UD Dissolution Liquidating Trust v. Sphere 3D Corp. (In re UD Dissolution Corp.)
| Decision Date | 19 March 2021 |
| Docket Number | Utah Bankruptcy Case No. 14-32546,Misc. Pro. No.: 18-00102 (MFW) |
| Citation | 629 B.R. 11 |
| Parties | IN RE: UD DISSOLUTION CORP. (f/k/a, V3 Systems, Inc.) Debtor. UD Dissolution Liquidating Trust, Plaintiff, v. Sphere 3D Corp., V3 Systems Holdings, Inc., Peter Tassiopoulos, Jason D. Meretsky, Eric L. Kelly, Peter Ashkin, Mario Biasini, Glenn M. Bowman, Daniel J. Bordessa, Vivekanand Mahadevan, Overland Storage, Inc., Silicon Valley Technology Partners, LLC, Cyrus Capital Partners, L.P., FBC Holdings, S.A.R.L., Crescent 1, L.P., CRS Master Fund, L.P., Cyrus Opportunities Master Fund II, Ltd., Cyrus Select Opportunities Master Fund II, Ltd., Cyrus Capital Partners GP, L.L.C., Cyrus Capital Advisors, L.L.C., Stephen C. Freidheim, and John Does I-X, Defendants. |
| Court | U.S. Bankruptcy Court — District of Delaware |
Albert H. Manwaring, IV, Esquire, Morris James LLP, Wilmington, DE, Kevin N. Anderson, Esquire, Fabian Vancott, Salt Lake City, UT, Counsel for UD Dissolution Liquidating Trust.
Eric Lopez Schnabel, Esquire, Alessandra Glorioso, Esquire, Dorsey & Whitney (Delaware) LLP, Wilmington, DE, Milo Steven Marsden, Esquire, Sarah Goldberg, Esquire, Dorsey & Whitney LLP, Salt Lake City, UT, Counsel for the Sphere Defendants.
L. Katherine Good, Esquire, Matthew F. Davis, Esquire, Potter Anderson & Corroon LLP, Wilmington, DE, Brian R. Carney, Esquire, Kristen Diane White, Esquire, Akin Gump Strauss Hauer & Feld LLP, New York, NY, Counsel for the Cyrus Defendants.
TABLE OF CONTENTS
Before the Court are Motions by numerous Defendants to Dismiss several Counts of the Amended Complaint filed by UD Dissolution Liquidating Trust (the "Plaintiff"). For the following reasons, the Court will grant in part and deny in part the Motions to Dismiss.
The Amended Complaint asserts various contract, tort, and equitable claims against the Defendants for actions related to the sale of the assets of V3 Systems, Inc. ("V3") to V3 Systems Holdings, Inc. ("Holdings") and its parent, Sphere 3D Corporation ("Sphere"), and the subsequent transfer of the V3 business to Overland Storage, Inc. ("Overland") and ultimately to Silicon Valley Technology Partners ("SVTP"). These transactions were allegedly orchestrated by the Cyrus Defendants2 through a series of transactions involving the other Defendants.3 (D.I. 18 at ¶ 43.)4 The Cyrus Defendants began this scheme with their acquisition of Tandberg Data Holdings S.a.r.l. ("Tandberg") in 2009. (Id. at ¶ 45.) In 2013, the Cyrus Defendants gained control of Overland, through a series of loans, and caused Overland to acquire Tandberg from them. Beginning in the summer of 2013, Overland began discussions with Sphere to acquire its assets for stock in Overland. In July 2013, Overland became the exclusive distributor of Sphere products, and the Chairman of Overland, Eric Kelly, became the Chairman of Sphere. (Id. at ¶¶ 56-57.) In December 2013, Overland received notifications from NASDAQ that its stock would be delisted; as a result, Overland and Sphere started discussing a joint venture ownership of V3. (Id. at ¶¶ 59-60.)
At that same time, without disclosing its discussions with Overland, Sphere entered into a letter of intent on December 4, 2013, to purchase V3's assets for $14.7 million. (Id. at ¶ 73.) During negotiations of that sale, Sphere caused V3 to enter into an agreement to transfer V3's sales to Overland to increase Overland's revenues. (Id. at ¶ 61.) While Sphere was doing due diligence on the sale, V3 had problems paying its operating costs and Sphere began filling orders for V3, which was treated as a loan against the cash portion of the sale price due to V3. (Id. at ¶ 78.)
On February 11, 2014, the Asset Purchase Agreement (the "APA") was signed for the sale of V3's assets to Sphere and Holdings, which closed on March 21, 2014. (Id. at ¶¶ 37, 65.) The Cyrus Defendants lent $5 million to Sphere to facilitate that transaction. (Id. at ¶ 66.) The APA provided that the sale price would be paid as follows: (1) $4 million in cash, (2) $5.7 million in common stock of Sphere ("the Initial Shares") based on a share price of $5.23, and (3) an earn-out of up to $5 million payable in cash or Sphere stock ("the Earn-out") based on sales achieved over a period of 15 months by Sphere originating from V3 business. (Id., Ex D.) The Initial Shares contained a legend restricting their resale for four months and one day from the date of issuance. (D.I. 18 at ¶ 87.) In accordance with the APA, Sphere was authorized to hold back 95,603 of the Initial Shares until July 6, 2015 (the "Holdback Shares") and an additional 95,603 shares and $200,000 of the cash price until certain litigation pending against V3 was resolved (the "Litigation Holdback"). (Id. at ¶¶ 96-99.) Sphere agreed that, during the Earn-out period, it would maintain the V3 business as a separate business unit, maintain separate accounts for that business, and pay the monthly costs to operate that business in a viable manner. (Id. at ¶ 101.) After closing on the sale, V3 filed for dissolution premised on the expectation it would be able to use sale proceeds from the Initial Shares and the Earn-out to repay its creditors in full. (Id. at ¶ 106.)
Less than two months after closing on the V3 transaction, Sphere announced its agreement to merge with Overland. (Id. at ¶ 108.) As part of that merger, Sphere announced it would issue an additional 8.5 million shares to Overland shareholders, thereby diluting the Initial Shares that had just been issued to V3 as partial compensation for the sale of the V3 business to Sphere. (Id. at ¶ 109.)
In July 2014, V3 sought to remove the restrictive legend on the Initial Shares, so it could sell them and pay its creditors. (Id. at ¶ 118.) Sphere refused to agree to the release of the restrictive covenant as required by the APA, and Sphere and various Directors misrepresented to V3's broker and regulators that the legend could not be removed. (Id. at ¶¶ 119-24.) In the interim, Sphere's Directors sold stock they owned individually. (Id. at ¶ 126.) Sphere also took actions to reduce the Earn-out due to V3 under the APA, by not supporting the V3 business, not paying its debts, and breaching an agreement to allow the business to be managed by Eric Lindstrom. (Id. at ¶¶ 113, 133-34.) As a result of the actions of the Defendants, V3 was unable to pay its creditors and was forced to enter into an additional agreement with Sphere on October 14, 2014, in which it agreed to further restrictions on its ability to sell the Initial Shares (the "Leak-out Agreement") in exchange for a release of $100,000 from the Litigation Holdback and payment by Sphere of some of V3's creditors. (Id. at ¶¶ 135-39.)
In December 2014, the Cyrus Defendants consolidated the debt owed by Sphere and Overland into a new $19.5 million obligation (the "December 2014 Debenture"). (Id. at ¶ 144.) The Cyrus Defendants continued to lend funds to Sphere and acquire stock in Sphere from June 2014 through 2018. (Id. at ¶¶ 144-47, 157-62.) On February 20, 2018, Sphere entered into an agreement to sell Overland's stock to SVTP for $45 million (the "SPA"). (Id. at ¶¶ 165-78.) The sale closed on November 13, 2018, and Sphere received $1 million in cash, 19.9% of the preferred stock of SVTP, and the assumption by SVTP of $41.7 million of Sphere's debt (principally held by the Cyrus Defendants). (Id. at ¶ 176.) As a result of the divestiture of Overland, Sphere lost 90% of its revenues and was unable to pay its obligations to V3 and its other creditors. (Id. at ¶¶ 178-81.)
The shares V3 was able to sell under the Leak-out Agreement yielded insufficient funds to pay creditors. (Id. at ¶¶ 142-43.) On November 26, 2014, the successor to V3, UD Dissolution Corp., commenced a chapter 11 bankruptcy case in the Bankruptcy Court for the District of Utah. (Id. at ¶ 3.) On April 6, 2015, Sphere and Holdings filed a proof of claim in that case. (Id. at ¶ 152.) On July 9, 2015, the Bankruptcy Court confirmed V3's Plan of Liquidation which transferred all causes of action held by the estate to the Plaintiff. (Id. at ¶¶ 5-7.)
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