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Lightbox Ventures, LLC v. 3Rd Home Ltd.

United States District Court, S.D. New York

November 13, 2017

LIGHTBOX VENTURES, LLC, Plaintiff,
v.
3RD HOME LIMITED and WADE SHEALY, Defendants.

          For Lightbox Ventures, LLC and Andrew Ellner: Brem Moldovsky Brem Moldovsky, LLC.

          For 3RD Home Limited and Wade Shealy: Phillip Byron Jones Evans, Jones & Reynolds, P.C.

          OPINION & ORDER

          DENISE COTE, DISTRICT JUDGE.

         This litigation arises out of a failed joint venture (“Joint Venture”) between plaintiff Lightbox Ventures, LLC (“Lightbox”) and defendant 3RD Home Limited (“Third Home”). The Joint Venture was designed to facilitate the sale of high-end vacation properties by Lightbox. The parties have cross-moved for summary judgment. For the following reasons, the summary judgment motions are each granted in part.

         BACKGROUND

         The history of this litigation is set out in this Court's October 28, 2016 Opinion, with which familiarity is assumed. Lightbox Ventures, LLC v. 3RD Home Ltd., 16-cv-2379(DLC), 2016 WL 6562107 (S.D.N.Y. Oct. 28, 2016). The following facts are undisputed unless otherwise noted.

         Third Home was established as a luxury home exchange program in 2011 by Wade Shealy (“Shealy”) and others. Shealy is Third Home's Chief Executive Officer (“CEO”). On January 11, 2011, Third Home obtained registrations for the trademarks “3RD HOME” (Registration No. 3, 905, 513) and “3RD HOME” with a symbol of a house replacing the letter “O” (Registration No. 3, 905, 514).

         Third Home operates a website -- www.3rdhome.com -- that allows its members to exchange time in their luxury homes. Once an individual becomes a member of Third Home's property exchange program, and their property is determined to be eligible, they can spend days in a luxury home owned by another member in exchange for allowing other members to stay in their home. For example, a Third Home member who owns a home in Antigua may permit another member to stay in his home for one week, and in return may stay in another member's home in Vail, Colorado for a week. These exchanges are facilitated by the use of points or “keys, ” which is the currency used in the exchange program to reserve time in a given property. By October 2015, Third Home had approximately 6, 500 members.

         Andrew Ellner (“Ellner”) is a former managing director at Lehman Brothers. He is also a member of and investor in Third Home. In 2015, Ellner established Lightbox as an online real estate listing and sales business for luxury vacation homes and contacted Third Home about forming a joint venture. Hoping that Lightbox would earn brokerage commissions and other fees from the sale of vacation homes through the joint venture, Ellner proposed that Third Home promote Lightbox's online real estate sales business via a link on Third Home's website.

         Lightbox and Third Home entered into a joint venture agreement (“the Agreement”) on July 13, 2015. Shortly thereafter, on August 27, Lightbox acquired its first real estate brokerage license. That license is for the State of New York. Neither Lightbox nor Ellner are licensed real estate brokers in any other jurisdiction.

         A. The Agreement

         The stated purpose of the Agreement is “to establish a joint venture between the parties to create an online platform for the resale of vacation homes, fractional ownership properties and other properties eligible to be listed on 3RDHOME.COM, which is to be linked to the existing 3RD HOME site.” Paragraph 1 of the Agreement describes Lightbox's obligations. These included paying for the necessary build-out of a website for the Joint Venture and managing the sale of real estate business.

         Paragraph 1 provides in pertinent part:

a. [Lightbox] shall be responsible for fronting the cost for the technology build-out of the 3RD Home website including an interface for [Lightbox] use. Fronting the cost of the creating a [Lightbox] website at a level equivalent to the 3RD Home site is also the financial responsibility of [Lightbox].
c. [Lightbox] shall be fully responsible for managing any and all interactions with buyers and sellers and potential buyers and sellers, as well as all intermediaries for any sale, including local real estate brokers, property management companies and local attorneys as needed.
f. [Lightbox] agrees that it will share evenly with 3RD Home (50%/50%) all profits realized from this business venture after deducting reasonable direct costs of doing business, which costs will be documented and records presented to 3RD Home upon request. However, this profit share will begin only after the outlay for the technology build-out has been recouped, as described in paragraph 2b below.

(Emphasis supplied.)

         Paragraph 2 of the Agreement describes Third Home's obligations. These included maintaining an active link to the Joint Venture website, forwarding all inquiries regarding property sales to Lightbox, and not entering into any “similar” arrangement with another real estate sales business. Paragraph 2 provides in pertinent part:

a. 3RD Home agrees to keep an active link on their site to the [Lightbox] site, this link shall be in a prominent place which is easily recognizable and usable by potential buyers and sellers of properties through the site. The location and visibility of the link shall be agreed upon between the parties with final determination by 3RD HOME.
b. 3RD Home agrees that the first profits of [Lightbox] will go toward reimbursing [Lightbox] for the technology build-out mentioned earlier in paragraph 1(a). After that amount has been reimbursed, the 50%/50% profit sharing will begin and continue as long as this Agreement remains in full force and effect.
c. 3RD Home agrees to forward all inquiries related to the buying and selling of vacation homes, residence clubs, fractionals and the like to [Lightbox] and that 3RD Home will be a passive partner in the sales and marketing of these homes, with its only active role being the maintenance of the links on the 3RD HOME site with [Lightbox]. It will forward all inquiries regarding sales and purchases of vacation homes, residence clubs, fractionals and the like to [Lightbox] exclusively and in a timely manner.
d. 3RD Home agrees to [sic] that this arrangement is exclusive and that they will not enter into any similar arrangement with another sales and marketing organization without the permission of [Lightbox].
e. 3RD Home will be responsible for all relationships with the affiliates. In the interest of maintaining these relationships, 3RD Home retains the right to determine that certain affiliate properties may not be able to be sold through [Lightbox]. 3RD Home will inform [Lightbox] in writing of such an exclusion, should it occur.
f. 3RD HOME will make the final determination of the name and the URL of the resale business. All 3RD HOME names, marks, and other proprietary assets that may be used in conjunction with the marketing of this program will remain the exclusive property of 3RD HOME at all times during the term and after.

(Emphasis supplied.)

         The Agreement contained a number of other provisions, including a choice of law provision selecting New York law and a provision shifting attorneys' fees. The Agreement requires written notice of any requests or demands made under the Agreement.

         The parties envisioned that the Agreement would be supplemented by a document addressing termination of the relationship in more detail. Paragraph 15 of the Agreement titled “Termination” provides:

This is a temporary interim agreement to indicate the intent of the parties, and will remain in effect until July 13, 2017 or earlier if superseded by a later agreement. If 3RD HOME should desire to terminate because of unanticipated issues before July 13, 2017 then it will promptly reimburse LightBox for any unreimbursed costs of the technology build out. Additional terms regarding termination of this agreement and the rights and steps to terminate it are expected before August 31, 2015.

(Emphasis supplied.)

         Ellner signed the Agreement on behalf of Lightbox. An authorized representative for Shealy signed the Agreement on Shealy's behalf.

         B. The Amendment

         In December 2015, the parties executed an amendment to the Agreement that principally modifies the termination provision contained in Paragraph 15. The amendment extended the Joint Venture to July 1, 2018, but outlined the terms by which either of the parties could terminate it earlier. It reads in pertinent part as follows:

15. TERMINATION
(a) The Agreement shall be for a term of thirty (30) months, expiring on July 1, 2018, unless terminated earlier in accordance with the provisions set forth below. . . .
(b) LIGHTBOX VENTURES may terminate this Agreement in advance of its expiration upon thirty (30) days' written notice. In the event LIGHTBOX VENTURES terminates this Agreement pursuant to this clause, it waives any claim it has or may have for reimbursement of the technology costs referenced in Paragraph 1(a), herein, and the fees referenced in 1(d), herein. Furthermore, in the event LIGHTBOX VENTURES so terminates this Agreement in advance of its expiration, without selling its portion of the joint venture to either 3RD HOME or a third party, in accordance with the terms of Paragraph 16 herein, it thereby waives any claim it has or may have to its share of the joint venture between the parties as set forth in this Agreement.
(c) 3RD HOME may terminate this Agreement in advance of its expiration upon a upon [sic] thirty (30) days written notice without cause. In the event of an early termination pursuant to this clause, 3RD HOME agrees to reimburse LIGHTBOX VENTURES for the technology costs referenced in Paragraph 1(a) herein, to the extent those costs are not already fully recouped at the time of said termination, pursuant to Paragraph 1(f), herein. Furthermore, in the event 3RD HOME elects to terminate this Agreement in accordance with this Paragraph 15(c), it agrees that it will not re-enter the business of or otherwise operate, in any manner, an online platform for the sale and resale of vacation homes and fractional ownership properties or otherwise engage in any venture which is intended to compete with or does compete with LIGHTBOX VENTURES in the business contemplated by this Agreement for a period of time totaling two (2) years following the date of termination of this Agreement. Nothing herein however shall restrict, prohibit or otherwise restrain 3RD HOME from the continued operation of its other business activities, including but not limited to its operation of a vacation property management and home exchange website and those matters related hereto.
(d) Either party may terminate this agreement due to cause as follows. In the case of LIGHTBOX VENTURES, they may terminate this Agreement due to cause if 3RD HOME does not adequately create an attractive inventory of homes and/or generate adequate sales leads. If 3RD HOME is unable to cure such poor performance within a reasonable period of time, and LIGHTBOX VENTURES decides to exercise its right to terminate the Agreement due to cause, 3RD HOME agrees not to re-enter the business of or otherwise operate, in any manner, an online platform for the sale and resale of vacation homes and fractional ownership properties or otherwise engage in any venture which is intended to compete with or does compete with LIGHTBOX VENTURES in the business contemplated by this Agreement for a period of two (2) years following the date of termination of this Agreement. In the case of 3RD HOME, they may terminate due to cause if LIGHTBOX VENTURES does not expeditiously follow up on leads generated and otherwise make a good faith effort to generate sales as contemplated by this Agreement. If LIGHTBOX VENTURES is unable to cure such poor performance within a reasonable period of time, 3RD HOME will promptly reimburse LIGHTBOX VENTURES for any unreimbursed costs of the technology build out and may continue to operate the business independently.
(e) In addition, in the event 3RD HOME wishes to terminate this Agreement with LIGHTBOX VENTURES but continue to operate the business of the joint venture contemplated by this Agreement independently of LIGHTBOX VENTURES, 3RD HOME will buy out LIGHTBOX VENTURES from the joint venture, and the price of such buyout will be determined by averaging three (3) separate prices determined by three separate and independent accredited business valuation professionals who will each value the joint venture created by this Agreement. 3RD HOME will pay all costs of such valuations. At the conclusion of these valuations 3RD HOME will pay to LIGHTBOX VENTURES an amount equal to fifty percent (50%) of the average of the three (3) values as determined by the aforementioned business valuation professionals. Upon such payment the joint venture between the parties shall terminate.

(Emphasis supplied.)

         The amendment also included provisions concerning the winding up of the Joint Venture and the use of either party's trademarks.

(f) In the event of a termination of this Agreement pursuant to Paragraph 15 above (by LIGHTBOX VENTURES) or 15(c), above (by 3RD HOME), it is agreed and understood that the operation of the joint venture shall cease within a reasonable time thereafter. In such event, the parties agree to cooperate with one another to wrap up the affairs of the joint venture in an appropriate and orderly manner, and to sign any and all documents necessary to effectuate the termination and dissolution of the joint venture. As part of the winding up of the affairs of the joint venture, it is agreed and understood that each party will take those steps necessary, and within a reasonable period of time, to deactivate any links to their respective websites that identify the remaining party.
(g) Other than as set forth herein, neither party shall have the right to use the other party's trademarks or name in any manner whatsoever other than in the materials that are approved in writing by the party whose trademarks or name is being used, and only for the express purposes set forth herein. Any such permission to use the aforementioned names and/or marks shall cease upon the expiration or termination of this Agreement, in accordance herewith.

(Emphasis supplied.) Ellner and Shealy signed the amendment.

         C. Exclusive Brokers

         At the same time that Third Home was amending its agreement with Lightbox, it started to execute about six contracts with other real estate brokers. Each contract was for a specified luxury home region (“Exclusive Brokers”). In these contracts, Third Home principally agrees to offer complimentary membership to Third Home's exchange program to owners and buyers sponsored by the Exclusive Broker and to promote the Exclusive Broker's business on Third Home's website. In return, the Exclusive Broker agrees to pay Third Home an upfront fee and promote the Third Home luxury home exchange program to its owners and buyers. The upfront fee, which ranged from $2, 500 to $10, 000 generally gives the Exclusive Broker “the agreed territory for exclusive representation for one year.” Of particular relevance to the instant dispute, some of these contracts also include a provision indicating that the Exclusive Broker “will receive all the leads generated by [Third Home's] inbound members and by our real estate posting site and as part of this agreement agrees to pay a referral fee of 25% on any real estate transaction that takes place based on that referral buying or selling.” (Emphasis in original.)

         A December 2015 draft of one such contract required the Exclusive Broker to pay the 25% referral fee to Third Home's “partner” Lightbox. A later version of this contract omitted the duty to pay Lightbox. Third Home received $52, 500 from Exclusive Brokers in 2016.[1] Lightbox has not received any of these funds.

         D. Joint Venture's Operations

         In January 2016, the website contemplated by the Joint Venture (“Website”) -- www.3rdhomerealestate.com -- became operational.[2] Lightbox spent over $60, 000 to build the Website.[3]Third Home has not reimbursed Lightbox for this expense of the Joint Venture.

         Third Home also provided Ellner with an email address for use in connection with the Joint Venture. Ellner was given the email address andy@3rdhomerealestate.com.

         No properties were ever sold through the Website, and the Joint Venture has not collected any commissions or revenue from the sale of any properties. The Joint Venture only procured two listing agreements from two property owners before the commencement of this lawsuit. One of the signed listing agreements concerned a timeshare in Costa Rican property owned by Ellner himself and valued at less than $200, 000. The second agreement was for a timeshare in Aspen, Colorado.

         Under these listing agreements, the owners of the properties retained the Joint Venture “for the purpose of marketing and/or selling” the properties on the Website. The owners agreed to give the Joint Venture a commission upon the sale of their properties “when such sale is either directly or indirectly the result of the Buyer, or a broker representing the Buyer, contacting 3rdHomeRealEstate.com to inquire about this or another property listed on 3rdHomeRealEstate.com.” The commission percentage ranged from 6% to 10% depending on the price at which the property was sold, but the agreement acknowledged that the commission would be split with the buyer's broker if that broker made the initial contact with the Joint Venture. The agreements expired after one year unless a contract was signed during that time.[4]

         According to a list prepared by Ellner, as of March 2016, the Website had eighteen properties with listing prices totaling approximately $33 million (“Ellner List”).[5] The list calculates commissions for the sale of each property ranging from 4% to 10% of the listing price, and arrives at a total “possible” commission figure of $1, 383, 615. Although the Website was operational, Third Home never activated the link to the Website from the Third Home website. By February 2016, the relationship between Ellner and Shealy had soured. Ellner repeatedly raised concerns with Shealy about Third Home's arrangements with the Exclusive Brokers. On March 21, Ellner received an email from a broker stating that Shealy had expressed concern with her listing certain real estate property on the Website because one of the Exclusive Brokers “has an exclusive.” Third Home did not provide copies of the contracts with the Exclusive Brokers to Lightbox before the commencement of this litigation.

         On March 8, counsel for Third Home sent Lightbox a written notice of termination. The notice stated that Third Home was exercising its termination rights under Paragraph 15 and sub-paragraph 15(e). Third Home sent a second letter to Lightbox on March 21 insisting on its “unconditional right to terminate under Section 15(e)” and to arrange a time for the parties to discuss valuation of the Joint Venture. Third ...


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