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Jeffrey Singer and andrew Singer v. Xipto Inc

March 30, 2012

JEFFREY SINGER AND ANDREW SINGER, PLAINTIFFS,
v.
XIPTO INC., DEFENDANT.



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

OPINION & ORDER

Plaintiffs Jeffrey and Andrew Singer ("Plaintiffs") claim that they invested in Defendant Xipto Inc. (Defendant) pursuant to a contract, and that their monies have not been returned, in breach of that contract, or, in the alternative, as an act of unjust enrichment by Defendant. Defendant moves to dismiss, pursuant to Fed. R. Civ. P. 12(b)(1) and 12(b)(6). Plaintiffs move for summary judgment, pursuant to Fed. R. Civ. P. 56. For the reasons stated herein, Plaintiffs' motion is denied; Defendant's motion is granted in part and denied in part.

I. BACKGROUND

A. Facts For purposes of Defendant's Motion to Dismiss, the Court assumes the allegations in Plaintiffs' Complaint to be true. However, for purposes of Plaintiffs' Summary Judgment Motion, the Court notes where there is a dispute over the facts, and does not take Plaintiffs' allegations to be true.

Plaintiffs describe Defendant as a "ringback tones" advertising business, which places selected advertising content on the tones heard by a mobile phone caller while waiting for a recipient to answer a phone call. (Compl. ¶ 17.) Defendant's business model allegedly relies in part upon coordination with mobile network operators who maintain the default ring tones heard by callers. (Id. ¶ 18.)

The Parties agree that a written document, entitled the "Convertible Bridge Note Financing Term Sheet" ("Term Sheet"), provided that each Plaintiff would make an investment of at least $50,000, but no more than $800,000, in the form of unsecured promissory notes ("Notes") in Defendant's business. (Compl. ¶ 23; Pls.' Statement of Undisputed Facts Pursuant to L.R. 56.1 ("Pls.' 56.1") ¶ 2; Def.'s Resp. to Pls.' L.R. 56.1 Statement of Facts ("Def.'s 56.1") ¶ 2.)*fn1 The Term Sheet contains several provisions relevant to the instant motions. First, the Term Sheet states that is "non-binding," and would be "consummated upon execution of a definitive Note Purchase Agreement." (Pls.' 56.1, Ex. 1.) Plaintiffs do not allege that a Note Purchase Agreement was ever executed, and, in fact, Defendant claims that the referenced Note Purchase Agreement never was drafted or executed. (Def.'s 56.1 second numbered ¶ 9.) Second, the Term Sheet includes a "Due Date" section. By its terms, the Notes are due "[o]n demand . . . any time on or after the 18 month anniversary of the applicable issuance of the Notes (the '[m]aturity [d]ate')." (Pls.' 56.1, Ex. 1.)

Third, the Term Sheet contains provisions for conversion of the Notes into stock in the event, or non-event, of qualified financing ("qualified financing provision"). If qualified financing, meaning "the first sale of capital stock of [Defendant] with immediately available gross proceeds . . . of at least $1,000,000," occurred before the 18-month maturity date, then the Notes, including "all principal and interest [would] automatically convert into shares of . . . capital stock . . . issued to investors." (Id.) If, on the other hand, such a qualified financing sale of capital stock did not occur before the 18-month maturity date, then the Notes "at the option of the holder thereof [would] become convertible into shares of common stock of the [Defendant]" at 80 percent of their "current fair market value." (Id.) No Party alleges that the qualified financing ever materialized.

Fourth, and most relevant to the instant motions, the Term Sheet includes a so-called "acceleration clause" that Plaintiffs claim allowed them to convert their investments into repayable loans at 8 percent interest in advance of the 18-month maturity date, unless a separate agreement was reached between Defendant and one of four named mobile network operator companies within three months of the Parties' agreement. This acceleration clause provides:

At any time after three (3) months following the closing date of this agreement, at the option of the investor, the promissory note or loan may be converted to a loan carrying an interest rate of 8% per annum, unless one of the following events occur: a) the agreement between Xipto and Verizon is signed; or b) an agreement placing Xipto's platform in service with ATT, Orange, or Vodafone is signed. Repayment of this loan will be required within 30 days from the date of written notice of this election being given by the investor. (Compl. ¶¶ 22, 28; Pls.' 56.1, Ex. 1.) The Term Sheet is dated "[o]n or about May 3rd, 2010." (Pls.' 56.1, Ex. 1.)

Two nearly identical Memoranda of Understanding ("MOUs"), dated May 3 and 5, 2010, were created and covered each individual Plaintiff and Defendant. (Pls.' 56.1, Ex. 2.)*fn2 Both MOUs are signed by Anthony DiCio, on behalf of Xipto, but one of the MOUs is signed by Plaintiff Jeffrey Singer, while the other one, marked for Plaintiff Andrew Singer, is not signed by him. (Id.) The MOUs provide that each individual Plaintiff agrees to lend Defendant $50,000 "using the terms as outlined" in the Term Sheet, which "may be substituted after attorney review," but that the "terms and conditions agreed will not be changed." (Id.)

Plaintiffs claim that the Term Sheet and the MOUs collectively constitute the entirety of the contract between the Parties. (Compl. ¶¶ 23, 24; Mem. of Law in Supp. of Pls.' Summ. J. Mot. ("Pls.' Mem.") 8-9; Reply Mem. of Law in Supp. of Pls.' Summ. J. Mot. ("Pls.' Reply Mem.") 6.) Defendant, in contrast, contends that "[t]hroughout April and May of 2010" the Parties engaged in negotiations which "resulted in two identical complex oral agreements" that predated the Term Sheet and MOUs; the latter documents were drafted "[i]n an attempt to formalize the [] oral agreement[s]," but did not "embody all of [their] terms." (Decl. of Anthony DiCio in Opp'n and Reply to Pls.' Cross-Mot. ("DiCio Decl.") ¶¶ 4, 6, 8; Def.'s 56.1 second numbered ¶¶ 1-3.)

Defendant describes these oral agreements as predicated upon an 18-month maturity date. According to Defendant, under this arrangement Plaintiffs had the option of demanding their investment funds plus 8 percent interest at any time "but [Plaintiffs] would not receive payment until after the lapse of an 18-month maturity date." (DiCio Decl. ¶ 7; Def.'s 56.1 second numbered ¶¶ 4-5.) If Plaintiffs exercised the acceleration clause, then, in Defendant's view, they would be paid "30 days after the maturity date." (DiCio Decl. ¶ 7.) Defendant further describes the oral agreements as requiring Plaintiffs, after three months, either to convert the Notes to loans (repayable 30 days after the maturity date) or convert the Notes to common stock, unless one of two conditions occurred: (1) Defendant reached a separate agreement with a mobile network, which would forestall Plaintiff's required decision from three months until the 18-month maturity date; or (2) a qualified financing occurred, which would have "already converted [the Notes] into capital stock." (Id.) Under Defendant's characterization of these oral agreements, Plaintiffs would have a "right to repayment of their two $50,000.00 investments [on] December 3 and 5, 2011," 30 days after the respective maturity dates of the purported oral agreements between the Parties. (Def.'s 56.1 second numbered ¶ 5; DiCio Decl. ¶¶ 6-7.)

It is undisputed that each Plaintiff tendered $50,000 to Defendant, which was received and deposited in its accounts without condition. (Compl. ¶ 25; Pls.' 56.1 ¶ 8; Def.'s 56.1 ¶ 8.) The Parties further agree that Plaintiffs sent a written demand letter to Defendant on August 5, 2010, claiming to exercise their rights under the acceleration clause and convert the $100,000 into a loan, with interest, due and payable within 30 days afterward.*fn3 (Def.'s 56.1 ¶ 11.) Thus, Plaintiffs claim that repayment was owed on September 4, 2010. (Compl. ¶ 30.) During the 30-day period, Plaintiffs claim that Defendant repeatedly "acknowledged the debt due and owing to Plaintiffs." (Compl. ¶ 34.)

Defendant disputes this. (Def.'s 56.1 second numbered ¶ 21.) For example, Defendant claims that on July 8, 2010 (nearly a month prior to Plaintiffs' demand letter) it "consummated an agreement with Muzicall Ltd." that would place its "proprietary platform in service on the Orange and Vodafone mobile telephone networks." (Def.'s 56.1 second numbered ¶ 14; DiCio Decl. ¶ 26.) Defendant further claims that the July 8 agreement with Muzicall was "superceded and replaced by a long-form agreement [five months later] on December 2, 2010." (DiCio Decl. ¶ 28.)

Defendant did not return the $100,000 to Plaintiffs, nor make any interest payments (Compl. ¶ 39; Def.'s 56.1 second numbered ¶ 13, 16), on the theory that the August 5, 2010 demand letter only converted investments into loans which would not be due until 30 days after the 18-month maturity date. (Def.'s 56.1 second numbered ¶ 16.) Defendant claims that the repayment deadlines would have occurred on "December 3 and 5, 2011, respectively." (Id.)

B. Procedural History

On October 13, 2010, Plaintiffs served Defendant with a Summons and Complaint, having initiated this action in New York State Supreme Court in Westchester County. On November 10, 2010, Defendant removed this action, without objection from Plaintiffs, ...


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