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Studio 159, LLC, A Connecticut Limited Liability Company v. Pophang

December 21, 2012

STUDIO 159, LLC, A CONNECTICUT LIMITED LIABILITY COMPANY, PLAINTIFFS,
v.
POPHANG, LLC, A DELAWARE LIMITED LIABILITY COMPANY; AND NEXTPOINT, INC., A DELAWARE CORPORATION, DEFENDANTS.



The opinion of the court was delivered by: John E. Mcdermott United States Magistrate Judge

I. INTRODUCTION

MEMORANDUM AND ORDER RE: APPLICATION FOR RIGHT TO ATTACH ORDER AND ORDER FOR ISSUANCE OF WRIT OF ATTACHMENT AGAINST NEXTPOINT, INC. (Docket Nos. 24 and 32); APPLICATION FOR RIGHT TO ATTACH ORDER AND ORDER FOR ISSUANCE OF WRIT OF ATTACHMENT AGAINST POPHANG, LLC (Docket Nos. 25 AND 33); REQUEST FOR JUDICIAL NOTICE IN SUPPORT THEREOF (Docket No. 16)

On October 29, 2012, Plaintiff Studio 159, LLC, filed Applications for Writs of Attachment against Defendants Pophang, LLC ("Pophang"), and NextPoint, Inc. ("NextPoint"). Plaintiff seeks an attachment order for $1,070,170.23 as the remainder due on the sale of internet websites pursuant to an Asset Purchase Agreement signed on February 10, 2012. Plaintiff's application for right to attach orders and for writs of attachment in the amount above are GRANTED.

II. BACKGROUND

Plaintiff Studio 159, LLC, a Connecticut limited liability company, owned several internet websites, including damnyouautocorrect.com ("DYAC"). (Declaration of Jillian Smith, ¶ 2.) Studio 159, LLC's sole member is Jill Smith, aka Jillian Madison. (Smith Decl., ¶ 1.)

Defendant NextPoint, Inc., a Delaware corporation doing business as Break Media, is, according to its Chief Financial Officer Andrew Doyle, "a leading creator, publisher and distributor of digital entertainment content [including] the largest humor website online - Break.com." (Declaration of Andrew Doyle, ¶ 2.) Defendant Pophang, LLC, is a Delaware limited liability company owned and created by NextPoint to acquire the websites owned by Smith. (Doyle Decl., ¶ 11.)

On February 10, 2012, Plaintiff and NextPoint entered into an Asset Purchase Agreement ("Agreement") pursuant to which Plaintiff sold to Pophang a suite of 22 internet websites ("Sites"), including the DYAC site, for $2.5 million, $1.5 million to be paid on the Closing Date and a $1 million Deferred Payment six months after the Closing Date. (Smith Decl., ¶ 4, Ex. A; Doyle Decl., ¶ 10.) In Section 2.1.3 of the Agreement, NextPoint guaranteed the prompt payment and performance by Pophang. (Smith Decl., ¶ 9, Ex. A.)

Pursuant to Section 10.4 of the Agreement, Defendants had the right to set off against the Deferred Payment any amount Plaintiff was obligated to indemnify Defendants in accordance with the Agreement. Sections 10.1, 10.1.1 and 10.1.2 obligate Plaintiff and Smith to indemnify NextPoint for any loss suffered from any breach of representation or warranty contained in any Transaction Document, or any failure to perform any covenant or condition imposed in any Transaction Document.

There is no dispute that, subsequent to the February 10, 2012, Closing Date, traffic to the websites Plaintiff sold Defendants declined. This prompted Defendants not to make the $1 million Deferred Payment due on August 10, 2012. On that date, Pophang, LLC, sent a letter to Plaintiff stating that it was exercising its right to set off the entire amount of the Deferred Payment. (Smith Decl., ¶ 8, Ex. B.) The letter states that Plaintiff is in breach of representations contained in Sections 3.6 and 3.11, "as evidenced by the immediate and dramatic drop in traffic to the sites following the Closing." (Id.) Section 3.6.1 represents that there are no paid traffic purchase agreements other than as disclosed (none were) and Section 3.11 represents that Seller has not made any untrue statement of material fact or omitted to state any material fact. Put simply, Defendants contend that Plaintiff manipulated traffic to its websites before the Closing Date in order to command an artificially high purchase price for them.

On August 17, 2012, Plaintiff sued Defendants for breach of contract and breach of guaranty, in the amount of not less than $977,257.89. (Complaint, ¶¶ 54, 63.) This amount is calculated by offsetting against the $1 million Deferred Payment owed to Plaintiff less $22,272.11 in revenue from the Sites collected by Plaintiff for Defendants after the Closing Date. (Id.) Section 10.4 of the Agreement provides that, if Buyer exercises a right of offset without justification, Buyer shall be liable to Seller for interest on the Deferred Payment at the rate of 10% per annum from the Closing Date until fully paid. With interest and attorneys' fees and costs permitted by statute, the amount of the attachment sought by Plaintiff is $1,070,170.23.

Defendants filed an Answer on October 14, 2012, denying the allegations of Plaintiff's complaint. Defendants also asserted the affirmative defenses of estoppel, unclean hands, justification, non-performance, fraud in the inducement, and mistake of fact.

After Plaintiff filed its Applications for Writ of Attachment on October 29, 2012, Defendants filed an Opposition on November 16, 2012. Plaintiff filed a Reply on November 27, 2012.

Defendants filed a Motion to Strike evidence raised for the first time in Plaintiff's Reply. On December 3, 2012, the Court issued an order permitting Defendants to respond to the new evidence raised for the first time in Plaintiff's Reply and requiring both parties to clarify certain issues left unclear by the briefing. The parties filed supplemental responses on December 10, 2012.

The matter is now ready for decision.*fn1

III. LEGAL STANDARDS

Fed. R. Civ. P. Rule 64(a) provides that "every remedy is available that, under the law of the state where the court is located, provides for seizing a person or property to secure satisfaction of the potential judgment." Remedies available under this rule include attachment. Rule 64(b).

The effect of Rule 64 is to incorporate state law to determine the availability of prejudgment remedies for the seizure of property to secure satisfaction of a judgment ultimately entered. Granny Goose Foods, Inc. v. Brotherhood of Teamsters & Auto Truck Drivers Local No. 70 of Alameda Co., 415 U.S. 423, 436 n.10 (1974); Blastrac, N.A. v. Concrete Solutions & Supply, 678 F. Supp. 2d 1001, 1004 (C.D. Cal. 2010). Thus, California Code of Civil Procedure §§ 481.010-493.060 provide the standards for prejudgment writs of attachment in this case.

Attachment "is a remedy by which a plaintiff with a contractual claim to money (not a claim to a specific item of property) may have various items of a defendant's property seized before judgment and held by a levying officer for execution after judgment." Waffer Int'l Corp. v. Khorsandi, 69 Cal. App. 4th 1261, 1271 (1999) (emphasis omitted). California allows prejudgment attachments under limited circumstances as "a provisional remedy to aid in the collection of a money demand." Kemp Bros. Constr., Inc. v. Titan Elec. Corp., 146 Cal. App. 4th 1474, 1476 (2007). It is "a harsh remedy because it causes the defendant to lose control of his property before the plaintiff's claim is adjudicated." Martin v. Aboyan, 148 Cal. App. 3d 826, 831 (1983). Therefore, the requirements for the issuance of a writ of attachment are strictly construed against the applicant. Pos-A-Traction, Inc. v. Kelly-Springfield Tire Co., 112 F. Supp. 2d 1178, 1181 (C.D. Cal. 2000). The burden is on the applicant to establish each element necessary for an attachment order by a preponderance of the evidence. Loeb & Loeb v. Beverly Glen Music, Inc., 166 Cal. App. 3d 1110, 1116 (1985).

A writ of attachment may be issued "only in an action on a claim or claims for money, each of which is based upon a contract, express or implied, where the total amount of the claim or claims is a fixed or readily ascertainable amount not less than five hundred dollars." Cal. Civ. Proc. Code § 483.010(a). Attachment is permitted on unsecured claims or claims secured by personal property, but not on claims secured by real property. Cal. Civ. Proc. Code § 483.010(b). Attachment lies on any claim against a partnership or corporation or on claims against individuals that arise out of the conduct by the individual of a trade, business, or profession. Cal. Civ. Proc. Code § 483.010(c).

Apart from these requirements, a Court must find all of the following before attachment may issue: (1) the claim upon which the attachment is based is one upon which an attachment may be issued; (2) the plaintiff has established the probable validity of the claim upon which the attachment is based; (3) the attachment is not sought for a purpose other than recovery of the claim upon which the attachment is based; and (4) the amount to be secured by the attachment is greater than zero. Cal. Civ. Proc. Code § 484.090(a).

In order to establish the "probable validity" component, the plaintiff must show it is more likely than not that it will obtain a judgment against the defendant. Cal. Civ. Proc. Code ยง 481.190; seealsoPos-A-Traction, 112 F. Supp. 2d at 1182. "In determining the probable validity of a claim where the defendant makes an appearance, the court must consider the relative merits of the positions of the respective parties and make a determination of the probable outcome of the litigation." Loeb & Loeb, 166 Cal. App. 3d at 1120. Thus, it is not enough for the plaintiff to make out a prima facie case for breach of contract; rather, the plaintiff must also show that the defenses raised are "less than fifty percent likely to succeed." Pet Food Express, Ltd. v. Royal Canin USA Inc., 2009 WL 2252108, at *5 (N.D. Cal. July 28, 2009). If an applicant fails to rebut a factually-supported defense that would defeat its claims, the applicant has not established probable validity. SeeIntervest ...


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