In a decision blasting the parties’ attorneys for “impos[ing] needless burdens on busy courts,” a federal judge in Manhattan has instructed a Hong Kong-based company to pay $21 million it had promised in exchange for shares in a marketing company.Southern District Judge William H. Pauley III said in BrandAid v. Biss, 03 Civ. 5088, that even though BrandAid “misrepresented … its corporate status in Delaware and its financial condition in order to procure” an investment by Cyberian Enterprises, Cyberian breached its contract with BrandAid. At the same time, however, he awarded only a nominal $1 in damages to BrandAid for the fraud he determined that Cyberian and co-defendant Steven S. Biss, a Virginia-based attorney, had committed.After announcing his ruling, Pauley concluded his opinion by saying, “This case presents a cautionary tale about the potential for advocates to obscure the issues and impose needless burdens on busy courts. The action began with a groundless application for preliminary relief. Incessant pretrial sparring, ad hominem attacks and a barrage of frivolous motions on the eve of trial impeded a resolution of the matter.”The judge did not single out any one attorney for criticism but said the parties’ post-trial submissions “further clouded” their “unfocused” trial presentations.
“Even on remand, the lawyers continued to obfuscate, leaving this Court to grope down a dimly lit corridor,” Pauley said. “Time will tell whether this Memorandum and Order finally puts an end to the madness.”
BrandAid’s attorney immediately vowed to appeal.
BrandAid was a marketing company incorporated in Delaware that installed supermarket kiosks and sold advertising space. Cyberian is a Hong Kong-based investment entity.
This is Pauley’s second ruling in the case. Noting after a three-day bench trial in 2005 that BrandAid had misrepresented where it was licensed and whether it was in good standing (the company’s corporate charter had been voided because it had failed to pay franchise taxes), he dismissed all allegations against the parties, finding that both had acted poorly. BrandAid Mtg. Corp. v. Biss, 418 Supp. 2d 329 (S.D.N.Y. 2005).
But the 2nd U.S. Circuit Court of Appeals overruled the judge in September 2006. In BrandAid Mktg. Corp. v. Biss, 462 F.3d 216, a panel concluded that BrandAid’s misrepresentations about its financial health were not severe enough to cancel Cyberian’s failure to pay for BrandAid stock (NYLJ, Sept. 6, 2006).
In his latest decision, Pauley held that BrandAid’s “misrepresentations rendered the contract voidable and subject to rescission by Cyberian. However, Cyberian made no effort to rescind the [agreement] once it learned of BrandAid’s corporate status in May 2003.”
According to the decision, in November 2002, Cyberian approached BrandAid and offered to invest $21 million in exchange for 23.5 million shares of stock. At the time, BrandAid had $304,000 in assets and more than $5 million in liabilities.
Cyberian assured BrandAid that the millions it planned to invest were “currently placed in New York at one of the largest U.S.A. Banks.” But Pauley said that Cyberian “never had the cash in New York” to complete the deal.
On Nov. 14, 2002, the parties signed an agreement requiring BrandAid to issue 23.5 million shares in exchange for Cyberian handing over its entire $21 million in a single payment within 30 days.
When Cyberian failed to pay on the closing date, the parties entered into an amended agreement under which Cyberian agreed to pay for the shares in 36 monthly installments starting on May 23, 2003. The shares would be held in escrow by Biss, who Pauley said would “release a proportional number of shares with each monthly payment.”
The judge said that “incredibly,” just two weeks after agreeing to the monthly installment plan, Cyberian changed its proposal, suggesting that instead of cash it would transfer real estate in China to BrandAid.
Biss stated that Cyberian, as a BrandAid shareholder, consented to the real estate deal. He demanded that BrandAid accept the proposal immediately, despite the fact that Cyberian had never paid for its shares.
Cyberian failed to make the first payment on May 23, 2003, under the amended agreement. In a letter written that same day, Biss, claiming to be a BrandAid shareholder and to “represent the holders of outstanding stock” by proxy, informed BrandAid that he was replacing its management with Cyberian associates.
“Also on May 23, 2003, an agent of Cyberian, purporting to be the newly installed president of BrandAid, accepted the Chinese real estate in lieu of cash consideration for the shares issued to Cyberian,” Pauley wrote. “Biss, as escrow agent, then released 23.5 million BrandAid shares to Cyberian on May 30.”
BrandAid’s original management demanded the return of the escrowed shares, but Biss refused. As a result, BrandAid was left with no choice but to default on its debt and ceased operations in July 2003.
A FALSE PROMISE
BrandAid filed suit against Cyberian a month later, claiming that Cyberian never meant to pay for the shares and accusing Cyberian and Biss of executing a fraudulent takeover.
Pauley held in this latest ruling that BrandAid had proven that Cyberian breached its contract and that it was entitled to the benefit of its bargain — the $21 million. And he ruled that Cyberian and Biss had defrauded BrandAid.
“As previously noted by this Court, the Defendants’ insistence that it had $21 million in cash ‘was false’ and ‘when Biss forwarded Cyberian’s letter [claiming the existence of the $21 million] to BrandAid, he was facilitating Cyberian’s deception, or consciously avoiding the truth,” the judge said.
Moreover, he said BrandAid had proved by clear and convincing evidence that Cyberian’s “false promise was made to induce it to part with 23.5 million shares.”
However, the judge said BrandAid “has not offered any viable method for quantifying its loss due to Defendants’ fraud.”
He said that while the 2nd Circuit was “technically correct” in noting that BrandAid was a publicly traded company when it brought suit, “the larger reality” was that by that time BrandAid had already closed its doors.
“Moreover, it is clear that BrandAid was insolvent long before that, with liabilities far exceeding its assets by the time it began negotiating with Cyberian,” Pauley said. “BrandAid’s abrupt demise raises questions about whether BrandAid shares were worth anything substantial when BrandAid transferred them, a suspicion reinforced by BrandAid’s failure to present any evidence of their actual value at trial.”
Pauley is unlikely to get his wish that his latest decision will put an end to the “madness” of the dispute. Paul W. Siegert, a Manhattan solo practitioner who represents BrandAid, said his client plans to appeal.
Siegert said in an interview that “any madness which occurred in this case was the result of Judge Pauley short-circuiting the trial by directing counsel to submit their direct cases in paper form.”
Siegert said his client submitted its direct testimony in paragraph form, but defendants submitted their testimony without numbered paragraphs in a “story book” fashion.
“It was impossible for [me] to specifically object to the defendants’ assertions,” he said.
Paul Sloan, BrandAid’s chairman, chief operating officer and secretary, said in an interview that Cyberian was a “sham” operation. As a result, he said he did not expect to receive the $21 million BrandAid is owed.
“There is a saying that you can’t get blood from a stone,” Sloan said. “But in this case there is no stone.”
Biss, who represented himself in the matter, declined to comment. Meanwhile, the Virginia State Bar has filed charges of misconduct against him in connection with the case.
Biss is accused of making misrepresentations to BrandAid about the availability of funds. The bar also alleges that he breached his fiduciary duties in connection with the escrow, violated federal securities laws, helped Cyberian to commit criminal or fraudulent acts, and made misrepresentations before Pauley and to the bar.
Robert Popescu of Manhattan’s Popescu, Iosepovici & Associates is listed on the court docket as representing Cyberian and Biss. But when contacted, Popescu said he has not been involved in the case since Pauley conducted his original three-day bench trial.
Source: New York Law Journal