United States District Court, S.D. New York
MEMORANDUM DECISION AND ORDER
B. DANIELS, UNITED STATES DISTRICT JUDGE
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.
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. 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.)
The Pipe Transaction and Related Agreements.
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).)
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 §
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
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.)
CVI's Exercise of the Warrants and Suits Against Patriot
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.)
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.)
This Court's Previous Rulings.
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 ...