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Aix Partners, LLC v. Aix Energy, Inc.

Supreme Court, New York county

August 22, 2013

AIX ENERGY, INC., Defendant
AIX ENERGY, INC., Third-Party Plaintiff, IROQUOIS CAPITAL OPPORTUNITY FUND, LP; IROQUOIS OPPORTUNITY MANAGEMENT, LLC; and GRUSHKO & MITTMAN, P.C, Third-Party Defendants Index No. 651401/2012 Third-Party Index No. 590550/2012

Unpublished Opinion


Motion Date: 4/4/2013

Hon. Eileen Bransten, J.S.C.

This matter comes before the Court on two motions: (1) an omnibus motion to dismiss brought by Counterclaim-Defendant AIX Partners I, LLC ("AIX Partners") and Third-Party Defendants Iroquois Capital Opportunity Fund, LP and Iroquois Opportunity Management, LLC (collectively "Iroquois") and (2) a motion to dismiss brought by Third Party-Defendant Grushko & Mittman, P.C. ("Grushko"). Defendant/Third-Party Plaintiff AIX Energy, Inc. ("AIX Energy") opposes both motions.

For the reasons that follow, AIX Partners' motion is granted in part and denied in part, while the motions filed by Iroquois and Grushko are granted in their entirety.

I. Background[1]

AIX Energy is a private oil and gas exploration company. (Third-Party Compl. ¶ 1.) The instant litigation stems from a transaction between AIX Energy and Iroquois, a New York private equity investor, whereby AIX Energy sought funding for its exploration operations in Louisiana. Id. Iroquois agreed to provide this funding through AIX Partners, a special purpose entity created by Iroquois for this transaction. Id. This transaction was effectuated through a Participation Agreement, executed on November 16, 2010. Id.¶ 29.

AIX Energy and Iroquois negotiated the terms of this transaction during the latter half of 2010, as AIX Energy's "financial situation was worsening." Id. ¶ 36. During the course of the parties' negotiations, AIX Energy alleges that it began to question Iroquois' sophistication and wondered "whether Iroquois was really capable of closing any deal at all." Id. at 37. Accordingly, AIX Energy insisted that the draft Participation Agreement include a representation that AIX Partners had "adequate capital to fund the entire Funding Limit." Id. at 38.

This "adequate capital" representation was "especially important given the 'extras' Iroquois was demanding to close a deal." Id. These "extras" included an "exit provision, " allowing AIX Partners to demand the return of 150% of its investment if AIX Energy failed to register its common stock with a public stock exchange by December 31, 2011. Id.¶ 40; AIX Energy Opp. Br. at 1. In addition, AIX Partners received warrants and a lockup agreement, restricting AIX Energy from selling common stock (collectively, with the "exit provision, " the "Extra Terms"). (Third-Party Compl.40.)

While the parties initially agreed to a $10.5 million investment, Iroquois later informed AIX Energy that it only would be able to provide $8, 351 million and that its payments would have to be made in two phases. (Counterclaim 36.) AIX Energy was unhappy with this change but agreed to pursue the smaller deal. Id. ¶35. Although the funding was to be provided in two installments, Iroquois repeated its "adequate capital" representation. Id. at 38.

Despite these representations, "on the eve of closing, " Iroquois representatives informed AIX Energy that AIX Partners would not be able to deposit the entire Phase I funding amount into escrow at closing. Id. ¶¶ 43, 45. Nonetheless, the parties went through with the closing and executed the Participation Agreement, the Lockup Agreement, and the Common Stock Purchase Warrant on November 16, 2010. Id. *¶ 52.

On April 27, 2012, AIX Partners commenced the instant breach of contract action, asserting that AIX Energy failed to comply with the "exit provision" of the Participation Agreement. Specifically, AIX Partners alleges that AIX Energy failed to list itself on a public exchange by December 31, 2011, and then failed to pay AIX Partners 150% of its investment as required by the "exit provision."

AIX Energy interposed an Answer and five Counterclaims, each premised on the theory that Iroquois did not have "adequate capital" to close the funding deal. In particular, the Counterclaims assert fraud; breach of the Participation Agreement; and, breach of the implied warranty of good faith and fair dealing. AIX Energy also seeks a declaratory judgment that AIX Partners breached the Participation Agreement and that AIX Energy is therefore not obligated to perform thereunder; and a permanent injunction directing that the transaction documents are rescinded. AIX Partners' motion to dismiss each of these five counterclaims is presently before the Court.

In addition to filing Counterclaims against AIX Partners, AIX Energy also filed a Third-Party Complaint against Iroquois and its counsel, Grushko & Mittman, P.C. ("Grushko"). The Third-Party Complaint's allegations regarding Iroquois largely repeat the allegations in AIX Energy's Counterclaims and assert claims against Iroquois for fraudulent misrepresentation and fraudulent concealment. As for Grushko, AIX Energy alleges that the law firm aided and abetted the fraud purportedly committed by AIX Partners and Iroquois through its role as Escrow Agent for the transaction and that Grushko breached its fiduciary duty to AIX Energy. Iroquois and Grushko each seek dismissal of this Third-Party Complaint.

II. Analysis

AIX Partners and Iroquois jointly filed a motion to dismiss the respective counts asserted against them in the Counterclaims and Third-Party Complaint. Grushko likewise seeks dismissal of the aiding and abetting fraud claim brought against it in the Third-Party Complaint. Since the claims against AIX Partners and Iroquois are substantially ...

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