United States District Court, C.D. California
CIVIL MINUTES - GENERAL O'
CHRISTINA A. SNYDER, District Judge.
Proceedings: (IN CHAMBERS): DEFENDANTS' MOTION FOR SUMMARY JUDGMENT (Dkt. #32, filed May 23, 2014)
PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT (Dkt. #36, filed June 9, 2014)
Plaintiffs Deakins Holding PTE Limited, Cristian Moga, C. Manda Holding B.V. and Sebastian Liusnea filed this action on March 17, 2014, against defendants NewNet Investment Group, LLC and NewNet Holdings, LLC (collectively, "defendants"). Dkt. 1. The complaint asserts two claims for breach of contract, one against NewNet Investment, and one against NewNet Holdings. Id. The claims arise out of a dispute as to the correct interpretation of a stock purchase agreement (the "Agreement") entered into by plaintiffs, defendants, and a company known as 3ple-Media, B.V. ("3ple"). Pursuant to the Agreement, plaintiffs transferred their stake in 3ple to defendants, in exchange for a series of payments. The parties disagree about the Agreement's terms governing the calculation of the amount and breakdown of one of the payments, defined in the Agreement as the "Earnout Amount."
Defendants filed a motion for summary judgment on May 23, 2014, dkt. 22, and plaintiffs filed a motion for summary judgment on June 9, 2014, dkt. 36. Oppositions and replies were exchanged on both summary judgment motions, dkts. 43, 44, 51, 52, and a hearing was held on July 7, 2014.
By order dated July 7, 2014, the Court denied both motions for summary judgment on the grounds that the relevant language of the Agreement was ambiguous. Dkt. 54 at 9. Accordingly, the Court concluded that it was appropriate to consider extrinsic evidence of the parties' intent in order to resolve the ambiguity, and directed the parties to conduct discovery into such evidence. Id. The parties were also instructed to provide the Court with supplemental briefing summarizing the evidence obtained during discovery. Id.
On December 1, 2014, both parties submitted supplemental briefs summarizing the relevant extrinsic evidence, dkts. 66, 67, and on December 8, 2014, the parties' each filed supplemental replies, dkts. 68, 69. The Court held a hearing on February 2, 2014. Having carefully considered the parties' arguments, the Court finds and concludes as follows.
A. The Stock Purchase Agreement
Most of the relevant facts are not in dispute. On September 25, 2010, plaintiffs, defendants, and 3ple entered into a stock purchase agreement (the "Agreement"). Plaintiffs' Statement of Uncontroverted Material Facts ("PSUMF") ¶ 1; Defendants' Statement of Genuine Disputes ("DSGD") ¶ 1. The Agreement provides that it shall be "governed, construed an interpreted in accordance with the laws of the State of New York, without giving effect to principles of conflicts of law." Defendants' Statement of Uncontroverted Material Facts ("DSUMF") ¶ 20; Plaintiffs' Statement of Genuine Disputes ("PSGD") ¶ 20. The Agreement also includes an integration clause, which provides that "[t]his Agreement (including the documents and instruments referred to herein) (a) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof." DSUMF ¶ 21; PSGD ¶ 21.
In accordance with the Agreement, plaintiffs sold and transferred all of their percentage shares in 3ple-Media to NewNet Holdings. DSUMF ¶ 2; PSGD ¶ 2. The Agreement requires NewNet Holdings to make a series of installment payments to plaintiffs, in consideration for plaintiffs' transfer of their shares in 3ple. DSUMF ¶ 4; PSGD ¶ 4. The Agreement provides for an initial payment of $2 million, followed by a second payment of $1.5 million, and a third payment of $1 million. DSUMF ¶¶ 5-7; DSUMF ¶¶ 5-7.
The Agreement also provides for the payment of an "Earnout Amount, if any, as determined in accordance with Section 1.4" of the Agreement. DSUMF ¶ 8; PSGD ¶ 8. Section 1.4 of the Agreement states the following:
"[Defendants] shall pay to [Plaintiffs] an amount (the "Earnout Amount"), which shall not exceed Three Million Dollars ($3, 000, 000), equal to: Twenty per cent of the difference between the Revenues of the Earnout Period and the Earnout Threshold. In the event such amount is less than One Million Five Hundred Thousand Dollars ($1, 500, 000), [Defendants] shall pay an additional amount equal to the difference between (i) One Million Five Hundred Thousand Dollars ($1, 500, 000) and (ii) twenty per cent of the difference between the Revenues of the Earnout Period and the Earnout Threshold (the "Additional Amount"). [Defendants] shall elect to pay the Additional Amount in either cash or common stock issued by [Defendants]."
DSUMF ¶ 10; PSGD ¶ 10. Defendants do not dispute that the Agreement provides that defendants shall pay the Earnout Amount to plaintiffs "no later than on the Earnout Payment Date, " as defined by the Agreement. PSUMF ¶ 4; DSGD ¶ 4. The Agreement provides that the term "Earnout Threshold" means $5 million. DSUMF ¶ 13; PSGD ¶ 13. Additionally, the parties do not dispute that 3ple's revenues during the Earnout Period are $1, 928, 784. PSUMF ¶ 8; DSGD ¶ 8. However, the basis for this action is that the parties dispute whether an Earnout Amount is due under the Agreement when 3ple's revenues during the Earnout Period are less than $5 million. See PSUMF ¶ 10; DSGD ¶ 10.
B. The Court's July 7, 2014 Order
By order dated July 7, 2014, the Court found that the Agreement's ambiguity rendered summary judgment inappropriate, since "both parties' interpretations find some support in the language of the Agreement." Dkt. 54 at 6.
Plaintiffs proffered two arguments as to why the language of the contract unambiguously supports their interpretation requiring a $1.5 million payout, even where the $5 million Earnout Threshold is not met. First, as the Court recognized, "a literal reading of Section 1.4(b)(i) results in an Earnout Amount becoming due, in the amount of $1.5 million, regardless of whether the revenues of the Earnout Period exceed $5 million." Dkt. 54 at 6-7. To illustrate plaintiffs' position, the Court explained:
The following hypothetical, in which revenues during the Earnout Period total $1 million, sets forth plaintiffs' interpretation. In this scenario, the Earnout Amount would be calculated as follows, according to a literal interpretation of Section 1.4(b)(i) of the Agreement: First, the difference between "Revenues of the Earnout Period" (here, $1 million) and the Earnout Threshold ($5 million), would be $4 million. Agreement § 1.4(b)(i). Twenty percent of that number is $800, 000. The parties do not appear to dispute that this amount is payable only in cash. Then, according to plaintiffs, an "Additional Amount" is also due, equal to the difference between $1.5 million and $800, 000, id., which comes to $700, 000. The Additional Amount is payable "either in cash or in common stock." Id. Thus, if revenues during the Earnout Period are $1 million, then, according to plaintiffs, they are entitled to a payment of $800, 000 in cash and $700, 000 in cash or common stock. Likewise, if revenues during the Earnout Period are $9 million, then the difference between "Revenues of the Earnout Period" (here, $9 million) and the Earnout Threshold ($5 million), would be $4 million. Agreement § 1.4(b)(i). Twenty percent of that number is $800, 000. As above, an Additional Amount becomes due, equal to the difference between $1.5 million and $800, 000, which amounts to $700, 000. Thus, if revenues during the Earnout Period are $9 million, then, according to plaintiffs, they are entitled to a payment of $800, 000 in cash and $700, 000 in cash or common stock, the exact same amount and cash versus stock mix as when Revenues of the Earnout Period were $1 million.
Id. at 6. Second, plaintiffs proffered a signed Letter of Intent dated July 30, 2010 ("July 30, 2010 LOI"), directing the court to the following language contained therein:
If no Earn-Out level is achieved, or the parties are unable to agree on a mutually acceptable performance metric, [Defendants] will structure a final note (Third Note) equal to $1.5 million, of which [Defendants] would maintain the exclusive right to either pay in cash or convert into equivalent Stock ownership.
Id. at 7. Plaintiffs asserted that this language was incorporated into the final Agreement in the form of Section 1.4(b)(i), and, accordingly, that Section 1.4(b)(i) should ...