Conru v. Buckheit

• Court: District Court, N.D. California
• Decided: March 21, 2024
• Docket: 5:23-cv-04056
• Status: Unknown

Opinion

1 2 3 UNITED STATES DISTRICT COURT 4 NORTHERN DISTRICT OF CALIFORNIA 5 SAN JOSE DIVISION 6 7 ANDREW CONRU, Case No. 23-cv-04056-BLF

8 Plaintiff, ORDER DENYING MOTION TO 9 v. DISMISS

10 JONATHAN B. BUCKHEIT, [Re: ECF No. 15] 11 Defendant.

12 13 Plaintiff Andrew Conru brings this action alleging Defendant Jonathan Buckheit breached 14 a Call Option Agreement (“COA”) entered into by the parties in 2021 when Defendant refused 15 Plaintiff’s attempt to execute the option two years later. ECF No. 1 (“Compl.”) ¶¶ 29–30. 16 Defendant moves to dismiss the complaint, arguing that the option lapsed because “Plaintiff failed 17 to timely deliver the expressly required specific consideration” required by the COA. ECF No. 15 18 (“Mot.”) at 2; ECF No. 21 (“Reply”). Plaintiff opposes the motion, arguing that the COA is 19 irrevocable because it was based on consideration, that it was otherwise irrevocable during a 20 vesting period defined in the COA, and that a waiver provision in the COA prevents the option 21 from lapsing. ECF No. 17 (“Opp.”). 22 For the reasons described below, Defendant’s motion is DENIED. 23 I. BACKGROUND 24 The following allegations are taken from the complaint and taken as true for the purposes 25 of this motion. In 1996, Plaintiff founded the company that became FriendFinder Networks, Inc. 26 (“FFN”), which hosted an online dating and adult content platform. Id. ¶ 10. Plaintiff sold the 27 company in 2007, and it went bankrupt in 2013. Compl. ¶¶ 11–12. In 2015, Defendant became 1 On February 18, 2021, the parties entered into and signed the COA. Compl. ¶ 1; ECF No 2 1-1 (“COA”). The COA grants Plaintiff the ability to secure the option (“Call Right”) to purchase 3 a declining number of Defendant’s shares in FFN. Compl. ¶¶ 15–17; COA § 1(a). Section 1(a) of 4 the COA contains the terms of the Call Right:

5 1. Grant of Call Option. (a) Right to Purchase. Subject to the terms and conditions of this 6 Agreement, for a period commencing on the date hereof and ending at the close of business on a date that is twelve (12) years from the 7 date hereof (the “Exercise Period”), Grantee shall have the right from time to time (the “Call Right”), but not the obligation, to cause 8 Grantor to sell all or a portion of the Shares, subject to the vesting provisions set forth in Section 1(b) below, at the Call Purchase Price 9 (as defined in Section 2 of this Agreement). To secure this Call Right, Grantee shall pay a fee of $1,000.00 to Grantor (the “Call Option 10 Fee”). 11 COA at 1 (emphasis in original). Section 1(b) contains a vesting schedule whereby the shares 12 available to Plaintiff for purchase decreases by 1/48 of the total amount of shares each quarter for 13 12 years. Id. Also relevant to this litigation is section 7 of the COA, the “Waiver Provision”:

14 7. Amendment and Modification; Waiver. . . . No waiver by any party of any of the provisions hereof shall be effective unless explicitly set 15 forth in writing and signed by the party so waiving. Except as otherwise set forth in this Agreement, no failure to exercise, or delay 16 in exercising, any rights, remedy, power or privilege arising from this Agreement shall operate or be construed as a waiver thereof; nor shall 17 any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the 18 exercise of any other right, remedy, power or privilege. 19 Id. at 3. 20 The parties executed at least four other agreements within two weeks of signing the COA. 21 First, also on February 18, 2021, Defendant directly purchased all right, title, and interest in 22 350,297 common shares, representing 51% ownership of FFN, from Kestrel Industries I LLC and 23 Kestrel Industries II LLC (“Kestrel affiliates”). Compl. ¶¶ 20; ECF No. 1-2 (“Purchase 24 Agreement”). That purchase allowed Defendant to assume majority control of FFN for the 25 nominal sum of $1,000. Compl. ¶ 21; Purchase Agreement at 1. The second agreement, also 26 entered into on February 18, 2021, is an amendment to FFN’s Stockholders’ Agreement reflecting 27 Plaintiff’s consent to Defendant’s purchase of the FFN shares. Compl. ¶ 22; ECF No. 1-3. 1 obtaining the Shares pursuant to the Purchase Agreement, Grantor [Defendant] and Grantee 2 [Plaintiff] agree that they will execute an amendment to the Amended and Restated Stockholders’ 3 Agreement[.]” COA at 4. Third, also dated February 18, 2021, is “a Note Purchase and Sale 4 Trade Confirmation and Agreement,” where Plaintiff “(acting through his trust) agreed to 5 purchase debt instruments held by the Kestrel affiliates for a sum exceeding $60 million.” Compl. 6 ¶ 23; ECF No. 1-4. Fourth, on March 1, 2021, the parties amended the Stockholders’ Agreement, 7 to “provide[] additional benefits to Buckheit, including director representation on FFN’s Board of 8 Directors.” Compl. ¶ 24; ECF No. 1-5. 9 Almost two years after the parties signed the COA, on February 3, 2023, Plaintiff sent a 10 certified letter to Defendant, referencing the Call Option Agreement and enclosing a $1,000 check 11 for payment of the Call Option Fee. Compl. ¶ 29; ECF No. 1-6. Defendant responded, stating that 12 he would return the check, that Plaintiff could no longer “consummate the call option” because 13 Conru had not tendered the payment within a reasonable time, and that Defendant had revoked the 14 option. Compl. ¶ 30. 15 On August 10, 2023, Plaintiff filed the instant action, alleging four causes of action: 1) 16 declaratory judgment, 2) breach of contract, 3) breach of covenant of good faith and fair dealing, 17 and 4) specific performance. Id. ¶¶ 40–65. 18 II. LEGAL STANDARD 19 “A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a 20 claim upon which relief can be granted ‘tests the legal sufficiency of a claim.’” Conservation 21 Force v. Salazar, 646 F.3d 1240, 1241–42 (9th Cir. 2011) (quoting Navarro v. Block, 250 F.3d 22 729, 732 (9th Cir. 2001)). When determining whether a claim has been stated, the Court accepts 23 as true all well-pled factual allegations and construes them in the light most favorable to the 24 plaintiff. Reese v. BP Expl. (Alaska) Inc., 643 F.3d 681, 690 (9th Cir. 2011). However, the Court 25 need not “accept as true allegations that contradict matters properly subject to judicial notice” or 26 “allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable 27 inferences.” In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008) (citation omitted). 1 matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 2 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A 3 claim is facially plausible when it “allows the court to draw the reasonable inference that the 4 defendant is liable for the misconduct alleged.” Id. On a motion to dismiss, the Court’s review is 5 limited to the face of the complaint and matters judicially noticeable. MGIC Indem. Corp. v. 6 Weisman, 803 F.2d 500, 504 (9th Cir. 1986); N. Star Int'l v. Ariz. Corp. Comm'n, 720 F.2d 578, 7 581 (9th Cir. 1983). 8 III. DISCUSSION 9 A. Claims One, Two, and Four 10 Defendant argues that claims one, two, and four fail as a matter of law for three reasons: 1) 11 that the “Call Right Option” lapsed because Plaintiff did not pay the required specific 12 consideration of $1000 at signing of the agreement or within a reasonable time thereafter, Mot. at 13 8–13; 2) that the time period with which Plaintiff could exercise the option is not 12 years (the 14 “Exercise Period”), id. at 14–15; and 3) that the “Waiver Provision” does not prevent the option 15 from lapsing, id. at 15–16. The Court addresses each in turn. 16 1. “Call Right Option” Lapse 17 Defendant first argues that the claims must be dismissed as a matter of law because nearly 18 two years passed after the parties signed the agreement and before Plaintiff attempted to pay the 19 $1000 “Call Option Fee” to “secure [the] Call Right,” which caused the option to lapse. Mot. at 20 9–14. Plaintiff responds that there was consideration other than the $1000, and that the option is 21 therefore irrevocable. Opp. at 10–15. Alternatively, Plaintiff argues that even if the $1000 was 22 the consideration, whether the option lapsed is a factual determination not appropriate for the 23 pleadings stage. Id. at 15–22. The Court first addresses consideration, then whether the option 24 lapsed. 25 a. Consideration 26 “An option based on consideration, whether it be the proverbial peppercorn or some other 27 detriment, is itself a binding contract within the traditional and accepted sense.” Torlai v. Lee, 270 1 consideration is irrevocable. See id. (“an option based on consideration contemplates two separate 2 contracts, i.e., the option contract itself, which for something of value gives to the optionee the 3 irrevocable right to buy under specified terms and conditions, and the mutually enforceable 4 agreement to buy and sell into which the option ripens after it is exercised”). 5 Defendant argues that the COA was not irrevocable because the $1000 “Call Option Fee,” 6 which Plaintiff did not pay for nearly two years, was the sole consideration of the COA. Mot. at 7 12–13. Plaintiff does not dispute that he did not attempt to pay the $1000 Call Option Fee for 8 nearly two years. Rather, Plaintiff contends that the COA was executed in conjunction with 9 several other agreements, including Defendant’s purchase of the majority stake of FFM and the 10 amendments to FFN’s stockholder agreement, and argues that the broader agreements were the 11 consideration. Opp. at 11. 12 Indeed, the Complaint alleges that “[t]he COA was part of a three-way transaction that also 13 involved a banker owning 51% of FFN’s debt (approximately Ninety Million Dollars ($90 14 Million)) and equity (350,297 shares)” and points to several contemporaneous agreements 15 involving or between the parties. Compl. ¶¶ 2, 15, 19–24; COA at 1 (noting that “Grantor 16 [Defendant] is purchasing 350,297 shares” and later stating “in consideration of the foregoing”). 17 The COA also required amendment of the Stockholders’ Agreement. Compl. ¶¶ 22, 24; COA at 4. 18 Drawing all inferences in Plaintiff’s favor, Plaintiff has plausibly alleged that the $1000 Call 19 Option Fee is not the sole consideration agreed upon by the parties. Thus, the Court cannot find as 20 a matter of law at this stage that the COA is not an irrevocable option. 21 b. Lapse 22 Plaintiff’s plausible allegation that he tendered the consideration required to make the 23 COA irrevocable is enough to deny Defendant’s motion. Even if the Court assumes arguendo that 24 the $1000 Call Option Fee was the sole consideration and that the option was not irrevocable, 25 Defendant’s argument that the COA lapsed because Plaintiff waited nearly two years to pay the 26 Call Option Fee fails. 27 Defendant argues that since Plaintiff did not pay consideration, the contract lapsed in the 1 Plaintiff responds that “the issue of reasonableness cannot be determined at this premature stage in 2 any event.” Opp. at 21. 3 “A proposal is revoked by . . . the lapse of the time prescribed in the proposal for its 4 acceptance or, if no time is prescribed, the lapse of a reasonable time without communication of 5 the acceptance.” Cal. Civ. Code § 1587. “What is a reasonable time is a question of law for the 6 courts,” Standard Box Co. v. Mutual Biscuit Co., 10 Cal. App. 746, 750 (1909) (citing Roberts v. 7 Evans, 43 Cal. 380, 383 (1872) (emphasis added)), and “depends upon the facts and circumstances 8 of the particular case.” Lohn v. Fletcher Oil Co., 38 Cal. App. 2d 26, 32 (1940). 9 Defendant points to several cases where the reasonable time during which a revocable 10 option lapsed was far less than two years. Roberts, 43 Cal. at 383 (one year); Standard Box, 10 11 Cal. App. at 750 (ten months); Crossmore v. Page, 73 Cal. 213, 215 (1887) (seven months). But 12 these examples are not persuasive at this stage; there is no per se or statutory length of time before 13 a revocable option lapses because the determination depends on the “facts and circumstances” of 14 the case. Lohn, 38 Cal. App. 2d at 32. Indeed, Defendant’s cited examples are all rulings on post- 15 trial appeals. See Roberts, 43 Cal. at 381 (appeal from “order overruling the defendant’s motion 16 for new trial”); Standard Box, 10 Cal. App. at 748 (appeal from “order denying [the defendant’s] 17 motion for a new trial”); Crossmore, 73 Cal. at 214 (appeal from order “granting a new trial”). 18 Defendant does not cite a single case where the reasonableness determination was made at the 19 pleadings stage. Nor does Defendant point to any indisputable fact obvious from the face of the 20 complaint or the COA that would permit the Court to make a fact-based determination at this 21 stage. Thus, even if the unpaid $1000 is the sole consideration for the COA, when the Court 22 draws all inferences in Plaintiff’s favor, Defendant has not shown as a matter of law that a 23 reasonable time has passed such that the COA has lapsed. 24 * * * 25 The Court finds that Plaintiff has plausibly alleged that the $1000 Call Option Fee is not 26 the sole consideration of the COA, and that even if it is, issues of fact preclude a determination at 27 the pleadings stage that the proposal was revoked by the lapse of a reasonable time. Accordingly, 1 2. Exercise Period and Waiver Provision 2 Because the Court denies Defendant’s motion to dismiss on the grounds stated above, the 3 || Court need not address Defendant’s “Exercise Period” or “Waiver Provision” arguments. 4 B. Claim Three 5 Defendant argues that claim three for breach of the covenant of good faith and fair dealing 6 || should be dismissed because he “was acting within the express rights granted him by the COA, 7 and could not, therefore, be in breach of the covenant of good faith and fair dealing.” Mot. at 17. 8 || Plaintiff responds that Defendant’s arguments for claim three fail for the same reasons as claims 9 one, two, and four. Opp. at 25 n.3. Because Plaintiff plausibly alleges claims one, two and four— 10 || essentially, that Defendant was not acting within express rights granted by the COA—tt follows 11 that Plaintiff plausibly alleges breach of the covenant of good faith and fair dealing. Accordingly, 12 || Defendant’s motion to dismiss claim three is denied. 13 || IV. ORDER 14 For the foregoing reasons, IT IS HEREBY ORDERED that Defendant’s motion to dismiss 3 15 || is DENIED. 16

= 17 Dated: March 21, 2024 18 Adu fhccian BETH LABSON FREEMAN 19 United States District Judge 20 21 22 23 24 25 26 27 28