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Renate Cordts-Auth, Individually and As A Member In Crunk, LLC, Suing v. Crunk

September 27, 2011

RENATE CORDTS-AUTH, INDIVIDUALLY AND AS A MEMBER IN CRUNK, LLC, SUING ON BEHALF OF HERSELF AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
v.
CRUNK, LLC, D/B/A CRUNK JUICE LLC AND/OR CRUNK ENERGY DRINK, SOLVI BRANDS, LLC, CATHERINE F. HALSTEAD, SAMUEL S. HOLDSWORTH, LOEB & LOEB, LLP, ROBERT B. LACHENAUER, CATHERINE F. HALSTEAD REVOCABLE TRUST, PETER A. HALSTEAD REVOCABLE TRUST, TIA TIPPET LAURENT TRUST, OLIVER NICOLAS LAURENT TRUST, 2003 IRREVOCABLE S CORPORATION TRUST AGREEMENT OF ELIZA FINKELSTEIN DATED JANUARY 1, 2003, 2003 IRREVOCABLE S CORPORATION TRUST AGREEMENT OF JENNIFER FINKELSTEIN DATED JANUARY 3, 2003, MATTHEW FRANK, MARK FRANK, ALEXANDRA FRANK, RUSSELL FRANK, BISON HOLDINGS CORP., TEDRIC HOLDSWORTH, LYDIA HOLDSWORTH, ERIC HOLDSWORTH, ARIEL HOLDSWORTH, WILLIAM MAYHER, DOUGLAS LACHANCE, PAMELA PUTNEY, SARAH MALM, KAREN MALM, GARFIELD SMITH, AND TOM MAHLKE, DEFENDANTS.



The opinion of the court was delivered by: Kenneth M. Karas, District Judge:

OPINION AND ORDER

Renate Cordts-Auth ("Plaintiff") brings this action against Crunk, LLC ("Crunk"), Solvi Brands, LLC ("Solvi"), Catherine Halstead ("Halstead"), Samuel Holdsworth ("Holdsworth"), and about twenty investors in Solvi (collectively, "the Crunk Defendants"), as well as against Loeb & Loeb, LLP ("Loeb") and Robert Lachenauer ("Lachenauer") (collectively, "the Loeb Defendants") (collectively, "Defendants"), seeking a declaratory judgment that Plaintiff was a member of Crunk and demanding access to records and an accounting in connection with the sale of Crunk to Solvi. Plaintiff also asserts derivative claims for breach of fiduciary duty, tortious interference, and legal malpractice, and a direct claim for breach of contract. The Crunk Defendants move to dismiss pursuant to Federal Rule of Civil Prodecure 12(b)(6), arguing that Plaintiff lacks standing to bring derivative claims on behalf of Crunk, and that Plaintiff's other claims fail as a matter of law. The Loeb Defendants, against whom only claims for breach of fiduciary duty and legal malpractice are asserted, contend that the Court lacks subject matter jurisdiction over this matter and separately move to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(1).*fn1 Plaintiff moves to amend the Amended Complaint, seeking to add a cause of action for constructive trust against the Crunk Defendants. For the reasons stated herein, Defendants' motions are granted and Plaintiff's motion is denied.

I. Background

A. Facts The Court assumes the following facts, as alleged in the Amended Complaint, to be true for purposes of the instant motion. Crunk, the manufacturer of a line of "high energy" soft drinks known as "Crunk Energy Drink," was created in 2003 by Sidney E. Frank ("Frank"), who, at the time, was founder and CEO of Sidney Frank Importing Company ("SFIC"). (Am. Compl. ¶¶ 36-37.) Frank had previously achieved success in marketing Grey Goose Vodka ("Grey Goose") and Jagermeister liqueur. (Id. ¶ 37.) In or about 2004, Frank made a capital contribution of approximately $6.6 million to Crunk. (Id. ¶ 38.) The money used for this investment was obtained through a personal loan to Frank from SFIC, which was subsequently repaid in full. (Id. ¶ 39.) In or about March 2004, the Limited Liability Company Agreement of Crunk, LLC (the "Original Crunk Operating Agreement") was amended to reflect Frank's capital contribution. (Id. ¶ 40; see also id. Ex. B (Amended and Restated Limited Liability Company Agreement of Crunk, LLC (the "Amended Crunk Operating Agreement" or the "Crunk Operating Agreement")).)

In or about April 2004, the Amended Crunk Operating Agreement was amended once more to reflect the addition of several "Performance Unit Holders." (Id. ¶ 41; see also id. Ex. C (Amendment to Amended Crunk Operating Agreement).) "Performance Units" are defined in the Amended Crunk Operating Agreement as "compensation for services where [Crunk] desires that the grantee's interest be limited to the post-grant date appreciation of the Company as contrasted with the grant date fair market value that would otherwise then be realized by the Company in an arms' length sale and, hence, that such grantee receive only a 'profits' interest for Federal income tax purposes." (Am. Compl. Ex. B § 3.3(a).) In other words, upon granting a Performance Unit, an appraisal of the company's value is conducted, and in the event of the company's sale, a holder of a Performance Unit receives only a share of the net proceeds that are greater than that appraisal value (the "Grant Floor Value"). (See id. Ex. B § 3.3(b).) Therefore, where a sale nets proceeds that are less than the Grant Floor Value, a Performance Unit holder receives no compensation, because Performance Units are only a "profits interest." The Grant Floor Value associated with Plaintiff's Performance Units was $2 million, meaning that Plaintiff could profit from a Crunk sale only if such sale netted greater than $2 million, or alternatively if Crunk was sold in gross for more than $8.66 million - that is, a value greater than Frank's initial contribution of $6.66, which would need to be repaid upon any sale, plus $2 million.

Plaintiff was employed with SFIC for approximately 18 years as a "key employee . . . overseeing all aspects of administration."*fn2 (Id. ¶ 45.) Plaintiff also assisted Frank in the operation of a number of other entities, including Crunk. (Id. ¶ 46.) In short, Plaintiff alleges, she was a highly-valued asset to Frank, and accordingly, in or about March 2005, Plaintiff entered into a Performance Unit Grant Agreement with Crunk, pursuant to which she was granted 384,615 Performance Units as consideration for her services to Crunk. (Id. ¶¶ 47-50; see also id. Ex. D.) On March 10, 2005, under the terms of the Performance Unit Grant Agreement, the Amended Crunk Operating Agreement was amended once more to reflect the addition of Plaintiff as a Performance Unit holder. (Id. ¶51; see also id. Ex. E (Second Amendment to Amended Crunk Operating Agreement ("Crunk Operating Agreement")).)*fn3 Plaintiff thereafter performed services as an employee of Crunk. (Id. ¶ 53.)

Sidney Frank died on January 10, 2006, leaving the administration of SFIC and Crunk to his daughter, Defendant Halstead. (Id. ¶¶ 55, 58.) Specifically, Halstead became chairwoman of SFIC and manager and principal executive of Crunk. (Id. ¶¶ 56-57.) Halstead's husband, Peter Halstead, began serving as principal advisor to Crunk's management personnel, including Plaintiff. (Id. ¶ 59.) In or about March 2006, Peter Halstead allegedly informed Plaintiff of his wife's intent to devalue Crunk's Performance Units and to issue new units, to restructure Crunk and re-launch the company with new investors, and to defraud Crunk's existing investors. (Id. ¶¶ 60-63.) Following Plaintiff's objection to these actions, on February 9, 2007, she was allegedly removed from her positions at SFIC and Crunk, without notice, by Defendant Halstead. (Id. ¶¶ 64-66.) On March 9, 2007, Plaintiff, SFIC, and Crunk entered into a separation agreement (the "Separation Agreement") wherein Plaintiff agreed to resign from her positions at SFIC and Crunk and to receive $2,000,000 in consideration. (Id. ¶¶ 67-69; see also id. Ex. F (the Separation Agreement).) Plaintiff alleges she retained ownership of her Performance Units. (Id. ¶ 70.)

Halstead allegedly pursued a course of intentionally devaluing Crunk "in order to render it insolvent, thereby extinguishing the rights of existing performance unit holders, like [] Plaintiff." (Id. ¶ 71.) In a letter written by Halstead and addressed to Plaintiff, dated March 29, 2007 (id. Ex. G), Halstead claimed that in 2006, Crunk lost approximately $1,500,000 and that Crunk was projected to lose its remaining cash investments during the upcoming fiscal year. (Id. ¶¶ 72-73.) In the letter, Halstead stated that Crunk had been sold, as of February 28, 2007, to Defendant Solvi for approximately $550,000. (Id. ¶ 75; id. Ex. G (describing the "Crunk sale").) In the letter, Halstead informed Plaintiff that she would receive no proceeds from the Crunk sale, as the Performance Units were "profits-only" interests, meaning that Plaintiff would receive a share of the net proceeds only: (1) after the initial investors were returned the amount of their contributions; and (2) if the value of the remaining proceeds exceeded $2 million, the Grant Floor Value of Plaintiff's Performance Units. (Id. ¶¶ 76-77; id. Ex. G.) As Sidney Frank was the only initial investor in Crunk, Halstead stood to receive the proceeds from the Crunk sale as Frank's heir. (Id. ¶¶ 78-79.) Following Crunk's sale, Halstead dissolved Crunk on or about May 18, 2007. (Id. ¶ 81; see also id. Ex. H.)

Plaintiff claims that Defendant Solvi, which was formed on or about January 31, 2007, was created for the "sole purpose" of purchasing Crunk and distributing its products. (Id. ¶¶ 83-84.) Halstead served as manager of Solvi, and Defendant Holdsworth was chairman of Solvi's board of directors. (Id. ¶¶ 85-86.) Plaintiff alleges that Holdsworth had actual and constructive knowledge of Halstead's intent to devalue Crunk and to re-launch Crunk with new investors, and that Holdsworth facilitated and profited from the Crunk sale. (Id. ¶¶ 112-18.) In or about February 2007, Solvi "purportedly" received $2,460,000 in capital contributions, from various investors named here as Defendants, as consideration for the purchase of "Common Units" of Solvi. (Id. ¶¶ 87-111.) Solvi allegedly never received the consideration paid to it by the investors. (Id. ¶ 119.) Solvi has allegedly produced and marketed Crunk Energy Drink since its purchase of Crunk. (Id. ¶ 134.) The re-launched Crunk has allegedly been successful, achieving annual sales of approximately $8,000,000, expanding its product portfolio, and entering new markets. (Id. ¶¶ 135-36.)

On or about February 12, 2009, Plaintiff requested an accounting from the re-launched Crunk of the proceeds from the Crunk sale, but this request went unheeded. (Id. ¶¶ 137-38.) On or about March 11, 2009, Plaintiff demanded from the re-launched Crunk a copy of the "Purchase and Sale Agreement" between Crunk and Solvi, the identities of all former interest-holders in Crunk, and current interest-holders in Solvi, and threatened legal action if these demands were not met. (Id. ¶139; id. Ex. Q.) This demand was rejected by an attorney for the re-launched Crunk, who threatened legal action based on Plaintiff's demands, citing the Separation Agreement, wherein Plaintiff agreed not to commence any legal action against Crunk. (Id. ¶¶ 140-41; id. Ex. R.) Plaintiff thereafter commenced this suit, asserting six causes of action against the Crunk Defendants, including at least one direct claim, several derivative claims, and various claims for equitable relief.

As to the Loeb Defendants, Plaintiff alleges that their representation of both Crunk and Solvi during the Crunk sale constituted a clear conflict of interest, and that because Halstead signed the sales contract on behalf of both Crunk, as seller, and Solvi, as purchaser, the deal was not an arms-length transaction. (Id. ¶¶ 121-33.) Plaintiff asserts two derivative claims against the Loeb Defendants, one for legal malpractice and the other for breach of fiduciary duty.

B. Procedural History

Plaintiff filed an initial Complaint on September 18, 2009. (Dkt. No. 1.) On June 3, 2010, Plaintiff filed an Amended Complaint. (Dkt. No. 16.) Defendants filed their motions to dismiss on September 10, 2010. (Dkt. Nos. 25, 28.) On October 19, 2010, Plaintiff filed a motion to amend the Amended Complaint. (Dkt. No. 38.) The Court held oral argument on June 2, 2011.

II. Discussion

A. Standard of Review "On a Rule 12(b)(6) motion to dismiss a complaint, the court must accept a plaintiff's factual allegations as true and draw all reasonable inferences in [the plaintiff's] favor." Gonzalez v. Caballero, 572 F. Supp. 2d 463, 466 (S.D.N.Y. 2008); see also Ruotolo v. City of New York, 514 F.3d 184, 188 (2d Cir. 2008) ("We review de novo a district court's dismissal of a complaint pursuant to Rule 12(b)(6), accepting all factual allegations in the complaint and drawing all reasonable inferences in the plaintiff's favor." (internal quotation marks omitted)). Generally, in adjudicating a Rule 12(b)(6) motion, a district court "confines its consideration to facts stated on the face of the complaint, in documents appended to the complaint or incorporated in the complaint by reference, and to matters of which judicial notice may be taken." Meisel v. Grunberg, 651 F. Supp. 2d 98, 107 (S.D.N.Y. 2009) (alteration omitted) (quoting Leonard F. v. Isr. Disc. Bank of N.Y.,199 F.3d 99, 107 (2d Cir. 1999)). "The court may . . . consider matters of which judicial notice may be taken, even if the corresponding documents are not attached to or incorporated by reference in the complaint." Munno v. Town of Orangetown, 391 F. Supp. 2d 263, 268 (S.D.N.Y. 2005); see also Kramer v. Time Warner Inc., 937 F.2d 767, 774 (2d Cir. 1991) (holding that district court properly took judicial notice of public documents filed with the SEC). In the motion to dismiss context, however, a court should generally take judicial notice "to determine what statements [the documents] contain[] . . . not for the truth of the matters asserted." Kramer, 937 F.2d at 774.

"While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (alteration, citations, and internal quotation marks omitted). Instead, the Supreme Court has emphasized that "[f]actual allegations must be enough to raise a right to relief above the speculative level," id., and that "once a claim has been stated adequately, it may be supported by showing any set of facts consistent with the allegations in the complaint," id. at 563. A plaintiff must allege "enough facts to state a claim to relief that is plausible on its face." Id. at 570. If a plaintiff "ha[s] not nudged [her] claims across the line from conceivable to plausible, [her] complaint must be dismissed." Id.; see also Ashcroft v. Iqbal, 129 S. Ct. 1937, 1950 (2009)("Determining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense. But where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged - but it has not 'show[n]' - 'that the pleader is entitled to relief.'" (alteration in original) (citation omitted) (quoting Fed. R. Civ. P. 8(a)(2))).

The Loeb Defendants, while joining in the Crunk Defendants' motion to dismiss pursuant to Rule 12(b)(6), also move to dismiss for the alternative reason that the Court lacks subject matter jurisdiction to adjudicate this matter. Pursuant to Federal Rule of Civil Procedure 12(b)(1), a court must dismiss a claim if the court "lacks the statutory or constitutional power to adjudicate it." Morrison v. Nat'l Austl. Bank Ltd.,547 F.3d 167, 170 (2d Cir. 2008) (internal quotation marks omitted)), aff'd, 130 S. Ct. 2869 (2010). "The plaintiff bears the burden of proving subject matter jurisdiction by a preponderance of the evidence." Aurecchione v. Schoolman Transp. Sys., Inc., 426 F.3d 635, 638 (2d Cir. 2005). In deciding a Rule 12(b)(1) motion to dismiss, the Court "'must take all facts alleged in the complaint as true and draw all reasonable inferences in favor of plaintiff,'" Morrison, 547 F.3d at 170 (quoting Natural Res. Def. Council v. Johnson, 461 F.3d 164, 171 (2d Cir. 2006)) (citation and internal quotation marks omitted), but "'jurisdiction must be shown affirmatively, and that showing is not made by drawing from the pleadings inferences favorable to the party asserting it,'" id. (quoting APWU v. Potter, 343 F.3d 619, 623 (2d Cir. 2003)). In deciding the motion, the court "may consider affidavits and other materials beyond the pleadings to resolve the jurisdictional issue, but [it] may not rely on conclusory ...


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