StarVest Partners II, L.P. v Emportal, Inc.
Decided on December 27, 2012
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Andrias, J.P., Sweeny, Catterson, Moskowitz, Manzanet-Daniels, JJ.
Order and judgment (one paper), Supreme Court, New York County (Ira Gammerman, J.H.O.), entered February 15, 2011, which, insofar as appealed from as limited by the briefs, granted plaintiffs' (Starvest) motion to dismiss defendant Emportal's first through third and seventh through ninth counterclaims and granted plaintiffs summary judgment declaring that they had no liability to defendant, unanimously affirmed, with costs.
This action arises from Emportal's solicitation of venture capital financing from New York-based StarVest in late 2008. Emportal, a California-based software company, discussed with StarVest the possibility of StarVest purchasing approximately $3.5 million worth of Emportal preferred stock. After conducting some preliminary due diligence, StarVest decided to work alongside another venture capital firm named Leapfrog Ventures (Leapfrog). These firms discussed with Emportal the possibility of providing a total of $7 million in funding in exchange for a combined 40% equity interest in the company. In September 2008, Emportal ceased discussions with StarVest and Leapfrog after selecting another venture capital syndicate to provide funding. That syndicate decided in October 2008 not to proceed with the financing. That same month, StarVest and Leapfrog made it known to Emportal that they remained interested in providing a combined investment of $6.5 million for a total of 65% of shareholders' equity.
The parties ultimately executed a term sheet consisting of five pages, the last four of which contained a listing of terms and conditions for the investment in Emportal. Significantly, the first page of this document, which was signed by all parties on October 29, 2008, contained the following language:
"Binding agreements will be entered into only upon the execution by all parties of the Stock Purchase Agreement and other related documents. This Term Sheet is for discussion purposes only and there is no obligation on the part of any party unless and until a definitive stock purchase agreement is signed by all parties." The term sheet set November 11, 2008 as a closing date for the transaction, subject to an acceptable financial plan, outstanding obligations of no more than $600,000, and "other diligence as requested by StarVest or Leapfrog." After this date passed without the transaction closing, the parties continued, via email, to discuss various issues with a view toward finalizing an agreement.
On November 18, 2008, a StarVest representative notified Emportal representatives via email that StarVest had received approval from the partnership to proceed with the investment. Emportal's attorneys prepared a series of documents necessary to close the deal, including a Litigation Indemnity Agreement, and sent them to StarVest's counsel. Both law firms were located in California and the documents included choice of law provisions which indicated that California law was to govern.
On November 21, 2008, StarVest's counsel emailed Emportal's attorneys changes to the Indemnity Agreement. A specifically referenced problem concerned a lawsuit a former partner of Emportal's chairman, Kevin Grauman, filed, alleging that Grauman defrauded him and seeking that the company's "founders" indemnify new investors.
Three days later, StarVest contacted Emportal and said it needed a "timeout" to continue to evaluate "certain dynamics" of the deal. On December 4, 2008, StarVest advised Grauman that it could not proceed with an investment in Emportal because of concerns about the lawsuit, "radical changes" in the economy and "other aspects of the background check due diligence."
After a series of what StarVest characterized as "inflammatory" emails from Grauman, accusing it of, among other things, "lost good will and reputation," StarVest commenced this declaratory relief action in New York, seeking a judgment declaring that Starvest had no obligation to provide funding to Emportal, and that its refusal to invest was not wrongful and caused no actionable harm or injury to Emportal. Starvest also sought a declaration that it was not liable for breach of contract, fraud or any other legal theory.
Emportal commenced an action for damages against StarVest in California, arguing extensively that California was the appropriate forum because it had a greater interest in the case than New York. After a hearing, the California court granted StarVest's motion for a stay on the ground of inconvenient forum, noting that Emportal could file a cross complaint in the New York action. The court also explicitly rejected Emportal's forum arguments, stating that "in weighing the public and private factors, there is no clear indication that California is preferable over New York."
Thereafter, Emportal filed an amended answer in the New York action, asserting nine counterclaims for damages similar to those filed in California, including, inter alia, breach of oral contract, breach of implied covenant of good faith and fair dealing, promissory estoppel, and fraud and negligent ...