Aquino v. Alexander Capital, LP

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JOHN J. AQUINO, Trustee, by his assignee, Convergent Distributors of Texas, LLC, Plaintiff-Counter Defendant, v. ALEXANDER CAPITAL, LP, and its Managing Partners JOSEPH AMATO, ROCCO GUIDICIPIETRO, and NESA MANAGEMENT, LLC, Defendants-Counter Claimants.

No. 21-CV-01355 (JSR)

United States District Court, S.D. New York

July 6, 2023

Chapter 7

FINDINGS OF FACT AND CONCLUSIONS OF LAW

JED S RAKOFF, U.S.D.J.

Following three days of bench trial, after plaintiff presented its case and was fully heard as to all remaining issues, defendants moved under Federal Rule 52(c) a directed verdict on each of plaintiff's remaining claims (for fraudulent inducement fraud, and breach of contract). For the following reasons the Court finds plaintiff failed to introduce sufficient evidence to support its claims, such that, if this were a jury trial, the Court would likely be prepared to grant a Rule 50(a) motion for judgment as a matter of law. Ruling, as it instead must, under Rule 52(c), the Court's task is even easier, since, after finding facts and weighing credibility, the Court concludes that judgment for defendants is plainly warranted as to all remaining claims.

I. Legal Standard

During a nonjury trial, Fed.R.Civ.P. 52(c) permits the Court to enter judgment on any issue after a party has been fully heard on that issue. If entering judgment, "the court must find the facts specially and state its conclusions of law separately." Fed.R.Civ.P. 52(a); see Id. 52 (c) . Unlike at summary judgment, Rule 52(c) authorizes the court to make credibility determinations and resolve disputed issues of fact, applying "the same standard of proof and weighting] the evidence as it would at the conclusion of the trial." EBC, Inc, v. Clark Bldg. Sys., Inc., 618 F.3d 253, 272 (3d Cir. 2010); 9C Fed. Prac. & Proc. Civ. § 2573.1 (Wright & Miller 3d ed.). Moreover, "the district court is not required to draw any inferences in favor of the non-moving party." Ritchie v. United States, 451 F.3d 1019, 1023 (9th Cir. 2006); see also Cosmopolitan Interior NY Corp, v. Dist. Council 9, 2021 WL 5331538, at *1 (S.D.N.Y. Nov. 16, 2021) (same).^[1] The Rule 52(c) standard stands in contrast to the standard applicable to a motion under Rule 50(a) for judgment as a matter of law, for which "the evidence must be viewed in the light most favorable to, and drawing all reasonable inferences in favor of, [the non-moving party]." Burger v. New York Inst, of Tech., 94 F.3d 830, 835 (2d Cir. 1996). However, Rule 50 is expressly limited to jury trials, so it is inapplicable in this bench trial, in which the Court is the sole factfinder. See Fed.R.Civ.P. 50(a)(1). The fact that the federal rules treat these two rules differently makes complete sense, since, following a bench trial, a district court will necessarily need to find facts and make credibility determinations in any event, so there would be no point in making the court wait to do so until the conclusion of all evidence to the extent a party has already been fully heard on an issue and the court finds against that same party. See Fed.R.Civ.P. 52(c). Indeed, Rule 52(c) does not even require that "the court wait until [a] party rests its case in chief to enter judgment [against that party] pursuant to Rule 52(c)," EBC, Inc., 618 F.3d at 272, although, here, defendants made a motion under Rule 52(c) only after plaintiff had presented its entire affirmative case and had formally rested.

II. Findings of Fact

Several undisputed facts were previously laid out in detail in this Court's July 8, 2022 summary judgment Opinion and Order, which both discussed the facts at issue in this case at length and also significantly limited the scope of the issues remaining for trial. See generally Aquino v. Alexander Capital, 642 B.R. 106 (S.D.N.Y. 2022) . Based on the trial record and testimony, exhibits, and deposition designations, the Court makes the following additional factual findings:

1. The company known as Inpellis (previously named Alterix^[2]) was created in 2012 as a wholly owned subsidiary of the company called BioChemics as part of BioChemics's strategy to commercialize transdermal technology in which it held IP rights. Inpellis was trying to create products to address pain and neuropathy. John Masiz, the founder and CEO of BioChemics, was initially the sole officer and director of Inpellis, but he resigned those positions in June 2014, shortly before the IPO preparation process began.

2. Masiz, who had significant liabilities to the SEC and was the subject of an active SEC investigation, wanted to make it harder for the SEC to reach the assets of Inpellis. He accordingly stepped back from management of Inpellis and took several ultimately ineffective steps to shield Inpellis's assets. In 2014, Masiz and his family transferred their ownership of Biochemics into a limited liability company called Sea Change Pharma, which was 2/3 owned by them and 1/3 owned by three other individuals. One of those, Jan Schlichtman, managed the LLC.

3. In January 2015, ownership of Inpellis was transferred from Biochemics into a trust for the benefit of Masiz and his family called the "Shareholder Resolution Trust." While the trust had several trustees, one in particular - Jan Schlichtman - was most active in managing it.

4. In summer 2014, Inpellis signed an engagement letter with an investment banking firm, defendant Alexander Capital LP, with the goal of moving toward an initial public offering. At the time, the parties both contemplated that any future IPO would go forward on what is called a "firm commitment," as opposed to a "best efforts," basis, meaning that, at the time of the actual IPO, the underwriter would guarantee to buy any remaining shares at a particular price in the event demand for the shares did not materialize.

5. At the time Inpellis and Alexander Capital signed the engagement letter in summer 2014, Alexander Capital believed it had authority to underwrite firm commitment offerings.

6. Shortly after Alexander and Inpellis signed the engagement letter, Inpellis installed a new CEO, Dr. Patrick Mooney. Before joining Inpellis, Mooney worked as a consultant for Alexander Capital and had been involved on the Inpellis deal, a fact that Mooney disclosed to Inpellis's outside counsel Thomas Barrette prior to taking the job. Mooney was hired in order to market the company to investors prior to the anticipated IPO.

7. Mooney's pay package was structured so that his pay would increase once the company obtained "bridge financing" -- in other words, a loan or loans designed to give the company cash to hire staff and get through the IPO. During 2014 and 2015, the company was actively seeking to obtain bridge financing, both with Alexander's help and on its own. The company required bridge financing in order to continue as a going concern in advance of the IPO.

8. In May 2015, after Alexander notified the Financial Industry Regulatory Authority ("FINRA") of its intent to act as underwriter to Inpellis on a firm commitment basis, Alexander received an "unreasonable letter" from FINRA, notifying Alexander that it did not then have authority to conduct a firm commitment offering. Inpellis was not aware at this time of the unreasonable letter.

9. In August 2015, Inpellis took out a $5 million loan, known as the "bridge" loan, designed to get it through an IPO. Although Inpellis had searched for other underwriters than Alexander, it had not found any, and it obtained the bridge loan with Alexander's help. Alexander received a half million dollar finder's fee in connection with this financing.

10. In August or September 2015, Inpellis became aware that Alexander lacked firm commitment authority. In a September 10 meeting at which both Barette, Mooney, and several others were present, Alexander's then-present inability to conduct a firm commitment IPO was discussed, and the decision was made to press forward with Alexander with the hope that it could resolve its FINRA issues and obtain the necessary authority.

11. Throughout this time, Inpellis was actively looking for other underwriters that could take the company public. It did not find any.

III. Conclusions of Law

Following this Court's July 8, 2022 summary judgment opinion and order, the only remaining claims at issue in this case are (1) plaintiff's claim for fraudulent inducement based on the theory that Alexander fraudulently misrepresented its ability to conduct a firm commitment IPO in order to get Inpellis to sign it, (2) plaintiff's fraud claim with respect to whether Alexander's misrepresentations/omissions caused Inpellis to take on the $5 million dollar bridge loan, and (3) several breach-of-contract theories discussed in greater detail below. For the reasons that follow, the Court now finds for defendant on each of these claims.

A. Fraudulent Inducement

"The elements of fraudulent inducement are: a false representation of a material fact and with scienter; reliance thereon by defendant to its detriment." Nat11 Union Fire Ins. Co. of Pittsburgh, Pa. v. Worley, 257 A.D.2d 228, 690 N.Y.S.2d 57, 61 (1st Dep't 1999) . The Court previously held that the July 2014 First Engagement Agreement between Inpellis and Alexander, although basically a largely non-binding agreement to enter into a subsequent agreement, nevertheless implied that Alexander had the capacity to conduct the IPO on a firm-commitment basis, rendering Alexander's failure to disclose this fact materially misleading. Aquino, 642 B.R. at 135. However, the Court declined to grant either party summary judgment on this claim, because the issue of scienter remained disputed, and the record at that point "d[id] not support finding that [Alexander] made the misrepresentations with intent to...