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Cummings v. Worktap, Inc.

United States District Court, N.D. California, Oakland Division

September 4, 2019




         The instant action arises from a contract dispute principally between Plaintiffs Jonathan Cummings and Hilary Hegener (collectively “Plaintiffs”) and Defendant Worktap, Inc. (“Worktap”). The Second Amended Complaint (“SAC”), the operative pleading, alleges that Worktap failed to repay two convertible promissory notes from 2015 and 2016 (collectively “Notes”) in the amounts of $150, 000 and $50, 000, respectively, plus interest. The first and second causes of action are for breach of contract against Worktap. The third and fourth causes of action allege that Defendants Mark Robinson (“Robinson”) and David Lee (“Lee”) (together “Individual Defendants”) are personally liable on the Notes as alter egos of Worktap. As relief, Plaintiffs seek repayment of the Notes, plus interest and attorney's fees. The Court has entered Worktap's default, leaving only the Individual Defendants as active party-defendants in the action.

         The parties are now before the Court on Plaintiffs' Motion for Summary Judgment Against Defendants Mark Robinson and David Lee. Having read and considered the papers submitted and being fully informed, the Court DENIES Plaintiffs' motion and sua sponte GRANTS summary judgment for the Individual Defendants. The Court, in its discretion, finds this matter suitable for resolution without oral argument. See Fed.R.Civ.P. 78(b); N.D. Cal. Civ. L.R. 7-1(b).

         I. BACKGROUND

         A. Factual Summary

         1. Formation of Worktap

          Robinson founded Worktap in 2012 while working out of his home. Robinson Decl. ¶ 4, Dkt. 107-2. Robinson incorporated Worktap on January 9, 2012. Id. & Exs. A-E. To incorporate Worktap, Robinson used LegalZoom, a legal form site, to draft and file the requisite documents with the California Secretary of State. Id. Robinson also completed other tasks and paperwork, such as the corporation's by-laws, required to form and maintain a corporation. Id. In accordance with Worktap's by-laws, Robinson appointed himself as the sole Board of Director. Id. ¶¶ 4-5. A few days after incorporating Worktap, Robinson executed a stock purchase agreement in which he invested $10, 000 in exchange for 10 million shares of Worktap common stock. Id. ¶ 6 & Ex. D. Over the course of the next two years, Robinson used his $10, 000 investment and “sweat equity” to grow Worktap into a viable business. Id. ¶ 8. Robinson eventually completed development of an “onboarding platform that became the basis of Worktap's consumer product.” Id.

         On January 15, 2014, Worktap enacted a resolution to appoint Defendant Lee as a board member. Id. ¶ 9. A few months later, when Worktap's product was ready for customer presentations, Lee began working at Worktap as its Senior Vice President of Sales. Lee Decl. ¶ 3, Dkt. 107-1. Although his annual salary was $160, 000, he typically received only double the minimum wage due to Worktap's cash flow issues. Id. ¶ 6. In February 2015, Lee received 16 million shares of Worktap, with 25% vesting immediately and the remainder vesting over time. Id.

         In the meantime, in or about August 2014, Worktap released its product and began to make customer sales. Robinson Decl. ¶ 14. Around the same time-period, Worktap began renting an office in San Rafael, California, and opened a bank account at the Bank of Marin. Id. ¶¶ 11, 12. Worktap had not opened a bank account before then because the company was not previously transacting business. Id. ¶ 11. Over the next year, Worktap hired four additional employees, including Christopher Cummings (“Chris”), the brother of Plaintiff Jonathan Cummings. Id. ¶¶ 14-16.[1]

         Worktap's relationship with Chris came about because Lee and Chris' children attended the same school in Marin County. Lee Decl. ¶ 7. In March 2015, Worktap initially offered Chris an “advisory” role, as it would have been too costly to hire him as a full-time employee. Id. However, Chris told the Individual Defendants that he would use his Ivy League connections to foster significant investments in Worktap. Id. ¶ 8. Chris further represented that if he were hired, his sibling-Plaintiff Jonathan Cummings-would make an early investment in the sum of $150, 000. Id. Persuaded Chris would add value as an employee, Worktap hired him in April 2015 to act as the company's Senior Vice-President of Corporate Development and Finance. Robinson Decl. ¶ 19. In that capacity, Chris had two primary responsibilities: (1) fundraising (i.e., securing outside investments in Worktap); and (2) finance and accounting. Lee Decl. ¶ 8. As compensation, Chris was to be paid a salary $170, 000 per year and receive a 3% equity stake in Worktap. Id. In Worktap's view, Chris' successful fundraising was essential to the continued operation of the company. Robinson Decl. ¶ 11.

         2. Fundraising

         Prior to Chris' hiring, Lee began to solicit investors in or about August 2014. Id. ¶ 13. Between October 1, 2014, and March 22, 2015, Worktap raised $319, 000 from different investors. Id.

         As noted, Chris was hired by Worktap in April 2015. In July 2015, he secured $350, 000 in capital from various investors, including $150, 000 from Plaintiffs. 4/19/18 Order at 2, Dkt. 75. The terms of Plaintiffs' investment were memorialized in a Note Purchase Agreement, which included a Convertible Promissory Note (collectively “2015 Note”), dated April 13, 2015. Id. In October 2015, another investor invested $50, 000.

         Robinson Decl. ¶ 24. Nevertheless, Chris' financing efforts were not resulting in the level of investment the company had expected. Id. ¶ 24. As such, in November 2015, Robinson informed Chris that if he were unable to raise additional monies, the company would be unable to make payroll and would have to lay off employees, including Chris. Id.

         In December 2015 or January 2016, Chris informed Robinson that he might be motivated to work harder if Worktap increased his equity stake in the company. Id. ¶ 25. Shortly thereafter, on January 27, 2016, Plaintiffs invested an additional $50, 000 in Worktap. 4/19/18 Order at 2. The investment was memorialized in a Note Purchase Agreement and Convertible Promissory Note (collectively “2016 Note”).

         Throughout 2016, Worktap continued to struggle financially and experienced cash flow issues due to the lack of funding. Id. ¶ 26. Robinson again informed Chris that since he was Worktap's highest paid employee, the company would be unable to maintain his employment unless he secured additional investments. Id. Beginning in December 2015 and throughout 2016, Chris loaned monies to Worktap that were used, in part, to ensure that Worktap could make payroll. Id. ¶ 28; C. Cummings Decl. ¶¶ 44-46, Dkt. 101. Worktap repaid those loans, often within days. Robinson Decl. ¶ 28.

         In September 2016, Chris secured his final investment in the sum of $25, 000. Id. ¶ 29. In December 2016, Chris told Robinson that if he did not receive additional equity, he would leave. Id. ¶ 30. Robinson responded that he was prepared to accept Chris' resignation, but Chris said he was not serious. Id. However, Chris thereafter ceased communicating with Robinson and Lee, abandoned his payroll duties and “left Worktap locked out of its payroll provider account with Tri-Net.” Id. Worktap eventually terminated Chris in January 2017 for insubordination and abandonment of duties. Id. ¶ 31. Following Chris' termination, Robinson learned that Chris allegedly had engaged in a host of misconduct, including, inter alia: completely mismanaging his accounting and financial duties; misrepresenting the company's financial status; and writing company checks to himself. Id. ¶¶ 31-33. Chris also failed to provide the Individual Defendants documents pertaining to the promissory notes executed during the 2015-2016 time-period. Id.

         B. Procedural History[2]

         Plaintiffs filed their initial Complaint on October 27, 2017, and a First Amended Complaint on December 18, 2017. Dkt. 1, 18. Plaintiffs filed their SAC on January 5, 2018. Dkt. 21. The first and second causes of action are for breach of contract based on the 2015 Note and 2016 Note, respectively. The third and fourth causes of action allege alter ego liability as to Robinson and Lee. Defendants answered the SAC and filed a counterclaim against Cummings. Dkt. 26, 28. As to the 2016 Note, the Counterclaim alleges, inter alia, that Cummings and his brother Christopher altered the parties' agreement to give Plaintiffs more favorable discount rates and valuation and conversion terms. Counterclaim ¶ 18, Dkt. 28.

         On October 10, 2018, the Court granted defense counsel's motion to withdraw as counsel of record. Dkt. 88. The Court stayed the action for thirty days to allow Worktap- a corporation which can only appear in federal court through an attorney-the opportunity to retain new counsel. Id. Worktap failed to retain new counsel within the specified time-frame, which resulted in its default being entered by the Clerk on November 20, 2018. Dkt. 94. The Individual Defendants have since retained new counsel. Dkt. 105.

         On November 11, 2018, Plaintiffs submitted a proposed order for the entry of default judgment against Worktap. Dkt. 92. Because the proposed order was not accompanied by a motion or application, the Court struck it from the record. Dkt. 93.

         Shortly thereafter, Plaintiffs filed a motion seeking leave to file a motion for reconsideration and to modify the Court's pretrial schedule. Dkt. 95. They claimed, among other things, that a scheduling modification was necessary so that they could file out-of-time motions for default judgment as to Worktap and for summary judgment as to the Individual Defendants. Id.[3] The Court denied all requests for lack of good cause. Dkt. 96 at 3-6. However, in the interests of judicial efficiency, the Court directed Plaintiffs to file a motion for summary judgment as to the alter ego issue by no later than January 4, 2019. Id. at 6. The Court further indicated that upon resolution of Plaintiffs' summary judgment motion, the Court would set a briefing schedule on Plaintiffs' motion for default judgment as to Worktap. Id.

         On December 24, 2018, Plaintiffs filed an administrative motion for leave to submit a 35-page motion for summary judgment. Dkt. 97; see Civ. L.R. 7-2 (limiting motions to 25 pages). The Court denied the request but sua sponte extended the filing deadline to January 11, 2019 “[t]o facilitate Plaintiffs' efforts to file a concise motion.” Dkt. 98 at 2. Notwithstanding the week-long extension provided, Plaintiffs, without seeking or obtaining prior leave of court, filed their untimely motion for summary judgment on January 12, 2019. Dkt. 100.[4] Accompanying the motion is an administrative motion to seal certain of the exhibits presented in support of the motion. Dkt. 99. Plaintiffs did not serve unredacted copies of the subject exhibits until January 21, 2019. Gibson Decl. ¶ 5, Dkt. 107-2.

         Plaintiffs' summary judgment motion seeks a determination, as a matter of law, that the Individual Defendants are alter egos of Worktap and therefore are personally liable to Plaintiffs for repayment of the Notes, plus interest and attorney's fees. Aside from a declaration from their counsel, the substance of Plaintiffs' motion is based entirely on the accompanying declaration of Chris. The Individual Defendants oppose Plaintiffs' motion on the merits and as untimely. In addition, they object to various statements and exhibits contained in Chris' declaration. The motion is fully briefed and is ripe for adjudication.[5]


         “[S]ummary judgment is appropriate where there ‘is no genuine issue as to any material fact” and the moving party is “entitled to a judgment as a matter of law.'” Alabama v. North Carolina, 560 U.S. 330, 344 (2010) (quoting Fed. Rule Civ. Proc. 56(c)) (citing cases). “The burden of establishing the nonexistence of a ‘genuine issue' is on the party moving for summary judgment.” Celotex Corp. v. Catrett, 477 U.S. 317, 330 (1986). “[A] party seeking summary judgment always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of ‘the pleadings, depositions, answers ...

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