Tarpon Bay Partners LLC v. Zerez Holdings Corp.

• Decision Date: 07 July 2021
• Docket Number: No. 3:17-cv-579 (SRU),3:17-cv-579 (SRU)
• Citation: 547 F.Supp.3d 195
• Parties: TARPON BAY PARTNERS LLC, Plaintiff, v. ZEREZ HOLDINGS CORP., Defendant.
• Court: U.S. District Court — District of Connecticut

547 F.Supp.3d 195

TARPON BAY PARTNERS LLC, Plaintiff,
v.
ZEREZ HOLDINGS CORP., Defendant.

No. 3:17-cv-579 (SRU)

United States District Court, D. Connecticut.

Signed July 7, 2021

547 F.Supp.3d 201

George O. Richardson, III, Sullivan & Worcester LLP, New York, NY, Randolph T. Lovallo, Law Office of Randolph T. Lovallo, P.C., Ridgefield, CT, for Plaintiff.

Rebecca A. Hartley, Jonathan M. Shapiro, Aeton Law Partners, LLP, Middletown, CT, Simon Irving Allentuch, New Haven, CT, for Defendant.

ORDER

Stefan R. Underhill, United States District Judge

This is a case about a business relationship that began with promise in January 2016 but slowly deteriorated and came to a screeching halt in October 2016. The plaintiff—Tarpon Bay Partners, LLC ("Tarpon Bay")—is a financial services company. The defendant—Zerez Holdings Corporation ("Zerez")—is a publicly traded penny stock company that invests in emerging technologies. Zerez also sued Tarpon Bay in a separate case that was consolidated into this one, and so Tarpon Bay is also a counterclaim defendant here, along with two other parties—Southridge Advisors II, LLC ("Southridge") and Stephen M. Hicks ("Hicks")—that are closely related to Tarpon Bay: Southridge managed Tarpon Bay, and Hicks managed both Southridge and Tarpon Bay. Together, I will refer to Tarpon Bay, Southridge, and Hicks as the "Counterclaim Defendants."

547 F.Supp.3d 202

In January 2016, the parties agreed—how formal the agreement was and whether it was a formal contract are matters in dispute—that the Counterclaim Defendants would purchase most or all of Zerez's outstanding debt from Zerez's individual creditors. Then, through a particular procedure contemplated by the federal securities laws, the Counterclaim Defendants would convert that debt into equity—Zerez's common stock. The Counterclaim Defendants would then sell that equity into the open market and use the proceeds to pay back Zerez's creditors (and to make a profit themselves).

Of course, the deal broke down, and Tarpon Bay and Zerez sued each other. In January 2019, Tarpon Bay moved for summary judgment on its affirmative claims and the Counterclaim Defendants moved for summary judgment on Zerez's counterclaims. In September 2019, I denied Tarpon Bay's motion for summary judgment with respect to its affirmative claims because one of the contracts at issue was arguably unsupported by adequate consideration and, in any event, was unconscionable and thus unenforceable. I dismissed the Counterclaim Defendants’ motion for summary judgment on Zerez's counterclaims because Zerez's counsel had indicated that Zerez would abandon its counterclaims if I held the relevant contract unenforceable as a matter of law.

But Zerez changed its mind because Tarpon Bay indicated its intent to appeal my ruling. Thus, the Counterclaim Defendants renewed their motion for summary judgment on all eleven of Zerez's counterclaims (listed below), doc. no. 124, and Zerez also moved for partial summary judgment on counterclaims two and eleven, doc. no. 134:

Count	Claim	Defendant
1	Breach of implied contract	Tarpon Bay
2	Declaratory relief	Tarpon Bay
3	Breach of fiduciary duty	Southridge
4	Usury	Tarpon Bay
5	Rescission – failure of consideration	Tarpon Bay
6	Fraudulent inducement	Counterclaim Defendants
7	Mistake	Counterclaim Defendants
8	Aiding and abetting	Counterclaim Defendants
9	Civil conspiracy	Counterclaim Defendants
10	Violation of the California Unfair Competition Law ("UCL")	Counterclaim Defendants
11	Violation of the Connecticut Unfair Trade Practices Act ("CUTPA")	Counterclaim Defendants

547 F.Supp.3d 203

For the following reasons, I grant in part and deny in part both motions for summary judgment.

I. Standard of Review

Summary judgment is appropriate when the record demonstrates that "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a) ; see also Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 256–57, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) (party must present affirmative evidence to defeat a properly supported motion for summary judgment).

When ruling on a summary judgment motion, the court must construe the facts of record in the light most favorable to the nonmoving party and must resolve all ambiguities and draw all reasonable inferences against the moving party. Anderson , 477 U.S. at 255, 106 S.Ct. 2505 ; Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp. , 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) ; Adickes v. S.H. Kress & Co. , 398 U.S. 144, 158–59, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970) ; see also Aldrich v. Randolph Cent. Sch. Dist. , 963 F.2d 520, 523 (2d Cir. 1992) (court is required to "resolve all ambiguities and draw all inferences in favor of the nonmoving party"). When a motion for summary judgment is properly supported by documentary and testimonial evidence, however, the nonmoving party may not rest upon the mere allegations or denials of the pleadings but must present sufficient probative evidence to establish a genuine issue of material fact. Celotex Corp. v. Catrett , 477 U.S. 317, 327, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).

"Only when reasonable minds could not differ as to the import of the evidence is summary judgment proper." Bryant v. Maffucci , 923 F.2d 979, 982 (2d Cir. 1991) ; see also Suburban Propane v. Proctor Gas, Inc. , 953 F.2d 780, 788 (2d Cir. 1992). If the nonmoving party submits evidence that is "merely colorable," or is not "significantly probative," summary judgment may be granted. Anderson , 477 U.S. at 249–50, 106 S.Ct. 2505.

[T]he mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact. As to materiality, the substantive law will identify which facts are material .... Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment. Factual disputes that are irrelevant or unnecessary will not be counted.

Id. at 247–48, 106 S.Ct. 2505. To present a "genuine" issue of material fact, there must be contradictory evidence "such that a reasonable jury could return a verdict for the nonmoving party." Id. at 248, 106 S.Ct. 2505.

If the nonmoving party has failed to make a sufficient showing on an essential element of his case with respect to which he has the burden of proof at trial, then summary judgment is appropriate. Celotex , 477 U.S. at 322, 106 S.Ct. 2548. "In such a situation, there can be ‘no genuine issue as to any material fact,’ since a complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial." Id. at 322–23, 106 S.Ct. 2548 ; accord Goenaga v. March of Dimes Birth Defects Found. , 51 F.3d 14, 18 (2d Cir. 1995) (movant's burden satisfied if he can point to an absence of evidence to support an essential element of nonmoving party's claim). In short, if there is no genuine issue of material fact, summary judgment may enter. Celotex , 477 U.S. at 323, 106 S.Ct. 2548.

547 F.Supp.3d 204

The same standard applies to cross-motions for summary judgment. In that case, a court must "assess each motion on its own merits and view the evidence in the light most favorable to the party opposing the motion, drawing all reasonable inference in favor of that party." Bey v. City of New York , 999 F.3d 157, 164 (2d Cir. 2021) (quoting Wachovia Bank, Nat'l Ass'n v. VCG Special Opportunities Master Fund, Ltd. , 661 F.3d 164, 171 (2d Cir. 2011) ) (cleaned up).

II. Background

A. Factual Background ¹

Zerez alleges that Southridge is a limited liability financial holding company organized under the laws of Connecticut that "renders financial services to clients" and specializes in "direct investment and advisory services to small and middle market companies." Counterclaims, Doc. No. 73, at 8 (¶ 5). Tarpon Bay is a limited liability company organized under Florida law that "make[s] investments and finance[s] small public companies in the U.S." Hicks Depo. Tr., Ex. B to Zerez's Opp'n, Doc. No. 133-2 ("Hicks Depo."), at 23:2–3. Hicks ran the day-to-day operations of both Southridge and Tarpon Bay. See id. at 19:21, 23:6.

Zerez is a corporation organized under Oklahoma law with headquarters in California. Zerez is a publicly traded company, but its stock is a "penny stock," meaning that it trades for very little money—in January 2016, for instance, Zerez's common stock traded between $0.02 and $0.04. Zerez's stock traded on an over-the-counter market. Zerez invested in and managed emerging companies and technologies. In early 2016, Zerez was carrying over $500,000 in debt. Zerez was interested in trying to get that debt off its balance sheet so that it would be a more attractive company to investors.

The parties in this case became acquainted in January 2016. The parties dispute how they connected. According to Zerez, numerous financial firms were interested in acquiring its debt, and it was receiving "cold calls" from those firms; Anish Aswani ("Aswani"), a Southridge employee, contacted them in that way. See Counterclaims, Doc. No. 73, at 11 (¶¶ 16–17). Zerez alleges that Aswani "offered to provide financial advisory services to Zerez," "failed to disclose that he was working for Hicks," and failed to disclose that "Hicks was involved in litigation" with the SEC and the state of Connecticut for fraud related to securities transactions. Id. at 11 (¶ 17). In contrast, Tarpon Bay claims that Aswani did not "cold call" Zerez. Instead, Tarpon Bay asserts that the parties were

547 F.Supp.3d 205

connected through a third party. See Tarpon Bay's Rule 56(a) 1 Stmnt., Doc. No. 125, at ¶ 10.

In any event, once acquainted, the parties engaged in discussions regarding a potential Section 3(a)(10) transaction. A Section 3(a)(10) transaction—so named because it is authorized by that section of the Securities Act of...