Ram Distribution Grp. v. Joseph Gunnar & Co. (In re Ram Distribution Grp.)

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In re: RAM DISTRIBUTION GROUP LLC dba TAL DEPOT, Debtor.

RAM DISTRIBUTION GROUP LLC dba TAL DEPOT, Plaintiff, v. JOSEPH GUNNAR & CO., LLC, Defendant.

No. 8-19-72701-las

Adv. Pro. No. 8-20-08081-las

United States Bankruptcy Court, E.D. New York

February 25, 2022

Chapter 11

MEMORANDUM DECISION AND ORDER GRANTING DEFENDANT'S MOTION TO DISMISS COMPLAINT

LOUIS A. SCARCELLA UNITED STATES BANKRUPTCY JUDGE

Plaintiff Ram Distribution Group LLC d/b/a Tal Depot ("plaintiff" or the "Company"), the debtor in this chapter 11 case, commenced this adversary proceeding against defendant Joseph Gunnar & Co., LLC ("defendant" or "Joseph Gunnar") asserting claims for breach of contract and breach of the implied duty of good faith and fair dealing. Complaint ("Compl.") [Dkt. No. 1]. According to plaintiff this dispute stems from a January 2017 engagement letter between the parties under which defendant agreed to act as financial advisor to plaintiff in connection with a proposed initial public offering of plaintiff's securities. Plaintiff claims wrongful conduct by defendant precluded plaintiff's completion of the public offering process and that defendant failed to fulfill its obligations under the engagement letter.

The Court has subject matter jurisdiction over this matter under 28 U.S.C. § 1334(b), 28 U.S.C. § 157(a), and the Standing Order of Reference entered by the United States District Court for the Eastern District of New York, dated August 28 1986, as amended by Order dated December 5, 2021.

Now before the Court is defendant's motion to dismiss plaintiff's Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure ("Fed. R. Civ P.") and made applicable to this adversary proceeding by Bankruptcy Rule 7012(b). The Court has carefully considered the arguments and submissions of the parties in connection with the motion to dismiss. For the following reasons, the Court grants defendant's motion to dismiss the Complaint.

BACKGROUND

A. Facts^[1]

Plaintiff is an online grocer, selling nonperishable groceries on its own website as well as on third-party seller websites. Compl. ¶ 1. Plaintiff started its business in 2012 and annual revenues grew over the next six years from $250, 000 in 2012 to $35 million in 2018. Id. ¶ 9. Plaintiff had plans for its continued growth and needed increased funding for its expansion. Id. ¶ 10. In the last quarter of 2016, plaintiff began looking at various options to secure funding. Id.

Plaintiff alleges that it was introduced to defendant in December 2016. Compl. ¶ 11. At that time, plaintiff's President and Chief Executive Officer, Jeremy Reichman, began communicating with representatives of defendant, including Ramnarain Jaigobind and Eric Lord. Id. According to plaintiff, defendant advised that the best option to secure funding was by an initial public offering ("IPO"). Id. Plaintiff further claims that defendant represented that it could obtain a $75 million valuation for plaintiff, that Mr. Jaigobind would lead the team of bankers on the IPO, and that Mr. Jaigobind could secure interim bridge financing for plaintiff during the IPO process. Id.

The engagement letter ("Letter" or "engagement letter"), which sets forth the parties' agreement for the IPO process, was executed on January 6, 2017, and is attached to the Complaint as Exhibit A. Compl. ¶ 12. The Letter states that defendant will "act as the Company's exclusive financial advisor, sole book-runner, sole underwriter and sole investment banker in connection with the proposed Offering or any other public financing." Compl. Ex. A, ¶ 1. The Letter further states that defendant will "use its best efforts, consistent with customary practice, during the Engagement Period to provide all investment banking services customarily provided in connection with transactions such as the proposed Offering." Id.

Although the opening paragraph of the Letter expressly states that it "is not intended to be a binding legal document," Paragraph 12 of the Letter provides that Paragraphs 1, 12, 13, 14, 17, 18, and 20 "are intended to be legally binding and enforceable on and against the Company and Joseph Gunnar." Id. ¶ 12(a). Paragraph 12 further states that the Letter is not "a legal commitment on the part of Joseph Gunnar to provide any financing to the Company, as the agreement between the parties hereto on these matters will be embodied in the Underwriting Agreement" and that "[u]ntil the Underwriting Agreement has been finally negotiated and signed, the Company or Joseph Gunnar may at any time terminate their further participation in the proposed transactions contemplated hereby and the engagement by the Company of Joseph Gunnar, and the party so terminating will have no liability to the other on account of any matters provided for herein, except as provided for in this Paragraph." Id.

Section (b) of Paragraph 12 of the Letter states what will occur should the engagement letter be terminated. If either party terminates its participation in the proposed transaction "after the 180-day anniversary of the execution of [the] engagement letter," defendant is entitled to reimbursement of "expenses and fees" as provided for in Paragraph 8, as well as the "full amount of its actual accountable expenses . . . up to a maximum of $100, 000." Id. ¶ 12(b). If plaintiff terminated the Letter prior to the 180-day anniversary "for any reason," it was obligated to pay defendant $100, 000 "inclusive of actual accountable expenses incurred up to such termination date." Id. The two circumstances under which defendant would not be entitled to payment or reimbursement upon termination are (1) if defendant terminated the Letter "prior to the execution of the Underwriting Agreement for other than Good Reason"^[2] or (2) if plaintiff terminated the Letter due to "Joseph Gunnar's gross negligence or willful misconduct." Id.

The first sentence of Paragraph 1 and the entirety of Section (b) of Paragraph 12 of the Letter were amended by letter agreement signed by the parties and dated October 19, 2017. See Compl. Ex. B. In pertinent part, the amendment states that the engagement period runs from the date of the amended engagement letter to "the earlier of the consummation of the Offering or October 6, 2018, unless sooner terminated." Id. The amendment further states that the Company may not terminate the Letter until July 6, 2018, except for as otherwise provided in the engagement letter or "pursuant to paragraph 12 of this engagement letter." Id. The amended engagement letter does not otherwise modify payment or reimbursement to Joseph Gunnar should the Letter be terminated. See id.

According to the Complaint, the "customary practice" of an investment bank during the IPO process includes "(a) engaging in the due diligence process, (b) participating in the development of Form S-1 to be drafted, amended as necessary, and filed with the Securities and Exchange Commission (the 'SEC'), (c) preselling the offering and (d) conducting a roadshow." Compl. ¶ 15. The Complaint alleges, albeit in conclusory fashion, these are "well-known, basic and necessary steps in the IPO process that eventually leads to the investment bank and the company executing an underwriting agreement." Id. ¶ 18. The only reference to any of these "customary practices" in the Letter is found in Paragraph 9, which states "Joseph Gunnar may plan and arrange one or more 'road show' marketing trips for the Company's management to meet with prospective investors." Compl. Ex. A, ¶ 9 (emphasis added). Notably, Paragraph 9 is excluded from those provisions in the Letter the parties intended to be legally binding and enforceable. Id. ¶ 12(a).

The Complaint alleges that the IPO process was very costly both financially and in terms of its use of plaintiff's personnel resources. Compl. ¶¶ 19-20. Furthermore, plaintiff states that one of the reasons it "agreed to do the IPO" - that Mr. Jaigobind would be working on the IPO - was hindered when plaintiff was informed that "Mr. Jaigobind was no longer affiliated with [d]efendant." Id. ¶ 22. This news concerned plaintiff because it understood this to mean that the team of investment bankers who had been working with Mr. Jaigobind on the IPO would now leave to join Mr. Jaigobind at his new employer. Id. However, despite this concern, plaintiff was assured by defendant that no one would leave, and that defendant could fulfill its obligations pursuant to the engagement letter. Id. ¶ 23.

The Complaint further alleges that defendant (1) made no effort to obtain bridge financing for plaintiff during the IPO process; (2) "forc[ed]" plaintiff to accept a reduced valuation of $25 million and file a Form S-1 with the lower valuation; (3) continued the IPO process when defendant knew it could not complete the process; and (4) convinced plaintiff to file a confidential "free writing prospectus" ("FWP") presentation, which was created for a roadshow that defendant knew it could not do. Id. ¶ 33.

After plaintiff filed the FWP presentation, this signaled "that [p]laintiff was ready to go public." Id. ¶ 29. However, it was at this point in the IPO process that plaintiff learned that the team at Joseph Gunnar who had been working on the IPO had resigned and were employed by the investment bank where Mr. Jaigobind was then employed. Id. ¶ 30. Due to the exodus of the team, the Complaint states that "[d]efendant admitted to [p]laintiff" it was not able to engage in presale activities, arrange meetings with investors, or go on roadshows "because [d]efendant had no representatives to work on any tasks with the loss of the entire team it had working on the IPO." Id. According to plaintiff, it should have been obvious to defendant that loss of the team leader and other team...