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CWIE, LLC v. Bandwith Consulting

April 20, 2009

CWIE, LLC, PLAINTIFF(S),
v.
BANDWITH CONSULTING, INC., A CALIFORNIA CORPORATION; ARI BENOWITZ, AN INDIVIDUAL; MIKE FLATIN, AN INDIVIDUAL; SCOT ROSS, AN INDIVIDUAL; AND DOES 1-10, DEFENDANT(S).



The opinion of the court was delivered by: David O. Carter United States District Judge

ORDER DENYING PRELIMINARY INJUNCTION ENJOINING ISSUANCE OF PREFERRED SHARES BY DEFENDANT BANDWIDTH CONSULTING, INC.

Before the Court is Motion of Plaintiff and Shareholder CWIE, LLC ("CWIE") to Enjoin Issuance of Preferred Shares by Defendant Bandwith Consulting, Inc. After considering the moving, opposing, and replying papers, and the oral argument of the parties, the Court hereby DENIES the Motion.*fn1

I. BACKGROUND

This case presents the Court with numerous contested facts and heated accusations between the parties. Plaintiff CWIE operates a wholesale internet access and website hosting business that it began operating in 1996. In early 2002, Defendant Ari Benowitz ("Benowitz")and Dean Wirtz approached CWIE principal Ron Cadwell ("Cadwell") for help in starting up their own internet hosting company originally named Big Blue Coyote, Inc. and ultimately renamed Bandwidth Consulting, Inc., or "BandCon.".*fn2 CWIE agreed to aid BandCon through the provision of equipment, training, and bandwidth access. CWIE alleges that it provided BandCon with engineering assistance, a high end router, technical assistance, a cash investment, and use of CWIE's own customer call center. CWIE also permitted BandCon to purchase services from Level 3, an internet connection provider, through CWIE's existing contract with Level 3. As a result, BandCon was able to purchase bandwith at a significantly discounted price.

In exchange for CWIE's start-up aid, the parties executed a Subscription Agreement in March 2002 meant to provide CWIE with some return on its investment in BandCon. Two provisions of that agreement are particularly relevant to the instant motion. First, under Section 7(a) of the Agreement, BandCon promised that CWIE would become a 10% shareholder of BandCon and that BandCon would issue additional stock to CWIE, if necessary, in order for CWIE to maintain its 10% equity interest without additional investment or payment by CWIE:

CWIE will receive a 10% equity interest in the form of the Company's voting common stock in exchange for a capital investment of $50,000.00....In the event that at any time the Company issues additional shares of stock to investors other than CWIE, the Company will issue enough additional shares to CWIE to allow CWIE to maintain its 10% interest. CWIE will not be required to invest additional capital or otherwise pay for these additional shares."

Cadwell Dec. In Sup. of Mot., Exh. A: Subscription Agreement, ¶ 7(a).

Pursuant to Section 7(c) of the Agreement, BandCon also promised to pay CWIE monthly payments of 10% of BandCon's "Net Profit:

The Company shall make a distribution to CWIE within 30 days after the close of each successive calendar month in an amount equal to 10% of it's [sic] "Net Profit." For purposes of this Agreement, Net Profit is defined as "Gross Revenue less all Operating and Administrative Expenses" paid or incurred during any given calendar month BEFORE any salaries, wages, commissions and/or bonuses are paid to or incurred on behalf of Ariz Benowitz, Nathan Alexander and Dean Wirtz.

Id. at ¶7(c).

CWIE claims that it never received any share certificates pursuant to the Agreement, but neither Plaintiff nor Defendants dispute that CWIE owns 300 shares of BandCon pursuant to the March 2002 Agreement, which at that time consisted of 10% of BandCon's equity. Further, after BandCon was formed, Cadwell was named one of the company's board of directors.

Plaintiff bases its request for preliminary relief on two alleged violations of law by BandCon. First, Plaintiff claims BandCon's directors and majority shareholders (the individual named defendants) breached their fiduciary duties to Plaintiff and minority shareholder CWIE by improperly diluting its 10% equity interest. Second, Plaintiff contends that BandCon breached both provisions of the Agreement as cited above. The Court proceeds to address the facts relevant to the dilution claim first, and then outlines those allegations relevant to the monthly profit payments.

Dilution

Three separate transactions have resulted in CWIE's equity interest in BandCon dropping to around 8%. The first instance occurred on June 26, 2007, regarding BandCon's planned acquisition of AM6, a telecommunications company. The parties present starkly different pictures of this meeting. BandCon contends that the meeting was held on behalf of the shareholders and directors and that all shareholders were present at the meeting as Benowitz owned 45% of BandCon, the other board of director present, Defendant Michael Flatin, also was a 45% shareholder of BandCon, and Cadwell was present as both a director and representative of 10% shareholder CWIE. Further, BandCon contends that Cadwell was told that the purchase of AM6 would result in a dilution of CWIE's 10% equity interest in BandCon as the purchase agreement involved the issuance of common stock to AM6 with no additional stock being issued to CWIE. BandCon contends that Cadwell agreed to the dilution of CWIE's 10% stock as long as all shareholders' interests would be diluted equally. BandCon provides a copy of minutes for the June 26, 2007 meeting that were completed on December 19, 2008, which indicate the same.

CWIE, on the other hand, contends that the meeting was only between the board of directors, it was not properly noticed as a shareholders' meeting pursuant to BandCon bylaws, Cadwell never agreed to a dilution of CWIE's interest (and could not have since he was only present as a director, rather than as a representative of shareholder CWIE), and also alleges that the record of minutes submitted by BandCon are fabricated. As evidence of the fabrication, CWIE points out that Cadwell was issued draft minutes at or near the time of the actual meeting and indicates that those minutes do not state that the meeting was also a shareholder meeting or that Cadwell agreed to a dilution. CWIE further contends that there is no plausible reason for BandCon to have waited until December 2008 to draft alleged "final" minutes of the 2007 meeting unless BandCon was merely fabricating evidence to support its defense.

BandCon also points out two other meetings in which Cadwell allegedly agreed to a dilution of CWIE's interest. One meeting took place on August 15, 2007, and involved approval of a consulting agreement with RFC, LLC for the services of Defendant Scot Ross that included the issuance of shares to Ross. Further, on November 15, 2007, BandCon alleges that shareholders approved an Equity Participation Plan and Incentive Stock Option Agreement that involved the issuance of stock to BandCon employees with no new stock being issued to CWIE. CWIE makes the same allegations that the minutes provides by BandCon are fabricated, evidenced by the fact that the final drafts were not written until December 2008 (no drafts were ever issued to Cadwell regarding these meetings), there is no evidence of proper notification of such meetings to include shareholders, and thus Cadwell could not have and did not waive CWIE's anti-dilution rights.

Monthly Profit Payments

CWIE also contends that BandCon has breached the Agreement by failing to pay CWIE its agreed 10% share in BandCon's monthly profits. The parties agree that the provision of the Agreement providing for 10% monthly payments was amended in 2003; however, they dispute the meaning of the change. In September 2003, BandCon sent CWIE a letter stating that BandCon's accountant "seems to think that [Section 7(c)] looks too much like a dividend" and that the parties needed to revise the section to "'clarify' that [BandCon is] not paying a 'dividend' but rather a payment on services from CWIE...." ...


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