Over the years I've become less enamored with arbitration as an alternative to litigating complex business cases in court, mostly because the traditional trade-off between abundant due process protections (court) versus expediency and cost savings (arbitration) has eroded as motion practice and generous discovery including depositions have become more common in arbitration.
But if there's one important advantage that arbitration still has over litigating in court, it's the fact that everything that happens in arbitration is kept under wraps, whereas just about everything that happens in court is publicly available online thanks to almost universal e-filing, at least in the business courts.
Last month, Manhattan Commercial Division Justice Joel M. Cohen issued a decision in a case centering on the plaintiff's single fraud claim arising from the involuntary redemption and appraisal of his membership interest in an LLC after his employment was terminated. Read on and see if you agree, the case would have been a good candidate for a confidential arbitration.
Background
In Landau v DGital Media, LLC, the plaintiff co-founded DGital in 2015, described in the decision as "an audio engagement company created to distribute and monetize 'spoken word products,' including podcasts."
In July 2016, the Board delegated substantially all its power to its soon-to-be CEO with whom plaintiff already was on the outs. The relationship went from bad to worse when the CEO subsequently told plaintiff he was "out" of the company and asked him to stop coming to the office.
The company ultimately terminated plaintiff's employment in October 2017. DGital then exercised its call right to redeem plaintiff's approximate 16% membership interest to be valued by an independent appraiser. Following the appraisal, in May 2018, plaintiff and DGital entered into a Redemption Agreement and Release ("R&R") under which plaintiff released all claims regarding the appraisal except for fraud.
In between plaintiff's alleged ouster from the office in 2016 and his post-termination buyout, one of DGital's investors formed a company in March 2017 known as Crossover. In his lawsuit, the plaintiff contended that Crossover essentially was de facto owned by DGital, using its assets and resources to conceal from one of DGital's major clients its business relationship with one of its other major clients.
In July 2017, DGital sold a 45% stake in the company's operating subsidiary for an undisclosed amount.
The Lawsuit
After his buyout closed, in October 2018 plaintiff sued DGital and two of its principals asserting a series of claims (not including fraud) centered on the alleged formation and use of Crossover to divert DGital assets and resources. The suit was dismissed in early 2019 based on the R&R release of all claims other than fraud.
The plaintiff followed up in July 2019 with a new, single-count lawsuit alleging that DGital fraudulently induced him into signing the R&R by falsely representing that DGital had "no ownership interest in Crossover and is not in possession of information regarding Crossover's ownership or corporate structure," along with several other allegedly false statements concerning Crossover. Plaintiff also contended that DGital deleted damaging information about Crossover from the data room used for the July 2017 sale of a stake in DGital's operating subsidiary and that Crossover's value "should have been incorporated into the appraised value of Plaintiffs' ownership interest" in DGital.
What Were They Thinking?
If, as the WWII slogan goes, loose lips sink ships, it equally can be said loose emails sink lawsuits.
The 2019 lawsuit survived an initial pre-answer motion to dismiss. There followed several years of document and deposition discovery. In mid-2023, DGital moved for summary judgment.
Eye popping possibly describes some of the emails that DGital obtained from the plaintiff in discovery.
The emails shared among plaintiff, family members, and his counsel revealed: (a) plaintiff knew of the alleged misrepresentations and omissions underlying his fraud claim, on which he claimed to have reasonably relied in entering into the R&R, before his termination in October 2017 and long before he signed the R&R in 2018, and (b) plaintiff deliberately delayed suing DGital until after he closed on the buyout of his shares in 2018.
The emails cited by Justice Cohen in his decision include:
- Plaintiff in a November 2016 email: "We have a plan to get [the CEO] personally. It will completely mind fuck him ;)"
- Plaintiff's wife's email around the same time: "We want to make him squirm...I never felt this vengeful towards anyone in my life."
- Plaintiff to his brother-in-law in May 2017, referring to Crossover: "This is crazzzzy. Fraud with the UFC. Fraud with me. What am I missing that they think they could do this without informing me."
- Plaintiff to his counsel in June 2017, referring to Crossover: "It's one company with the exception of Ron being in a different floor..."
- Plaintiff's brother-in-law to plaintiff in July 2017 referring to the data room: "That's gonna be sterile beyond sterile!" to which plaintiff replied "Yes. We're not looking for info. We're looking for omissions. Hope he didn't sanitize that."
- Plaintiff in a July 2017 email chain: "Just got off the phone with [plaintiff's counsel] and we decided to drill baby drill down on [Crossover]. That's it from the turret. Peace out and love :)"
- Also in July 2017, in response to an inquiry from plaintiff's counsel, DGital's general counsel disclaimed knowledge of Crossover's ownership and corporate structure. Hours before receiving that response, plaintiff's counsel wrote to plaintiff: "We continue to drip drip drip. Create a record. Let damages and, just as important, proof grow. . . . This is a wolverine trap. You don't come after the wolverine with a 2×4. You let it get stuck in your trap" [emphasis added].
- Plaintiff to his brother-in-law around that same time: "REVENGE. Your thoughts for the counter offensive[?]" to which the brother-in-law replied: "I like that [plaintiff's lawyer is] getting answers in drips and that each is burying them a bit further . . .."
- Plaintiff's wife around that same time: "I think Crossover is the leverage we have to cut a deal with those assholes, the opportunity to cash out is when [DGital] is flush with cash."
In the course of the independent appraisal of plaintiff's membership interest in 2018, despite having the opportunity to do so, plaintiff did not raise any issue with the appraiser about including Crossover in the valuation of DGital.
The Court's Ruling
Justice Cohen's analysis notes that plaintiff's fraud claim principally relies on (a) the alleged misrepresentations in the July 2017 email from DGital's general counsel replying to plaintiff's counsel's email inquiring about Crossover, and her failure to respond to follow up questions, and (b) DGital's listing of Crossover as a customer/advertising agent (rather than as a part of DGital) in their submission to the independent appraiser.
The claim fails, the judge writes, because plaintiff "cannot demonstrate justifiable reliance on any of these statements," as the "contemporaneous evidence bears that out quite colorfully," referring to the many emails. As he further explains:
In other words, Plaintiffs knew the facts underlying their legally dubious "de facto ownership" theory when the alleged misrepresentations were made—long before the buyout was effectuated—and elected not to raise these concerns to Defendants or the appraiser. Instead, the contemporaneous communications indicate a purposeful strategy of gathering evidence for a future litigation. . . . While Plaintiffs seek to downplay these and similar communications as "speculative banter," they cannot defeat summary judgment by contradicting their own unfavorable testimony to create an issue of fact."
Moreover, Plaintiffs provide no evidentiary basis for concluding that the appraised value would have changed had the appraiser been aware of the facts underlying Plaintiffs' "de facto ownership" theory. There is no allegation or evidence suggesting that DGital had any financial interest in Crossover that would have increased the appraised value of DGital (and thus ultimately [plaintiff's] compensation). Accordingly, summary judgment is granted to Defendants on Plaintiffs' fraud claim.
The Court Awards Sanctions Against Plaintiff
Under New York law, a litigant who engages in "frivolous conduct," defined to include assertion of material factual misstatements that are false, can be sanctioned by saddling them with the opposing party's legal fees.
DGital asked Justice Cohen to find that plaintiff engaged in frivolous litigation conduct and to award its legal fees. The judge obliged, writing:
Here, Defendants provide numerous examples of Plaintiffs' awareness of the facts underlying the fraud claim well before the buyout, as well as Plaintiffs' statements to the contrary in this litigation. The contemporaneous record makes clear that Plaintiff made a tactical decision not to raise the question of Crossover's ownership or "fraud," and to instead create a litigation record for future use. And then, despite agreeing to a release of claims that waived all claims other than fraud, he nevertheless pursued a fraud claim despite unmistakable awareness that he was not misled by the purportedly fraudulent statements upon which this case rests. Thus, the claim was frivolous.
Last week, DGital's counsel submitted its request for an award of costs and attorney's fees just under $800,000.
Moral of the story: Trying to manufacture a litigation "trap" is at least as likely to backfire as it is to succeed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
