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Gladstone Business Loan, LLC v. Randa Corp.

August 17, 2009

GLADSTONE BUSINESS LOAN, LLC, SUCCESSOR-IN-INTEREST TO GLADSTONE CAPITAL CORPORATION PLAINTIFF,
v.
RANDA CORP., ET AL., DEFENDANTS.



The opinion of the court was delivered by: McKENNA, D.J.

MEMORANDUM AND ORDER

This action arises from Gladstone Business Loan, LLC ("Gladstone") seeking to recover sums allegedly due under a Capital Call Agreement between Randa Corp. ("Randa") and Gladstone. The Complaint alleges five claims: breach of contract, breach of the covenant of good faith and fair dealing, fraudulent-concealment, intentional misrepresentation, and civil conspiracy. Claim 1 alleging breach of contract is brought only against Randa. (Cmpl. ¶¶ 36-39.) The remaining claims are alleged against Randa, Jeffrey O. Spiegel ("Spiegel")*fn1 and Adnar Finance*fn2, LLC ("Adnar"). Spiegel and Adnar seek to have the claims brought against them dismissed pursuant to Fed. R. Civ. P. 12(b)(6). This Court GRANTS the Defendants' motion to dismiss. Claims 2, 3, 4, and 5 are DISMISSED as to Spiegel and Adnar.

I. Factual and Procedural Background:

On a 12(b)(6) motion for dismissal a court will take factual allegations in the Complaint as true. "For purposes of reviewing the dismissal of a complaint for failure to state a claim, we accept the complaint's factual allegations... as true." Roth v. Jennings, 489 F.3d 499, 501 (2d Cir. 2007). Gladstone is a specialty finance company that invests in debt securities. On January 24, 2007, Gladstone and CapitalSource Finance LLC ("CapSource")*fn3 agreed to loan money to Randa Luggage, Inc. ("Randa Luggage").*fn4 Randa Luggage was engaged in the manufacture, distribution, and marketing of luggage, bags, backpacks and cases. Adnar Mem. at 3.

CapSource agreed to lend up to $42,625,000 and Gladstone up to $17,500,000 on a secured basis. (Cmpl. ¶¶ 11, 12.) CapSource held the senior position and entered into a subordination agreement with Gladstone. In April 2008, Spiegel created an affiliate company called Adnar. (Cmpl. ¶ 8.) Adnar purchased the CapSource Loan on April 29, 2008. (Cmpl. ¶ 14.)

Galdstone objected to this transaction because the transaction would have the effect of subordinating Gladstone's loan below that of a loan owned by an entity controlled by Spiegel (who is alleged to control Randa Luggage). (Cmpl. ¶ 15.) Spiegel would control both the debtor (Randa Luggage) and the creditor (Adnar) -- sitting on both sides of the transaction. Gladstone feared that the Defendants could use their position to "intentionally diminish the value of the Borrowers and render Gladstone's loan position worthless." Gladstone Mem. at 5.

One June 30, 2008 the parties attempted to resolve the dispute regarding Adnar's purchase of the CapSource Loan. Gladstone and Randa entered into a Capital Call Agreement ("Capital Call Agreement"). The Capital Call Agreement obligated Randa to pay $1,250,000 (the, "Capital Call Amount") to Randa Luggage if there was a financial covenant default under the Gladstone Loan. If however, there was a monetary default under the Gladstone Loan then the Capital Call Amount must be paid in cash to Gladstone. (Cmpl. ¶¶ 18, 19.)

In December 2008, Randa Luggage breached the financial covenants of the Gladstone Loan and triggered a Capital Call Event. (Cmpl. ¶ 23.) In January 2009, the required principal and interest were not paid on the Gladstone Loan. The nonpayment triggered a monetary default under the Gladstone Loan. On January 27, 2009, Gladstone provided notice to Randa that a monetary default had been triggered and Randa was obligated to pay $1,250,000 in cash to Gladstone.

On February 2, 2009, Randa replied that it did not have to pay the $1,250,000 to Gladstone because it had converted "previously advanced loan proceeds that Adnar... was owed under the former CapitalSource Loan that it purchased." (Cmpl. ¶ 27.) Randa argued that forgiveness of a portion of the CapSource Loan which was owned by Adnar had the effect of fully satisfying Randa's obligations under the Capital Call Agreement. (Cmpl. ¶¶ 27, 28.) On February 19, 2009, Gladstone rejected Randa's assertion and argued that the conversion of a previously advanced loan amount did not constitute a 'cash payment' in accordance with the Capital Call Agreement. (Cmpl. ¶ 31.)

Further, Gladstone alleges that even if such contributions do qualify as 'cash payments' the contributions were never made by Adnar or Randa in November or December of 2008. Records of the contributions are the result of fraudulent and intentional backdating of accounting records. "The Borrowers' financial records reflect that the Borrowers made a fraudulent accounting book entry purporting to convert $1,250,000 from the Capital Source loan purchased by Adnar to common equity with a retroactive backdate of December 2008." Gladstone Mem. at 6 (citing Cmpl. ¶ 34.).*fn5

On April 29, 2009, Gladstone filed suit in this Court against Randa Corp., Badanco Acquisition LLC, Randa Luggage Inc., Randa Luggage Holdings Corp., Jeffrey Spiegel and Adnar Finance. Shortly after the filing of the Complaint Randa Luggage Holdings Corp. and Randa Luggage Inc. (collectively, "Randa Luggage") filed for protection under Chapter 11, Title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware. Accordingly all claims against Randa Luggage were stayed. Adnar Mem. at 3.

On June 8, 2009, Spiegel and Adnar moved to dismiss Claims 2, 3, 4, and 5. Gladstone voluntary agreed to dismiss Claim 2 alleging Spiegel and Adnar breached the covenant of good faith and fair dealing. Gladstone Mem at 8.

II. Standard of Review

To avoid dismissal of claims under Fed. R. Civ. P. 12(b)(6) Gladstone must plead "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a). However, adequate pleadings must raise a right to relief above the speculative level. "[A] plaintiff's obligation to provide the 'grounds' of his entitle[ment] to relief requires more than labels and conclusions, and a formulaic ...


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