CRG Fin., LLC v. Two Diamond Capital Corp.

CRG FINANCIAL, LLC and CLAIMS RECOVERY GROUP, LLC, Plaintiffs, v. TWO DIAMOND CAPITAL CORP. and MEDEA, INC., Defendants.

No. 19-cv-10182-DJC

UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS

June 16, 2021

MEMORANDUM AND ORDER

CASPER, J.

I. Introduction

This case arises out of a series of agreements to fund the purchase and sale of Medea Vodka. D. 1. Plaintiffs CRG Financial, LLC ("CRG") and Claims Recovery Group, LLC ("Claims Recovery") (collectively, "Plaintiffs") have filed this lawsuit against Defendants Two Diamond Capital Corp. ("Two Diamond") and Medea, Inc. ("Medea") in connection with the loan facility and related agreements. D. 1. Medea has moved for summary judgment on the single count against it for fraud (Count III). D. 126. For the reasons stated below, the Court ALLOWS the motion.

II. Standard of Review

The Court grants summary judgment where there is no genuine dispute as to any material fact and the undisputed facts demonstrate that the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a). "A fact is material if it carries with it the potential to affect the outcome of the suit under applicable law." Santiago-Ramos v. Centennial P.R. Wireless Corp., 217 F.3d 46, 52 (1st Cir. 2000). The movant bears the burden of demonstrating the absence of a genuine issue of material fact. Carmona v. Toledo, 215 F.3d 124, 132 (1st Cir. 2000); see Celotex v. Catrett, 477 U.S. 317, 323 (1986). If the movant meets its burden, the non-moving party may not rest on the allegations or denials in its pleadings, Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986), but must come forward with specific admissible facts showing that there is a genuine issue for trial. Borges ex rel. S.M.B.W. v. Serrano-Isern, 605 F.3d 1, 5 (1st Cir. 2010). The Court "view[s] the record in the light most favorable to the nonmovant, drawing reasonable inferences in his favor." Noonan v. Staples, Inc., 556 F.3d 20, 25 (1st Cir. 2009).

III. Factual Background

The following summary of material facts is taken from Medea's statement of material facts, D. 128 as well as CRG's response to same, D. 133, and are undisputed unless otherwise noted.

Medea is in the business of manufacturing and distributing Medea Vodka. D. 128 & 133 at ¶¶ 15, 19; D. 127 at 8. Brandon Laidlaw ("Laidlaw") is Medea's CEO. D. 128 & D. 133 at ¶ 16. In 2016, Medea decided to spin off its vodka inventory and focus on licensing the proprietary electronic messaging technology on its bottles. D. 128 & D. 133 at ¶¶ 19-20, 25. Non-party Bevriqo, Inc. ("Bevriqo") is in the vodka business and is headed by Richard Cabael("Cabael"). Id. at ¶¶ 17-18. Laidlaw and Cabael were in touch about Bevriqo purchasing Medea Vodka. Id. at ¶ 26. Plaintiff CRG provided liquidity to bankruptcy creditors and loans on distressed assets. Id. at ¶ 11. Joseph Brosnan ("Brosnan") was employed by DRB Capital LLC as a trader for CRG. Id. at ¶ 8. Robert Axenrod ("Axenrod") is the CEO of CRG and the managing member of Claims Recovery. Id. at ¶ 10. Two Diamond is in the business of providing asset-based lending accounts receivable financing and other specialty loans. Id. at ¶¶ 12, 14. Michael Kot ("Kot") and George Gochis ("Gochis") are Two Diamond's principals. Id. at ¶ 13.

As explained in further detail below, there were several transactions involved in the funding and purchase of Medea Vodka inventory. The purchase and sale portion of the underlying transaction was executed in the Second Amended Inventory Purchase and Licensing Agreement (the "Asset Agreement") signed by Medea and Bevriqo on April 14, 2017. Id. at ¶ 39; D. 126-5. On April 11, 2017, Two Diamond loaned money to Bevriqo, pursuant to the Loan and Security Agreement, to acquire the Medea Vodka inventory. D. 128 & D. 133 at ¶ 62. Plaintiffs and Two Diamond entered into participation agreements to provide such financing so that Bevriqo could purchase the Medea Vodka. Id. ¶¶ 67-70. Specifically, on April 13, 2017, CRG executed a participation agreements for $800,000 to invest in the inventory loan. Id. at ¶ 67. Claims Recovery did the same on the same day for an investment of $500,000. Id. at ¶ 68. On April 17, 2017, CRG wired these funds to Two Diamond and Two Diamond then wired $1,500,000 to Medea towards Bevriqo's purchase. Id. at ¶ 45.

Since the sole claim against Medea is one for fraud, based upon the alleged misrepresentations that Medea made regarding "the existence of bona fide purchase orders" forMedea Vodka in the formation of the contracts under which Bevriqo later defaulted, D. 1 (verified complaint) ¶ 54, the Court focuses on this matter in the summary below.

A. Prior to Execution of the Asset Agreement

On April 12, 2017, prior to the execution of the Asset Agreement (or the other agreements), Medea provided copies of its distribution agreements with Allstar Global, LLC ("Allstar"), Youngs Market and Duggans Distillers ("Duggans") and Herman Jensen Agreement to Bevriqo. D. 128 & 133 at ¶ 123; D. 126-32 at 164. Medea provided copies of purchase orders for Medea Vodka issued by third party liquor distributors, including Allstar to Cabael. D. 128 & D. 133 at ¶ 126. Gary Carpenter ("Carpenter"), an advisor engaged by Cabael to assist him in getting financing for his Medea Vodka transaction, forwarded copies of several purchase orders issued by distributors for Medea Vodka to Two Diamond, who forwarded the communication to Brosnan. Id. at ¶¶ 55, 127. Stevens, principal of Allstar, represented to Cabael and Medea that, among other things, he sought to extend its exclusive distribution agreement with Medea for distribution in Latin America from three years, dated December 9, 2016, to ninety-nine years. Id. at ¶¶ 139, 141. This agreement required Allstar to purchase 17,500 cases of Medea Vodka annually for a three-year term for distribution in Latin America. Id. at ¶ 142. Allstar had the contractual right to terminate this agreement on thirty days written notice. Id. at ¶ 143. Allstar paid Medea $224,000 for its purchase of Medea Vodka under purchase order #1001. Id. at ¶ 147. Cabael or Carpenter informed Two Diamond that Allstar had made this payment. Id. at ¶ 148. Medea later assigned Purchase Orders ## 1002 and 1003 from Allstar to Bevriqo. Id. at ¶ 149.

Also prior to the execution of the Asset Agreement, Medea provided its financial records to Cabael. Id. at ¶ 164; D. 126-24; D. 126-32 at 722-23. This transmittal included salesforecasts, accounts receivable and new purchase order information reporting sales of 1147 cases for $229,800 from January 1, 2017. D. 128 & 133 at ¶ 181; D. 126-24. Medea informed Cabael that Medea Vodka was losing money and Cabael informed Two Diamond that Medea was losing money. D. 128 & 133 at ¶ 165-166. The projections provided by Carpenter to Two Diamond on March 20, 2017, D. 126-28, the sales projections Two Diamond provided in the Participation Memorandum regarding the "Medea Vodka Opportunity," D. 1-5, and sales projections provided in the Two Diamond "Participation Opportunity," D. 1-7, are different than the projections that Medea provided to Cabael on March 14, 2017. D. 128 & 133 at ¶ 183. Cabael made up his own sales projections utilizing his own "growth formula" that he provided to Two Diamond. Id. at ¶ 184.

B. The Underlying Medea and Bevriqo Transaction

Medea was engaged in the manufacture and distribution of Medea Vodka. Id. at ¶ 19. For the first three quarters of 2016, Medea's Vodka sales trended negatively. D. 133 at ¶ 24. In 2016, Medea decided to sell its vodka inventory. Id. at ¶ 25.

On April 14, 2017, Medea and Bevriqo executed the Asset Agreement. Id. at ¶ 39. The Asset Agreement provided for Bevriqo to pay Medea a total of $7,720,000, including (i) $2,720,000 to purchase an inventory of finished Medea Vodka products and components; and (ii) license fees for use of Medea's electronic messaging system in the sum of $1,000,000 per year for a term of five years. Id. at ¶ 40. Under the Asset Agreement, Bevriqo represented and warranted to Medea that, among other things, it had sufficient facilities, resources and personnel to market and sell Medea Vodka and perform its duties under the contract, that it acknowledged and received no assurances that its business relationship with Medea would continue or that any investment would be recouped and that it was familiar with the laws of the territories which itoperated and released Medea from any claims in connection with vodka imports or exports. Id. at ¶ 42.

C. Bevriqo Defaults on the Asset Agreement with Medea

The Asset Agreement required Bevriqo to make an initial payment of $1,500,000 towards its $2,720,000 vodka inventory purchase. Id. at ¶ 44. Bevriqo paid Medea this $1,500,000 on April 17, 2017. Id. at ¶ 45. On or about May 9, 2017, Bevriqo invoiced Allstar for its Purchase Orders ## 1002 and 1003. Id. at ¶ 150. Allstar did not take delivery or pay for the Medea Vodka for which it was invoiced by Bevriqo on May 9, 2017. Id. at ¶ 151.

Bevriqo ultimately sold no Medea Vodka, generated no receivables and defaulted on its loan payment. Id. at ¶ 50. Bevriqo defaulted on payment of its $2,000,000 promissory note to secure payment of the first- and second-years' license fees and the balance of its payment to Medea for the vodka inventory. Id. at ¶ 51. Medea declared Bevriqo's default under the Asset Agreement on June 26, 2017. Id. at ¶ 52; D. 126-7.

D. Bevriqo Defaults on the Loan and Security Agreement with Two Diamond

On April 11, 2017, Bevriqo, as a borrower, and Two Diamond, as a lender, entered into a Loan and Security Agreement in the principal sum of $2,000,000, pursuant to which Two Diamond funded the Inventory Loan. Id. at ¶ 62. Bevriqo delivered its $2,000,000 note payable to Two Diamond. Id. at ¶ 63. Cabael delivered his unconditional guarantee of Bevriqo's performance. Id. at ¶ 64. Bevriqo's obligations to Two Diamond were secured and collateralized by (i) the Medea Vodka inventory; and (ii) Cabael's...