Ajzn, Inc. v. Donald Yu, Aerielle, LLC

AJZN, INC. A California corporation, formerly known as AERIELLE, INC., Plaintiff, v. DONALD YU, AERIELLE, LLC, GREAT AMERICAN LIFE INSURANCE COMPANY,AERIELLE TECHNOLOGIES, INC., AERIELLE IP HOLDINGS, LLC,and AERIELLE ACQUISITIONS CORPORATION, Defendants.

Civil Action No. 13-149 GMS

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE

January 26, 2015

I. INTRODUCTION

The plaintiff, AJZN, Inc. ("AJZN") filed this lawsuit against Defendants Donald Yu, Aerielle, LLC, Great American Life Insurance Company, Aerielle Technologies, Inc., Aerielle Acquisitions Corporation, and Aerielle IP Holdings, LLC (collectively, "the defendants") on June 28, 2012. (D.I. 1.) The Complaint raises a num8ber of claims relating to corporate transactions.

The defendants filed a motion to dismiss for failure to state a claim on April 15, 2013. (D.I. 38.) For the reasons stated below, the defendants' motion is granted as to Counts 1, 2, 3, 4, 5, 7, and 10 (in part), and denied as to Counts 6, 8, 9, 10 (in part), and 11.

II. BACKGROUND

AJZN, formerly known as Aerielle, Inc., is incorporated and has its principal place of business in Santa Clara County, California. (D.I. 36 at ¶ 2.) Defendant Donald Yu ("Yu") is anindividual who, upon belief, resides in Santa Clara County, California. (Id. at ¶ 3.) Defendant Aerielle, LLC ("Aerielle") is a Delaware-organized limited liability company with its principal place of business in California. (Id. at ¶ 4.) Defendant Great American Life Insurance Company ("GALIC") is incorporated and has its principal place of business in Ohio. (Id. at ¶ 5.) It is believed to be the sole member of Aerielle. (Id. at ¶¶ 4-5.) Defendant Aerielle Technologies, Inc. ("ATI") is incorporated in California, with its principal place of business there. (Id. at ¶ 6.) Defendant Aerielle Acquisition Corporation ("AAC") is a Delaware corporation, whose principal place of business is also in California, and upon belief, was formed and controlled by Yu. (Id. at ¶ 7.) Defendant Aerielle IP Holdings, LLC ("AIPH") is an Ohio-organized limited liability company and GALIC was the sole member of AIPH. (Id. at ¶ 8.)

AJZN was founded in 2004 by Arthur Cohen, who held numerous patents, trademarks and a copyright primarily in wireless audio and internet radio technology (collectively, the "Intellectual Property"). (Id. at ¶ 12.) As the sole shareholder of ATI from 2007 through 2009, AJZN assigned almost all of its Intellectual Property to ATI. (Id.) On September 17, 2007, AJZN entered into a Senior Secured Note Purchase Agreement (the "Note Purchase Agreement") with GALIC, whereby AJZN, as the borrower, incurred debt obligations to GALIC, while GALIC procured a security interest in substantially all of AJZN's assets. (Id. at ¶ 13.) In January 2009, AJZN received approximately $1.5 million for settlement of a patent lawsuit. (Id. at ¶ 14.) GALIC demanded the settlement proceeds be paid directly to it in accordance with the Note Purchase Agreement. (Id.) In lieu of immediate payment from the settlement funds, GALIC insisted AJZN appoint Yu as CEO of AJZN. (Id.) AJZN obliged and Yu became its CEO in February 2009. (Id.)

GALIC formed Aerielle in February 2009, with Yu acting as CEO. (Id. at ¶ 15.) On April 10, 2009, AJZN entered into an Asset Purchase Agreement with Aerielle in which AJZN sold substantially all of its assets and its 100% interest ownership in ATI to Aerielle in exchange for the assumption of certain debt and a warrant (the "Warrant"). (Id. at ¶ 16.) The Warrant gave AJZN the option, after April 10, 2010, to acquire up to 12,000 membership units of Aerielle. (Id.) The Warrant was to further compensate AJZN for its assets, which were purportedly worth more than the amount of debt assumed by Aerielle. (Id.) As part of this transaction, AJZN entered into other agreements, including a Confidential Mutual Release and a Settlement Agreement (the "Release"). (Id. at ¶ 17.)

In May 2010, AJZN attempted to exercise its rights under the Warrant by notifying the Aerielle board. (Id. at ¶ 20.) It was informed the necessary paperwork would be provided. (Id.) On June 21, 2010, Cohen followed up with a written request for the necessary paperwork. (Id. at ¶ 21.) Aerielle again failed to respond. (Id.) In October 2010, GALIC representatives met with Cohen to discuss AJZN's interest in Aerielle and requested to terminate the Warrant in exchange for an Earnout Agreement, which would pay AJZN a percentage of gross revenues, generated by ATI, if ATI merged with Aerielle. (Id. at ¶¶ 22-23.) AJZN declined the offer. (Id. at ¶ 24.)

Effective December 31, 2010, Aerielle transferred substantially all of its assets, including those acquired from AJZN, and its shares of ATI to AAC, which was owned and controlled by Yu. (Id. at ¶ 25.) As part of the transfer, AJZN received an earnout (the "Earnout") similar to the Earnout Agreement previously proposed and rejected. (Id.) The Earnout was contoured as a percentage interest in a "Revenue Participation Agreement," issued by AAC to Aerielle and capped the maximum payment at $1.5 million. (Id.) Aerielle sent AJZN notice of the Earnout; but AJZN never received a copy of the Revenue Participation Agreement. (Id.) AJZN continuedvoicing its objections to the Earnout, which defendants did not acknowledge. (Id.) The Earnout ultimately failed to generate any revenue for AJZN. (Id. at ¶ 26.)

III. DISCUSSION

Count 1 - Violation of Securities Exchange Act of 1934 and Rule 10b-5 against Yu; Aerielle, LLC; and GALIC

FED. R. CIV. P. 9(b) requires circumstances of fraud be described with particularity to provide notice to a defendant of the specific misconduct charged. Seville Indus. Machinery Corp. v. Southmost Machinery Corp., 742 F.2d 786, 791 (3d Cir. 1984). Allegations of "date, place or time" to fulfill the particularity requirement of Rule 9(b) are not required. Id. "Plaintiffs are free to use alternative means of injecting precision and some measure of substantiation into their allegations of fraud." Id. When substantive information lies within another party's control, a plaintiff may plead based on information and belief, "but only if the pleading sets forth the specific facts upon which the belief is reasonably based." Brinkmeier v. BIC Corp., 733 F. Supp. 2d 552, 559 (D. Del. 2010). In satisfying Rule 9(b), in conjunction with Rule 8(a)(2),¹ "the requirement of particularity . . . does not entail an exhaustive cataloging of facts but only sufficient factual specificity to provide assurance that plaintiff has investigated . . . the alleged fraud and reasonably believes that a wrong has occurred." Temple v. Haft, F.R.D. 49, 53 (D. Del. 1976).

The heightened pleading requirement of Section 78u-4(b) of the Private Securities Litigation Reform Act (the "PSLRA"), however, imposes an additional layer of factual particularity superseding the standard of Rule 9(b). In re Rockefeller Ctr. Props., Inc. Sec. Litig., 311 F.3d 198, 215-18 (3d Cir. 2002). Section 78u-4(b)(1) requires securities fraud be pled to (1) specify each statement alleged as misleading; (2) provide the reason why the statement ismisleading; and (3) if an allegation regarding the statement or omission is made on information and belief, state with particularity all facts on which the belief is formed. 15 U.S.C. § 78u-4(b)(1). According to Section 78u-4(b)(2), a plaintiff must "state with particularity facts giving rise to a strong inference" of the defendant's scienter. 15 U.S.C. § 78u-4(b)(2). Allegations of securities fraud must therefore resemble "the first paragraph of any newspaper story" and set out the "who, what, when, where and how" of the events at issue. In re Burlington Coat Factory Sec. Litig, 114 F.3d 1410, 1422 (3d Cir. 1997).

Section 10(b) of the Securities Exchange Act of 1934 provides it is unlawful to:

use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so based registered, or any securities-based swap agreement . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

15 U.S.C. § 78j(b). Additionally, Rule 10b-5 states:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5. In order to state a claim under § 10(b) and Rule 10b-5, a plaintiff must establish: "(1) a material misrepresentation (or omission); (2) scienter, i.e., a wrongful state of mind; (3) a connection with the purchase or sale of a security; (4) reliance . . .; (5) economic loss;and (6) 'loss causation,' i.e., a causal connection between the material representation and the loss." City of Roseville Employees' Retirement Sys. v. Horizon Lines, Inc., 713 F. Supp. 2d 378, 386 (D. Del. 2010) (quoting Dura Pharms, Inc. v. Broudo, 544 U.S. 336, 341-42 (2005)).

Under the heightened pleading standard of the PSLRA, claims under § 10(b) and Rule 10b-5 must initially "specify each allegedly misleading statement, why the statement was misleading, and, if an allegation is made on information and belief, all facts supporting that belief with particularity." Id. at 386 (quoting Inst'1 Investors Group v. Avaya, Inc., 564 F.3d 242, 252-53 (3d Cir. 2009)). Therefore, a plaintiff "must identify either false statements or statements...