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Christopher Watson and v. Riptide Worldwide

February 7, 2012

CHRISTOPHER WATSON AND INTELLECTUS, LLC, PLAINTIFFS,
v.
RIPTIDE WORLDWIDE, INC. (F/K/A SHEA DEVELOPMENT CORP.), FRANCIS E. WILDE, TOMMY E. WHEELER, E. JOSEPH VITETTA, JR., RICHARD CONNELLY, AND PHILIP E. LOEFFEL, DEFENDANTS.



The opinion of the court was delivered by: Honorable Paul A. Crotty, United States District Judge:

USDC SDNY

OPINION & ORDER

Plaintiffs Christopher Watson and Intellectus, LLC filed this action on February 8, 2011 asserting claims for breach of contract, tort, violations of the securities laws, and fraudulent conveyance against Defendants Riptide Worldwide, Inc. ("Riptide"), Francis Wilde, Tommy Wheeler, Joseph Vitetta, Jr., Richard Connelly, and Philip Loeffel.*fn1 Plaintiffs' allegations arise out of alleged misrepresentations Defendants made during merger negotiations with Plaintiffs in April 2007. Defendants Vitetta, Connelly, and Loeffel each filed motions to dismiss the Complaint. For the reasons discussed below, the Court grants Connelly and Vitetta's motions to dismiss Counts 3 and 8. Loeffel's motion to dismiss Counts 12 though 18 is granted in part and denied in part. Plaintiffs are granted leave to replead Counts 3, 8 and 18.

BACKGROUND

In March 2007, Defendants sought to acquire Watson's software company, Bravera, Inc. (Compl. ¶ 13.) On April 26, 2007, Watson, Riptide, and Bravera signed an "Agreement and Plan of Merger"*fn2 (the "Merger Agreement") setting forth the terms of the transaction. (Id. ¶ 14.) Under its terms, Bravera was to merge into Shea Development Acquisition No. 3 Corp., a special entity created by Riptide for the Merger, and Watson's shares of Bravera stock were to convert into shares of Riptide common stock. (Id. ¶¶ 16-17.) Watson was also to receive $1,500,000 in cash, as well as other consideration. (Id. ¶¶ 18-19.)

Before the transaction closed on July 16, 2007, the parties also entered into a Senior Management Employment Agreement (the ("Employment Agreement"),*fn3 dated July 15, 2007, which provided that Bravera would continue to employ Watson for three years, unless Watson terminated his employment with 30 days notice. (Id. ¶ 65-66.) Wilde and the Individual Defendants*fn4 represented to Watson that he would receive all compensation and benefits due to him under the Merger and Employment Agreements if his employment ended within the three year period for any reason other than for cause. (Id. ¶¶ 67-68.)

Plaintiffs also allege that Intellectus had intellectual property rights in certain software and trademarks which Bravera utilized. (Id. ¶¶ 70-71.) As part of the Merger, Riptide sought exclusive rights to the software and trademarks, and entered into a Software License and Asset Purchase Agreement (the "Software License")*fn5 with Intellectus through its subsidiary, IP Holding of Nevada Corp. ("IP Holding") (Id. ¶¶ 72-73.) In exchange for a license to use, market, modify, and further develop the software, IP Holding was to provide Intellectus with 450,000 warrants to purchase Riptide Stock, as well as specified cash payments and "earn out" payments. (Id. ¶¶ 74-76.) The Software License contemplated that IP Holding would continue to create "derivative works" of the software during the term of the license, and that if IP Holding materially breached the agreement, all rights to the derivative works would revert to Intellectus. (Id. ¶¶ 77-78.)

A. Defendants' Alleged Misrepresentations

During their negotiations, the Individual Defendants made representations about Riptide's capital structure and outstanding obligations.*fn6 (Id. ¶¶ 4-7, 21, 22.) These representations were incorporated into the Merger Agreement. Plaintiffs contend that these representations were false, and that the Individual Defendants "knew, or should have known, that Riptide had more shares outstanding and had committed itself to issue more shares than were disclosed to Watson in [the Merger Agreement]." (Id. ¶ 24.)

According to Plaintiffs, on July 12, 2007, Riptide amended its Articles of Incorporation to increase the authorized number of shares of its preferred stock "from 20,000,000-the amount Riptide represented in . . . the Merger Agreement-to 60,000,000." (Id. ¶ 27.) On July 13, 2007, "immediately prior to the closing of the merger," Riptide entered into a Securities Purchase Agreement (the "SPA") with two investors.*fn7 (Id. ¶ 25.) The SPA obligated Riptide to issue an additional 12,797,500 shares of Riptide common stock and warrants to purchase 3,500,000 shares of Riptide common. (Id.) On the same day, Riptide issued an additional 1,000,000 shares of Series A convertible preferred stock and altered the price of that stock. (Id. ¶ 28.) Riptide also entered into a "Series B Preferred Stock Purchase Agreement" with other investors on July 13, 2007. Watson contends that neither Riptide nor the Individual Defendants informed him of these developments before the Merger closed on July 16, 2007. (Id. ¶¶ 29, 32.)

The Complaint alleges that during the Merger negotiations, the Individual Defendants also misrepresented Riptide's outstanding debts and liabilities. (Id. ¶¶ 34-35.) According to Plaintiffs, Riptide incurred "significant commitments" and expenses under the SPA and Series B Preferred Stock Purchase Agreement. (Id. ¶¶ 36-37.) In addition, the minute books and records provided to Watson during due diligence "either did not reflect these transactions or inaccurately depicted Riptide's actions." (Id. ¶ 51.)

B. Post-Merger

Watson alleges that when the Merger closed, Riptide failed to pay him the full cash consideration due, and that as a result of the SPA, which improperly diluted Riptide's common stock, the Riptide shares and warrants he received were "worthless." (Id. ¶¶ 57-61.) In addition, Watson alleges that he terminated his employment with Bravera on October 29, 2007, with the required thirty days' notice, and that Riptide has not paid him any of the compensation and benefits to which he is entitled under the Employment Agreement. (Id. ¶ 69.)

Plaintiffs also allege that Riptide "substantially mismanaged Bravera's operations," which caused Bravera to fail to perform under its contracts with third parties. (Id. ¶ 83.) In addition, the Defendants failed to return software and derivative works to Intellectus. Plaintiffs contend that Riptide, at Loeffel's direction, delivered to Watson various computer servers from which the software and derivative works had been removed. (Id. ¶¶ 88-89.) The parties began fighting almost from the beginning, and the net result has been litigation rather than a successful merger.

DISCUSSION

I. Standard of Review

In considering a Fed.R.Civ.P. 12(b)(6) motion to dismiss, a court accepts the complaint's factual allegations as true and draws all reasonable inferences in the plaintiff's favor. See Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002). A court need not accept as true, however, "[l]egal conclusions, deductions or opinions couched as factual allegations." In re NYSE Specialists Sec. Litig., 503 F.3d 89, 95 (2d Cir. 2007).

"To 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, 556 U.S. 662, 129 S.Ct. 1937, 1960 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955 (2007)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id.

In determining the sufficiency of a complaint, the Court may consider "the factual allegations in [the] . . . complaint, . . . documents attached to the complaint as an exhibit or incorporated in it by reference, . . . matters of which judicial notice may be taken, [and] documents either in plaintiffs' possession or of which the plaintiffs had knowledge and ...


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