of the Settlement," id. at 7-9.
Under Fed. R. Civ. P. 56, summary judgment is proper where admissible evidence in the form of affidavits, deposition transcripts, or other documentation demonstrates the absence of a genuine issue of material fact and one party's entitlement to judgment as a matter of law. SeeViola v. Philips Med. Sys. of N. Am., 42 F.3d 712, 716 (2d Cir. 1994). The moving party has the burden "to demonstrate that no genuine issue respecting any material fact exists." Gallo v. Prudential Residential Servs., Ltd. P'ship, 22 F.3d 1219, 1223 (2d Cir. 1994) (citing Heyman v. Commerce & Indus. Ins. Co., 524 F.2d 1317, 1320 (2d Cir. 1975)). A genuine issue of material fact exists "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). In deciding a summary judgment motion, courts must construe the evidence in the light most favorable to the non-moving party and draw all reasonable inferences in its favor. Niagara Mohawk Power Corp. v. Jones Chemical Inc., 315 F.3d 171, 175 (2d Cir. 2003) (citing to Anderson, 477 U.S. at 255).
When reviewing a Magistrate Judge's report and recommendation, the Court may "accept, reject, or modify, in whole or in part, the findings or recommendations made by the magistrate judge." 28 U.S.C. § 636(b)(1). "Within 14 days after being served with a copy of the [magistrate judge's] recommended disposition, a party may serve and file specific written objections to the proposed findings and recommendations." Fed. R. Civ. P. 72(b)(2). A district court must review de novo "those...
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