The opinion of the court was delivered by: Chin, D.J.
These three related diversity cases arisee out of a failed financial arrangement pursuant to which College Partnership, Inc. ("College Partnership"), a college preparation company, engaged financial advisor and investment banking outfit Duncan Capital LLC ("Duncan") to assist in College Partnership's expansion. Towards that end, Duncan arranged for two funds, CAMOFI Master LDC ("CAMOFI") and Bridges & Pipes LLC ("Bridges"), to each lend College Partnership $250,000. Each loan was secured by a promissory note executed by College Partnership (the "Notes").
In these actions, CAMOFI and Bridges sue College Partnership to recover payment on the Notes. In turn, College Partnership counterclaims against CAMOFI and Bridges to, inter alia, rescind the Notes on grounds of fraudulent inducement. College Partnership also asserts claims against Duncan for allegedly failing to perform services as promised under the terms of a financial advisory and investment banking agreement (the "Banking Agreement").
Before the Court are CAMOFI's and Bridges's summary judgment motions to recover on the Notes and motions to dismiss College Partnership's counterclaims. Duncan has joined in the dismissal motions with respect to College Partnership's claims against it.
For the reasons set forth below, CAMOFI's and Bridges's motions for summary judgment and motions to dismiss are granted. Duncan's motion to dismiss is granted in part and denied in part.
College Partnership is incorporated in Nevada with its principal place of business in Colorado. (6/10/05 Compl. ¶ 1; 9/9/05 Countercl. ¶ 1; 10/19/05 Countercl. ¶ 1). Its mission is to assist high school students from lower-income and middle-class families with college admissions and funding. (Jones Decl. ¶ 1).
Duncan is a New York limited liability company ("LLC") with offices in Manhattan. (9/9/05 Countercl. ¶ 2; 10/19/05 Countercl. ¶ 2). CAMOFI, formerly known as DCOFI Master LDC, is a "limited duration company" organized under the laws of the Cayman Islands, with its principal place of business there as well.*fn1 (CAMOFI Compl. ¶ 2; 9/9/05 Countercl. ¶ 3; 10/19/05 Countercl. ¶¶ 3-4). Bridges is a New York LLC, with its principal place of business in New York, New York. (Bridges Compl. ¶ 2; 9/9/05 Countercl. ¶ 4).
The facts, which are drawn both from the pleadings and from the evidentiary materials in the record, are summarized below. As to the motions to dismiss College Partnership's claims, the allegations set forth in its complaint, counterclaims, and third party claims are assumed to be true. As to the motions for summary judgment on the Notes, the facts are construed in the light most favorable to College Partnership, as the party opposing the motions.
1. Negotiation and Execution of the Banking Agreement
In early 2004, the husband and wife founders of College Partnership, John Grace and Janice Jones, decided to seek outside financing for the expansion of their company. (Jones Decl. ¶¶ 1, 3). Towards this end, they flew to New York in April 2004 to meet with Richard Smithline and Michael Crow at Duncan's offices, located on the fourteenth floor of 830 Third Avenue, New York, New York. (Id. ¶¶ 4-6 & Ex. J).
In the weeks that followed, these four individuals negotiated the terms of the Banking Agreement between College Partnership and Duncan. (Id. ¶¶ 7-12 & Exs. A, B, & C). Grace and Jones met at least one more time with Smithline at the Duncan offices in New York and once with Crow in Los Angeles to work out a deal. (Id. ¶ 7). In emails to Jones and Grace in April and May 2004, Smithline expressed eagerness to complete the deal with College Partnership. (See id. Exs. B ("Let's not get bogged down here.") & J ("We would love the opportunity to partner with you and help take College Partnership to the next level.")). These emails were sent from Smithline at his email@example.com account and with the company name "Duncan Capital Group LLC" accompanying his signature. (Id.). Smithline claims he met with Jones and Grace in his capacity as Director of CAMOFI. (Smithline Aff. ¶¶ 1-2).
On May 27, 2004, Grace, as Chief Financial Officer of College Partnership, and Bradford E. Monks, as General Counsel/ Senior Vice President of Duncan Capital, executed the Banking Agreement. (Jones Decl. ¶ 12 & Ex. C). By its terms, College Partnership engaged Duncan as its "exclusive advisor for . . . financial advisory, investment banking and related transactions." (Id. Ex. C at 1). Duncan agreed to
(i) identify on a "best efforts" basis funding sources and secure financing for [College Partnership] through a private placement of equity and/or debt in one or more transactions between [College Partnership] and one or more investors and/or lenders . . . (the "Financing"), and
(ii) use commercially reasonable efforts to arrange an "accounts receivable" line (the "A/R Facility") with a third party . . . . Duncan also will seek to arrange a bridge financing for [College Partnership], the terms of which will be set forth in separately executed definitive documentation (the "Bridge Financing"). As compensation for services rendered in connection with arranging the Bridge Financing, upon receipt by [College Partnership] of gross proceeds of not less than $500,000 pursuant to the Bridge Financing, [College Partnership] will issue 250,000 shares of [College Partnership]'s restricted Common Stock as directed by Duncan or its affiliate and provide certain registration rights with respect to such shares of Common Stock.
In sum, on behalf of College Partnership, Duncan was to: (1) secure financing and funding sources, (2) arrange an accounts receivable line of credit (the "A/R Facility"), and (3) arrange bridge financing of $500,000. In return for the bridge financing, College Partnership was to issue 250,000 shares of company stock, with registration rights, to Duncan "or its affiliate." (Id.).
With respect to the financing and A/R Facility, the Banking Agreement also implemented a detailed fee structure to compensate Duncan for services rendered to College Partnership. (Id. Ex. C § 4). As exclusive advisor, Duncan would have the right of first refusal with respect to any financial transactions or advice sought by College Partnership. (Id. ¶ 13 & Ex. C § 9). The timeline for financing "contemplated that the Bridge Financing will close on or prior to June 7, 2004, and that, within thirty . . . or sixty . . . days following the closing of the Bridge Financing, [College Partnership] will pursue a Financing." (Id. Ex. C § 1).
2. The $500,000 Bridge Financing and Promissory Notes
The $500,000 in bridge financing came through two weeks later in the form of a $250,000 loan from CAMOFI and a $250,000 loan from Bridges. On June 15, 2004, Grace, acting on behalf of College Partnership, signed and delivered the two Notes, for $250,000 each -- one to CAMOFI (the "CAMOFI Note") and one to Bridges (the "Bridges Note"). (Smithline Aff. ¶ 4; 11/16/05 Fuchs Aff. ¶ 8; Jones Decl. Exs. D & E).
That same day, Grace also executed a Security Agreement on behalf of College Partnership, designating College Partnership's personal property and assets as collateral. (Jones Decl. Ex. F §§ 1(a), 4, 6, 8; 11/16/05 Fuchs Aff. ¶ 9). Listed as Secured Parties were Bridges and DCOFI Master LDC (now known as CAMOFI). As managing members, David Fuchs signed the Security Agreement for Bridges and Smithline signed for DCOFI Master LDC. Both Bridges and DCOFI Master LDC provided 830 Third Avenue, 14th Floor, New York, New York, as their address. (Jones Decl. Ex. F).
3. College Partnership's Performance on the Notes
a. Payments of Interest and Principal
With the exception that one Note is payable to CAMOFI and the other to Bridges, the Notes are identical. They each provide for College Partnership to repay the principal of $250,000 with interest at 10% per annum. College Partnership was to make quarterly interest payments to CAMOFI and Bridges (on September 15, 2004, December 15, 2004, and March 15, 2005), with full payment of the principal and unpaid interest due on June 15, 2005. (Id. Exs. D §§ 1-2 & E §§ 1-2; Smithline Aff. ¶¶ 5-6; 11/16/05 Fuchs Aff. ¶¶ 8-9). Failure to make any interim interest payments gave CAMOFI and Bridges the right to demand full payment on their respective notes. (Jones Decl. Exs. D § 8, E § 8, & F § 6.1). Default on June 15, 2005, would trigger a late fee -- an increase in interest rate from 10% to 20% per annum. (Id. Exs. D § 1(b) & E § 1(b); Smithline Aff. ¶ 8).
College Partnership made quarterly interest payments to CAMOFI through March 15, 2005, but ceased further payment after that date. (Jones Decl. ¶ 23 & Ex. K; Smithline Aff. ¶ 5). On June 15, 2005, College Partnership did not pay the principal of $250,000 or the remaining interest, prompting CAMOFI's counsel to send College Partnership a letter on July 18, 2005, demanding immediate payment of the principal, as well as the unpaid interest, liquidated damages, and attorneys' fees. (Smithline Aff. ¶ 7 & Ex. B).
College Partnership failed to make any quarterly interest payments to Bridges or repay the principal amount of the $250,000 loan on June 15, 2005. (11/16/05 Fuchs Aff. ¶¶ 10, 23; Jones Decl. ¶¶ 19, 23). Bridges demanded payment of all principal, interest, liquidated damages, and attorneys' fees in a letter from its counsel dated August 12, 2005. (11/16/05 Fuchs Aff. ¶ 22 & Ex. D).
b. Registration Obligations
By the terms of the Banking Agreement, Duncan's fee for providing bridge financing was 250,000 shares in College Partnership common stock, which Duncan chose to have registered to CAMOFI and Bridges -- 125,000 shares to each. (Jones Decl. ¶ 16 & Exs. C § 1, H, & I). Upon CAMOFI's and Bridges's demand, College Partnership was to file a Registration Statement with the Securities and Exchange Commission ("SEC") within 120 days of the issuance of the Notes (October 13, 2004). (Id. Exs. D § 3(f) & E § 3(f)). Failure to timely file the Registration Statement would trigger "Filing Default" liquidated damages every thirty days in the amount of 1% of the outstanding principal. (Id. Exs. D § 3(f)(ii) & E § 3(f)(ii)). If the Registration Statement was not declared "effective" within 150 days following the Notes' issuance (November 12, 2004), then College Partnership would have to pay additional liquidated damages for the Effectiveness Default, also at thirty-day intervals. (Id. Exs. D § 3(f)(iii) & E § 3(f)(iii)).
On November 17, 2004, Crow sent a letter to inform Grace of College Partnership's default on its registration obligations "[i]n connection with the investment of $500,000 by [CAMOFI] and Bridges [ ] ('the Funds')." (Smith Decl. Ex. B; 11/16/05 Fuchs Aff. ¶ 19). Crow demanded $5,000 in liquidated damages for the filing default and gave notice of its intention to pursue effectiveness default damages as well. (Smith Decl. Ex. B). College Partnership paid CAMOFI -- but not Bridges --liquidated damages of $7,500 for the Filing Default and $5,000 for the Effectiveness Default through January 11, 2004. (11/16/05 Fuchs Aff. ¶¶ 20, 21, 23; Smithline Aff. ¶¶ 12, 14; Jones Decl. Ex. K). Thereafter, College Partnership made no further liquidated damages payments to either CAMOFI or Bridges in connection with its registration obligations.*fn2
Attached to the November 17, 2004 letter was a "Deal Amendment Proposal" that represented the "collective position" of Bridges, CAMOFI, and Duncan with respect to College Partnership's obligations under the Banking Agreement and the Notes. The proposal was purportedly in response to Grace's request for a waiver of the defaults and restructuring of the obligations, but it does not appear that College Partnership ever accepted or agreed to the amendments. (Smith Decl. Ex. B).
4. Performance on the Banking Agreement
While Duncan met its obligation to arrange bridge financing, it failed to provide the low-interest A/R Facility or permanent financing as described in the Banking Agreement. (Jones Decl. ¶ 20). Duncan also failed to provide funding for an infomercial, a term that was not included within the Banking Agreement, but Jones contends had been part of the negotiations. (Id. ¶ 20 & Ex. A). Jones and Grace complained to Duncan in late 2004, but received an evasive and defensive response. Smithline, in September 2004, told them that arranging lines of credit "wasn't [Duncan's] business." In October 2004, Smithline threatened to "ruin" College Partnership. (Id. ¶ 22).
Without permanent financing, College Partnership could not repay the bridge financing and corresponding penalties. It also remained bound to a high rate A/R facility. Because it was locked up to Duncan as its exclusive financial advisor, College Partnership could not seek alternative funding and was blocked from capitalizing on the expanding market. College Partnership suffered negative revenues in 2004 and projected losses in the millions in 2005. (Id. ¶¶ 19, 23).
The prior proceedings are somewhat convoluted, involving three separate cases, the same four parties, and overlapping claims.
On June 10, 2005, days before payment of the principal on the Notes was due, College Partnership filed suit against Duncan, CAMOFI, and Bridges in the Colorado State District Court. College Partnership sought three forms of relief: (1) a declaratory judgment that Duncan had not met its obligations under the Banking Agreement; (2) damages based on Duncan's alleged breach of the Banking Agreement; and (3) rescission and/or reformation of the Banking Agreement and both Notes, as well as cancellation of the shares of common stock, on grounds of fraudulent inducement.
The defendants removed the case on the basis of diversity jurisdiction to the Colorado federal district court on July 15, 2005. They then moved to dismiss the complaint under Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure and/or to transfer venue to this Court.
In an order dated October 12, 2005 (the "10/12/05 Order"), Judge Richard P. Matsch dismissed all of the claims against CAMOFI and Bridges for failure to state a claim, but also noted that College Partnership's "contentions . . . concerning the circumstances giv[ing] rise to the issuance of those notes would be defenses in [the actions pending in the Southern District of New York]." (10/12/05 Order at 2). Judge Matsch also dismissed the rescission and reformation claim against Duncan for failure to comply with the strict pleading requirements for fraud. (Id.). He then transferred the remaining two claims against Duncan (for declaratory judgment and for breach of contract damages) to this Court to honor a New York forum selection clause in the Banking ...