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CVI Investments, Inc. v. Mariano

United States District Court, S.D. New York

December 20, 2019




         Plaintiff CVI Investments, Inc. ("CVI") brings this action against Defendant Steven M. Mariano, asserting claims of fraudulent inducement, fraud, and tortious interference in connection with a private investment in public equity ("PIPE") transaction. (Compl., ECF No. 1.) Mariano moves to dismiss CVFs complaint for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). (Def. Steven M. Mariano's Notice of Mot. to Dismiss Compl., ECF No. 13.) Mariano's motion to dismiss is DENIED as to the fraudulent inducement and tortious interference claims, but GRANTED as to the fraud claim.


         This action is related to Hudson Bay Master Fund Ltd. v. Mariano, No. 16 Civ. 2767 (GBD) (the "Hudson Bay Action"), and CVI Investments, Inc. v. Patriot National, Inc., No. 16 Civ. 2787 (GBD) (the "Patriot Action"), both of which involve the same underlying PIPE transaction at issue here.[1] Mariano is the former Chairman of the Board of Directors and Chief Executive Officer of non-party Patriot National, Inc. ("Patriot"). (Compl. ¶ 1.) CVI and non-party Hudson Bay Master Fund Ltd. ("Hudson Bay") are two of three investment funds that invested in Patriot shares through the PIPE transaction, pursuant to the same Securities Purchase Agreement (the "SPA"). (See Id. ¶ 57; Def. Steven M. Mariano's Mem. of Law in Supp. of Mot. to Dismiss Compl. ("Def.'s Mem."), Ex. 1 ("SPA"), ECF No. 14-1.)

         A. The Pipe Transaction and Related Agreements.

         CVI entered into the SPA with Mariano and Patriot on December 13, 2015, agreeing to invest $22.5 million in Patriot in exchange for restricted, unregistered shares of Patriot's stock, as well as two series of warrants-the Series A and Series B warrants-to purchase additional shares at a later date. (Compl. ¶¶ 2, 57.) Under the deal, Mariano received $13.5 million of CVI's investment. (Id. ¶¶ 2, 58.) The SPA included a merger clause, stating that the SPA and other transaction documents "supersede all other prior oral or written agreements between [CVI], [Mariano], [and Patriot]" and "contain the entire understanding of the parties" with respect to the matters covered in the SPA. (SPA § 9(e).) The SPA also included a non-reliance clause, providing that CVI "has, in connection with [its] decision to purchase Securities, not relied upon any representations or other information (whether oral or written) other than as set forth in the representations and warranties of [Patriot] and [Mariano] contained herein and the information disclosed in the SEC Documents." (SPA § 2(e).)

         Patriot's stock price dropped after the SPA was publicly announced, prompting Mariano to renegotiate the SPA with CVI. (Compl. ¶ 3.) As a result, on December 23, 2015, the parties entered into a Rescission and Exchange Agreement (the "REA") that rescinded CVI's purchase of restricted stock from Patriot but maintained its purchase of restricted stock from Mariano, permitting Mariano to keep the $ 13.5 million that CVI had paid him in connection with the original investment. (Id. ¶ 4; Def.'s Mem., Ex. 2 ("REA"), ECF No. 14-2.) Section 8(f) of the REA stated that the REA "supersede[s] all other prior oral or written agreements among [CVI], [Patriot], their affiliates and persons acting on their behalf with respect to the matters discussed herein and therein." (REA § 8(f).)

         The REA amended the terms of the original warrants issued by Patriot. Specifically, the new Series A warrant entitled CVI to purchase more shares at a lower price than the original Series A warrant. (Compl. ¶¶ 61, 81.) The new Series B warrant, like the original Series B warrant, allowed CVI to purchase a certain number of additional shares at a nominal exercise price of $0.01 per share if Patriot's stock price declined during a specified period. (See Id. ¶¶ 62, 82.) However, it extended the pricing period for calculating how many additional shares CVI could claim for that nominal exercise price. (See id.)

         Mariano and Patriot also executed separate agreements that required Mariano to deliver certain shares to Patriot in connection with the SPA and REA. When executing the SPA, Mariano and Patriot entered into a Stock Back-to-Back Agreement, which provided that Mariano would contribute sixty percent of any shares that Patriot issued pursuant to the original warrants. (Id. ¶ 59.) When the SPA was amended by the REA, they executed an Amended and Restated Stock Back-to-Back Agreement, which required Mariano to provide Patriot with 100 percent, as opposed to sixty percent, of any shares issued pursuant to the new warrants. (Id. ¶ 6.)

         B. CVI's Exercise of the Warrants and Suits Against Patriot and Mariano

         On April 5, 2016, CVI submitted an exercise notice under the new Series B warrant for 250, 000 shares. (Id. ¶ 172.) In response, Patriot's counsel sent CVI a letter stating that Patriot would not honor the exercise notice at that time, due to a purported investigation into the transaction by the Financial Industry Regulatory Authority. (Id. ¶¶ 173, 175.) CVI commenced the Patriot Action on April 14, 2016, suing Patriot for breach of contract. (Id. ¶ 176.) On August 1, 2016, CVI submitted an additional exercise notice to Patriot, this time under the new Series A warrant for 100, 000 shares. (Id. ¶ 181.) Patriot again refused to honor the warrant. (Id. ¶ 182.)

         CVI commenced this action on April 3, 2019, asserting claims against Mariano for fraud, fraudulent inducement, and tortious interference. (Id. ¶¶ 203-41.) According to CVI, Mariano committed fraud and fraudulently induced CVI to invest in the PIPE transaction by making misrepresentations and omissions about (1) Patriot's precarious financial condition, (2) Mariano's failure to reserve sufficient unencumbered shares of Patriot stock, and (3) Mariano's intent not to deliver the shares to Patriot upon CVFs exercise of the warrants. (Id. ¶¶ 203-31.) CVI bases its fraud and fraudulent inducement claims on statements that Mariano allegedly made in Patriot's filings with the SEC, the Amended and Restated Stock Back-to-Back Agreement, and direct communications with CVI. (See Id. ¶¶ 1, 93-98.) The complaint further alleges that Mariano tortiously interfered with Patriot's obligations under the new warrants by not delivering shares to Patriot as required under the Amended and Restated Stock Back-to-Back Agreement, which in turn prevented Patriot from delivering those shares to CVI pursuant to the warrants. (Id. ¶ 235.)

         C. This Court's Previous Rulings.

         Two of this Court's previous rulings are relevant here: (1) its February 14, 2018 decision in the Hudson Bay Action on Hudson Bay's motion to dismiss counterclaims filed by Mariano (the "February 2018 Decision"), (February 2018 Decision, Hudson Bay, ECF No. 291), and (2) its March 28, 2019 decision in both the Hudson Bay Action and the Patriot Action on the parties' cross-motions for summary judgment (the "March 2019 ...

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