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Mercer Capital, Ltd. v. U.S. Dry Cleaning Corp.

July 21, 2009

MERCER CAPITAL, LTD., PLAINTIFF,
v.
U.S. DRY CLEANING CORPORATION, DEFENDANT.



MEMORANDUM OPINION AND ORDER

Plaintiff Mercer Capital, Ltd. ("Mercer" or "Plaintiff") commenced this action against defendant U.S. Dry Cleaning Corporation ("Dry Cleaning" or "Defendant") seeking to recover commission payments and other compensation allegedly due to it under a placement agency contract for the sale of Defendant's securities to accredited investors. Defendant has asserted six counterclaims, seeking a declaratory judgment that the contract never became binding, and seeking damages for breach of contract by Plaintiff, fraudulent inducement, negligent misrepresentation, reformation of contract, and recovery for unjust enrichment. Plaintiff now moves to dismiss Defendant's counterclaims pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state claims upon which relief can be granted. Defendant cross-moves for partial summary judgment pursuant to Federal Rule of Civil Procedure 56, seeking a determination that Plaintiff is not entitled to any compensation for sales that Defendant made. The Court has subject matter jurisdiction of this action pursuant to 28 U.S.C. § 1332(a)(1). For the following reasons, both motions are denied.

BACKGROUND

According to the complaint (the "Complaint"), Plaintiff is a registered broker/dealer. (Compl. at ¶ 15.) According to the answer (the "Answer"), Defendant is an up and coming national chain of dry cleaning businesses. (Answer at ¶ 75.) On September 1, 2007, Plaintiff and Defendant signed an Engagement Agreement (hereinafter the "Agreement")*fn1 which, among other terms and conditions, appointed Plaintiff the "[E]xclusive Placement Agent" (Agreement at § 2(a), Ex. 1 to Salino Aff.) to offer and sell, to accredited investors, a minimum of $2,000,000 and a maximum of $20,000,000 of Defendant's senior secured convertible notes (Agreement at 1). A Private Placement Memorandum ("Private Placement Memorandum")*fn2 was presented to investors interested in buying Defendant's securities. (Compl. at ¶ 25.)

Plaintiff brought suit in June 2008, alleging that Defendant breached the Agreement by failing to pay an outstanding balance of approximately $559,869 (Compl. at ¶ 46), to provide Plaintiff with five-year warrants to purchase 485,840 shares of common stock at $2.50 per share (Compl. at ¶ 47), and to pay Plaintiff 9% of the issue price of the notes sold in the offering (the "Offering") that have been converted on or before the maturity dates of the notes (Compl. at ¶¶ 51-54). Plaintiff also asserted a claim for unjust enrichment (Compl. at ¶¶ 56-61), and requested an accounting of all the notes that have been or will be converted (Compl. at ¶¶ 62-65). Defendant Dry Cleaning's Answer interposed counterclaims seeking a declaratory judgment that the Agreement is not binding on either party because Plaintiff allegedly did not perform a condition precedent that required Plaintiff to have raised $2,000,000 by the initial closing date. (Answer at ¶ 114.) Defendant also seeks relief for breach of the Agreement, fraud, negligent misrepresentation, unjust enrichment, and reformation of contract to correct two alleged scrivener's errors. (Answer at ¶¶ 115-53.)

Defendant's Allegations in Support of its Counterclaims

In its Answer, Defendant alleges the following facts, which are accepted as true for the purposes of Plaintiff's motion to dismiss the counterclaims. In or about Spring 2007, Defendant sought to raise capital through the offer and sale of its securities. (Answer at ¶ 76.) When Defendant sought a placement agent for an offering of its securities, Plaintiff offered its services. (Answer at ¶ 77.) Plaintiff's Director of Investment Banking, Chief Operating Officer/Principal and the head of institutional sales met with Defendant numerous times prior to contracting for Plaintiff to act as placement agent. (Answer at ¶¶ 78-83.) During these meetings, these three officers represented that Plaintiff's institutional investment arm and retail brokers had committed to raise $5,000,000 each ($10,000,000 total). (Answer at ¶¶ 80-81.) Plaintiff's officers also stated that, given Mercer's expertise and capacity to handle larger offerings, they could easily raise $100 million for Defendant. (Answer at ¶ 79.) Plaintiff's officers further stated that they had strong working relationships with syndicates of other brokerage firms such as National Securities, Newbridge Securities Corporation, J.P. Turner & Company, LLC, Joseph Stevens and Company, Inc., and numerous other firms and that Plaintiff could easily raise additional money through these connections. (Answer at ¶ 82.) Further, Plaintiff's officers stated that, if Defendant chose Plaintiff as the placement agent, Plaintiff would make the sale of Defendant's securities its sole focus and would not work on any other deals while raising money for Defendant. (Answer at ¶ 83.) Plaintiff's representations were false (Answer at ¶ 91), and Plaintiff knew that the representations were false, but made them to induce Defendant to enter into the Agreement (Answer at ¶¶ 80-83, 91-93, 95).

Defendant alleges that it entered into the Agreement in reliance on the representations made by Plaintiff's officers. (Answer at ¶ 84.) Plaintiff thereafter prioritized the offerings of other client companies before Defendant's, and Plaintiff's brokers would not sell Defendant's securities until they obtained an appropriate level of investment in the other offerings. (Answer at ¶ 96.) Plaintiff failed to raise even the $2,000,000 minimum offering amount. (Answer at ¶ 100.) Due to Plaintiff's inability to raise capital for Defendant, Defendant had to raise money on its own and successfully raised approximately $7,300,000. (Answer at ¶¶ 101-03.) In raising the capital on its own, Defendant incurred fees, charges, expenses, and disbursements of approximately $500,000. (Answer at ¶ 104.) Further, Defendant was forced to close the Offering with a material shortfall in funds, and this caused Defendant's market capitalization to drop approximately in half from approximately $40,000,000 to approximately $20,000,000. (Answer at ¶ 105.)

The Engagement Agreement and the Private Placement Memorandum The following facts are undisputed. The Agreement signed by Plaintiff and Defendant provided that Plaintiff was the "exclusive Placement Agent" (Agreement at § 2(a)), and would use its "'reasonable efforts' to offer and sell to accredited investors a minimum of $2,000,000 . . . and a maximum of $20,000,000 . . . of [s]ecurities." (Agreement at 1). Under section three of the Agreement, Plaintiff's compensation included a $35,000 retainer fee (Agreement at § 3(a)), "[t]en percent (13%) [sic]*fn3 of the gross proceeds raised by Mercer Capital" (Agreement at § 3(b)), and "[a] non accountable expense allowance . . . equal to three percent (2%) [sic] of the gross proceeds raised by Mercer Capital" (Agreement at § 3(c)).

The terms of compensation for Plaintiff are described in the Private Placement Memorandum dated October 8, 2007. According to the Private Placement Memorandum, Plaintiff was to receive, among other things, "(i) a selling commission aggregating 13% of the gross proceeds of the Offering, (ii) a non-accountable expense allowance equal to 2% of the gross proceeds of the Offering . . . ." (Private Placement Memorandum at Page 27.)

Under the heading "Conditions of Closing and Placement Agent's Obligations," the Agreement provides that " [o]n the Initial Closing Date, no less than the Minimum Offering [$2,000,000] shall have been subscribed for and accepted by the Company [Defendant]." (Agreement at § 7(a).) The Agreement also contains a general merger provision. (Agreement at § 11.)

DISCUSSION

Motion to Dismiss Counterclaims

In deciding a motion to dismiss a counterclaim for failure to state a claim pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, the Court must accept the allegations in the counterclaim as true and draw all reasonable inferences in the counterplaintiff's favor. See New York Mercantile Exchange v. Intercontinental Exchange, 323 F. Supp. 2d 559, 561 (S.D.N.Y. 2004) (internal citations omitted). The issue is whether the counterplaintiff is entitled to offer evidence to support his claims. See Hudson Valley Black Press v. Internal Revenue Service, 307 F. Supp. 2d 543, 545 (S.D.N.Y. 2004). Nevertheless, "[t]o survive 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.'" Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009), quoting Bell Atlantic v. Twombly, 550 U.S. 544, 570 (2007). This Twombly standard applies to all civil actions. Id. at 1953.

Rule 9(b) of the Federal Rules of Civil Procedure requires that "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other ...


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