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Kantor v. Bigtip, Inc.

United States District Court, W.D. Washington, Seattle

April 3, 2018

MICHAEL KANTOR, et al., Plaintiffs,
BIGTIP, INC., et al., Defendants.


          Honorable Marsha J. Pechman United States Senior District Court Judge

         The above-entitled Court having received and reviewed:

         1. Defendants' Joint Motion for Judgment on the Pleadings (Dkt. No. 144), Plaintiffs' Opposition to Defendants' Joint Motion for Judgment on the Pleadings (Dkt. No. 164), Defendants' Amended Reply in Support of Joint Motion for Judgment on the Pleadings (Dkt. No. 202);

         2. Defendants WhoToo, Inc. and Matt Rowlen's Joint Motion for Summary Judgment (Dkt. No. 146), Defendant BigTip, Inc.'s Joinder (Dkt. No. 149), Plaintiffs' Opposition to Joint Motion for Summary Judgment (Dkt. No. 166), Defendants' Amended Reply in Support of Joint Motion for Summary Judgment (Dkt. No. 203); all attached declarations and exhibits, and relevant portions of the record, rules as follows:

         IT IS ORDERED that Defendants' Motion for Judgment on the Pleadings is PARTIALLY GRANTED and PARTIALLY DENIED.

         IT IS FURTHER ORDERED that Defendants' WhoToo, Rowlen, and BigTip's Motion for Summary Judgment is DENIED.

         This case is comprised of derivative and direct claims filed by a group of investors against the CEO/founder (Rowlen) of the company in which they invested (BigTip, Inc.), BigTip itself, the next company the CEO formed (WhoToo, Inc.), and the company which bought WhoToo (Demandbase, Inc.).

         Motions practice has been vigorous and wide-ranging. This order concerns two motions: a motion for judgment on the pleadings brought by all Defendants and a motion for summary judgment filed by all Defendants except Demandbase (which filed its own summary judgment motion; see Order on Demandbase, Inc.'s Motion for Summary Judgment at Dkt. No. 220).


         In February 2011, Defendant Matt Rowlen (“Rowlen”) met with an individual investor, Plaintiff Michael Kantor (“Kantor”), and investors representing the other three Plaintiff investment companies (collectively, “Plaintiffs”) and pitched a business enterprise called BigTip, a company intended to connect retailers and consumers for the purpose of distributing discounts. Rowlen represented that he owned a database with at least 100 million email addresses and proposed a retailers-to-consumer connection business model. Based on Rowlen's representations, Plaintiffs made an initial round of investments totaling $575K; the investments took the form of convertible notes. (¶¶ 17-19; Dkt. No. 147-6 - 147-9; Rowlen Decl., Exs. 6-9.)

         Among the people recruited to the BigTip team was a man named Kevin Marcus. Marcus became BigTip's CTO (Dkt. No. 147, Rowlen Decl. at ¶ 7) and provided BigTip with a large database of consumer emails which he owned through his company Starnium LLC (“the Starnium database”). (Id. at ¶ 9; Dkt. No. 148-11, Cohen Decl., Ex. 50, p. 21.)

         By late 2011/early 2012, BigTip was beginning to run out of operating funds. Rowlen stopped taking a salary and advised his employees that BigTip would not be able to make payroll for long. By the second quarter of 2012, BigTip was down to four employees. (Cohen Decl., ¶¶ 11-12, 24; Rowlen Decl., ¶¶ 27-28.)

         At some point during 2012, Rowlen formulated an idea for a different business model, a “business to business data intelligence company, providing analytic tools for publishers and marketers” called “WhoToo.” (Dkt. No. 146, Motion at 10.) Plaintiffs allege that Rowlen, without their permission, used the resources of BigTip (including its employees) to work on WhoToo while BigTip was still operational. (¶¶ 22-24.) By July of 2012, BigTip was insolvent and no longer in business. As part of the windup of BigTip, several company assets were transferred to Rowlen “in partial exchange for [his] unpaid salary:” (1) the Starnium email database, (2) a business relationship with a client named InfoGroup, and (3) BigTip's website domains. (Motion at 10; Rowlen Decl. at ¶ 36; Dkt. No. 147-32 at 2.)

         In August 2012, Rowlen registered WhoToo as a separate company. (Rowlen Decl., ¶ 46.) Rowlen assigned the assets he had received, in turn, to WhoToo. (Dkt 147-32 at 2.) In the beginning of 2013, Plaintiffs received “vague information” that BigTip was no longer operational. (¶¶ 20-21.)

         There is evidence that the demise of BigTip was concealed from the Plaintiffs for a period of time. While Defendants admit that “[b]y July 1, 2012, BigTip had no more employees” (Motion at 9; Cohen Decl. at ¶¶ 11, 13), Plaintiffs present evidence that, as late as September of 2012, BigTip CFO George Bremer (“Bremer”) was still communicating with Plaintiffs as though BigTip was a going concern (albeit one in failing health). (Dkt. No. 147-23; Rowlen Decl., Ex. 23 at 1, 3.) In November, 2012, Rowlen emailed Plaintiffs:

It is our intent that the investors in BigTip receive their investment interest back in cash upon closing, but these details are still to be worked out. While I remain optimistic, we will likely shut down the BigTip operations before the end of the year.

(Dkt. No. 147-25; Rowlen Decl., Ex. 25.)

         Plaintiffs allege that, sometime in 2012 or early 2013[2], BigTip's assets (including the Starnium database) were improperly transferred to WhoToo (and later to Defendant Demandbase), despite which Rowlen and Bremer[3] continued to represent to Plaintiffs that BigTip was “solvent and a viable entity with substantial assets.” (¶ 31-32.) Plaintiffs further allege that “all or some of the source code and the platform that had been built for BigTip has been used by WhoToo without any authorization of the investors of BigTip to the ultimate detriment to the investors of BigTip.” (¶ 33.)

         BigTip was “administratively dissolved” as of February 1, 2013. (Rowen Decl., ¶ 50; Ex. 33.) On March 12, 2013, Rowlen finally advised Plaintiffs that BigTip was no longer a going concern. He emailed them that “ went dark and closed operations effective 12/31/12, ” but represented that “[w]e still have the technology and code.” (Dkt. No. 176-23, Freeburg Decl., Ex. 23 at 12; Rowen Decl. at ¶¶ 41-42.)

         Defendant Demandbase, Inc. acquired WhoToo (the parties disagree as to the date - Rowlen says it was in August of 2015, the SAC says September 2015 [¶ 34], and Plaintiffs claim it was January 2015). (Dkt. No. 176-11, Ex. 11 at 19.) The parties disagree about the acquisition price: Plaintiffs claim the merger price was $13 million in cash and stock (Dkt. No. 164 at 6), Demandbase asserts that the figure was “approximately $7, 430, 000.” (Dkt. No. 139 at 3.) Plaintiffs also maintain that Demandbase acquired all the assets and liabilities of WhoToo; those assets allegedly included the IP and source code improperly transferred from BigTip to WhoToo. (¶ 35.)


         Motion for Judgment on the Pleadings

         Standard of Review Motions for judgment on the pleadings are governed by FRCP 12(c); because 12(c) motions are “functionally identical” to Rule 12(b)(6) motions, the 12(b)(6) legal standard is applied. Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1054 n.4 (9th Cir. 2011). A complaint may be dismissed under this standard if it fails to state a cognizable legal theory or does not allege facts sufficient to support a cognizable legal theory. Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1988).

         The Court will apply the pleading standard announced in Iqbal/Twombly: a plaintiff must allege “enough facts to state a claim for relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Bell Atlantic. Corp. v.Twombly, 550 U.S. 544, 570 (2007). “Factual allegations must be enough to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 570 (citing 5 Wright & Miller, Federal Practice and Procedure § 1216, pp. 235-36 (3d ed. 2004). Adequately stating grounds for relief “requires more than labels and conclusion, and a formulaic recitation of the elements of a cause of action will not do.” Id. (citing Conley v. Gibson, 355 U.S. 41, 46-47 (1957)).


         Plaintiffs attack the 12(c) motion as untimely, and the Court is sympathetic to their point. While standing to sue (which is what this 12(c) motion attacks) is an issue which can be raised at any time, even the language of FRCP 12(c) says a motion should be brought “[a]fter the pleadings are closed - but early enough not to delay trial.” Under most circumstances, an order granting such a motion would allow a plaintiff an opportunity to amend - with trial set for April 16, 2018, this matter is clearly past the point where amendment can be permitted without delaying trial. The Court is only dismissing claims pursuant to this 12(c) motion where amendment would be futile.

         For purposes of the 12(c) motion, Defendants divide Plaintiffs' claims into two categories - derivative and fraud-based - and the Court will analyze the arguments using that dichotomy.

         Derivative causes of action

         Defendants assert that Plaintiffs' claims for conversion (Fifth Cause of Action), breach of fiduciary duty (Sixth Cause of Action), unjust enrichment (Seventh Cause of Action), fraudulent conveyance (Eighth Cause of Action), and declaratory judgment (Tenth Cause of Action) are derivative causes of action which Plaintiffs have no standing to assert. It is the law in the State of Washington that

[s]tanding to bring a stockholder derivative claim requires a proprietary interest in the corporation whose right is asserted Kauffman v. Dreyfus Fund, Inc., 434 F.2d 727, 735-36 (3d Cir. 1970), cert. denied, 401 U.S. 974 (1971). A creditor has no equitable standing to sue derivatively.

Haberman v. Wash. Pub. Power Supply Sys., 109 Wn.2d 107, 149 (1987).

         a. Conversion

         Plaintiffs' SAC alleges that “Defendants stole, misappropriated, and converted BigTip's equipment, inventory and assets and gave them to WhoToo. WhoToo subsequently transferred all of its assets to Demandbase.” (SAC, ¶ 63.) The claim is founded on the existence of some proprietary interest in the assets of BigTip, a proprietary interest in the corporation for which this group of investors (whose notes were never converted into BigTip stock) has provided no legal justification, either from the terms of their investment agreements, state or federal statute, or case law.

         The 12(c) motion will be GRANTED as to this claim; since Plaintiffs will never be able to allege a proprietary interest in the assets of the corporation, amendment would be futile and the dismissal will be with prejudice.

         b. Breach of fiduciary duty

         As a general rule, corporations and their officers owe no fiduciary duty to the corporation's creditors. Haberman, 109 Wn.2d at 109.

         However, there is case law (cited by the judge who formerly presided over this case; see Kantor v. BigTip, 2016 WL 4193861, at *4) that corporate officers or directors own a fiduciary duty to creditors once the corporation becomes insolvent. “That duty, in essence, is to use the remaining corporate assets for the benefit of creditors.” Textron Fin. Corp. v. Underwood (In re Underwood), 2004 Bankr. LEXIS 1461, *12 (E.D. Wash. 2004)(citing In re Jacks, 266 B.R. 728, 738 (U.S. BAP, 9th Cir. 2001)). Rowlen admitted that he assigned himself several corporate assets at the point that BigTip was on the brink of insolvency as compensation for the fact that he had been working without pay for a period of time. (Mtn. at 10; Rowlen Decl. at ¶ 36; Dkt. No. 147-32 at 2.) If proven, this could be found to be a breach of his fiduciary duty to the creditors under Textron.

         The Court acknowledges that this portion of the ruling creates somewhat of a jurisprudential bind. The SAC does not allege the transfer of BigTip's assets to Rowlen as part of the fiduciary breach claim. The evidence of Rowlen's receipt of the BigTip assets was developed during the discovery/deposition process. The legal impact of that transfer (in terms of the corporation's fiduciary duty to its creditors) was pointed out by U.S. District Judge Richard A. Jones in an earlier ruling, making these facts part of the court record.

         This particular motion was filed very late and the trial date is rapidly approaching. However, the pretrial order - the document which will supersede the complaint - has not yet been signed; no further facts need be developed, therefore the cause of action can be re-stated in the pretrial order (when the pleadings are realigned with the record). The evidence regarding the transfer of assets to Rowlen at a time of insolvency is there (by Defendants' own admission), it supports a breach of fiduciary duty claim on behalf of the creditors and the Court will allow it to go forward on that basis.

         The 12(c) motion is DENIED as to this claim.

         c. Unjust enrichment

         Plaintiffs' allegations as to this cause of action fall into two categories. First, Plaintiffs allege that “Defendants… moved all or some of BigTip's source code and the platform that had been built for BigTip and transferring [sic] same to WhoToo without any authorization of the investors to the harm of the investors.” (SAC, ¶ 75.) This portion of their pleading suffers from the same defect as the cause of action for conversion; namely, no legal basis for a proprietary interest in the assets of BigTip.

         However, Plaintiffs go on to assert that “Rowlen… conceived of WhoToo and began working on WhoToo while BigTip was still operating and during the time [he] had fiduciary duties to the investors of BigTip” (id.) and further that “the resources used to create WhoToo were taken from BigTip. Individuals were being paid to work at BigTip while launching WhoToo.” (Id. at ¶ 76.)

         While Plaintiffs had no proprietary interest in the assets of BigTip, they did have a contractual agreement with Rowlen and BigTip that the funds which they invested were to be used for the development, maintenance and improvement of the business in which they had agreed to invest; namely, BigTip. If, as they allege, those funds were utilized in part for the creation of a business in which they did not invest and from which they would see no return on their investment, Plaintiffs have stated a claim for unjust enrichment upon which relief may be granted. That claim for unjust enrichment extends to Rowlen, BigTip, and WhoToo, [4] and the 12(c) motion is DENIED to that extent.

         d. Fraudul ...

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