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Avomeen Holdings, LLC v. Thanedar

United States District Court, E.D. Michigan, Southern Division

April 15, 2019

SHRI THANEDAR, ET AL., Defendants.

          Anthony P. Patti, United States Magistrate Judge.


          Hon. Gershwin A. Drain, United States District Judge.

         I. Introduction

         Plaintiff Avomeen Holdings, LLC initiated this securities fraud action on November 14, 2017, alleging violations of Securities and Exchange Act Rule 10(b) and SEC Rule 10b-5. Dkt. No. 1. In addition, Plaintiff raises several claims arising under state law. Id.

         Present before the Court is Defendants Shri Thanedar and Chemreal, LLC's Motion for Summary Judgment. Dkt. No. 28. The Court will resolve the matter without a hearing. See E.D. Mich. LR 7.1(f)(2). For the reasons set forth below, the Court will DENY the Motion [#28].

         II. Background

         This action arises out of an Equity Purchase Agreement, under which Defendant Thanedar sold Plaintiff a majority interest in Avomeen, LLC (hereinafter “Avomeen”) __ a chemical testing laboratory. Dkt. No. 1, p. 1 (Pg. ID 1). In July 2016, Plaintiff furnished and Defendant Thanedar accepted a Letter of Intent (“LOI”) to purchase Avomeen for a pre-adjustment sale price of $30 million, plus an earn-out of up to $5 million depending on the company's 2016 EBITDA.[1]Id. Under the LOI, the transaction was subject to several conditions precedent, including a four-month period of accounting and business due diligence. Id.

         Plaintiff asserts that in pre-close discussions with its representatives, Defendant Thanedar made several representations that proved to be inaccurate. Id. at p. 9 (Pg. ID 889). Most glaring, Defendant Thanedar represented that the vast majority (90% or more) of Avomeen's revenue for a given month was recognized upon 100% completion of a project for a client. Id. He noted only three types of projects that fell outside of this general rule. Id. at p. 10 (Pg. ID 890). After the sale was completed, however, Defendant Thanedar revealed that it was Avomeen's practice that “projects that [were] 90% or more completed in a month [were] billed in the end of that month.” Dkt. No. 32-21, p. 3 (Pg. ID 1095).

         Andrew Kolbert, who reported directly to Defendant Thanedar, asserts that Thanedar made this change in September 2016 in order to inflate monthly revenue for certain months leading up to the sale of Avomeen. Dkt. No. 32-15, pp. 5-6 (Pg. ID 1061-62). But Plaintiff's expert witness__ Certified Public Accountant J. Bradley Sargent __ suggests Avomeen's improper reporting practices manifested much earlier. See Dkt. No. 28-13, p. 24 (Pg. ID 456). Namely, between October 1, 2015 and September 30, 2016, Avomeen had been pulling revenue from future months into present months to create a false appearance of steady growth. See Id. at pp. 24-27 (Pg. ID 456-59). This practice, which Sargent likened to a Ponzi scheme, led to an estimated $634, 530 in improperly recognized revenue during that twelve-month period. See id.

         At some point prior to close, the parties agreed to modify the terms of the original LOI. Dkt. No. 28-11. Rather than pay a base price of $30 million with a potential $5 million earn-out, Plaintiff would now pay a guaranteed price of $33.6 million. Id. Plaintiff asserts that the purpose of this change was to avoid potential disputes about what items fell inside or outside of the final adjusted EBITDA calculation. Dkt. No. 32-3, p. 5 (Pg. ID 969). Further, that it felt comfortable with this change because Avomeen had reported strong revenue earnings for several months in a row. Id. Defendants, in contrast, characterize this change as a reduction in price, and maintain that the reduction was prompted by concerns that Avomeen would not meet its revenue goal for the month of October, and consequently, its projected EBITDA for the year. Dkt. No. 28, p. 14 (Pg. ID 275).

         In any case, Avomeen did enter into a revenue slump beginning in October 2016. Id. at p. 13 (Pg. ID 274). One of Plaintiff's representatives testified that they were expecting Avomeen's revenue for the months of October and November to be close to $1 million, as opposed to the $800, 000 and $900, 000 actually generated. Dkt. No. 28-4, p. 5 (Pg. ID 319). Still, Plaintiff opted to move forward with the purchase and the parties closed their transaction on November 7, 2016. Id.; Dkt. No. 32, p. 8 (Pg. ID 888). Plaintiff purchased Avomeen's securities for $33.6 million and is now the majority owner of the company. Id. Defendant Chemreal, LLC -- an entity controlled by Defendant Thanedar __ continues to hold a minority interest in the company.

         Plaintiff brings the instant suit, asserting it was induced into overpaying for Avomeen due to alleged misrepresentations by Defendant Thanedar surrounding Avomeen's monthly revenue earnings. Plaintiff contends that it suffered damages in the range of $6, 995, 077 to $7, 980, 445. Id. at p. 17 (Pg. ID 897).

         III. Legal Standard

         Federal Rule of Civil Procedure 56(c) empowers a court to grant summary judgment if “there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law.” Cehrs v. Ne. Ohio Alzheimer's Research Ctr., 155 F.3d 775, 779 (6th Cir. 1998). The evidence and all reasonable inferences must be construed in the light most favorable to the non-moving party. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1968). There is a genuine issue of material fact “if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Mere allegations or denials in the non-movant's pleadings will not suffice, nor will a mere scintilla of evidence supporting the non-moving party. Id. at 248, 252. Rather, there must be evidence on which a jury could reasonably find for the non-movant. Id. at 252.

         IV. Discussion

         A. Plaintiff has Standing to Assert a Rule 10b-5 Claim.

         As an initial matter, Defendants assert that Plaintiff lacks standing to bring a claim under Rule 10b-5. Defendants put forth several arguments, none of which are persuasive.

         “Rule 10b-5 prohibits ‘mak[ing] any untrue statement of material fact' in connection with the purchase or sale of securities.” Janus Capital Grp, Inc. v. First Derivative Traders, 564 U.S. 135, 137-38 *2011). “A party bringing a private action for money damages under Rule 10b-5 must be an actual purchaser or seller of securities.” Grubb v. Fed. Deposit Ins. Corp., 868 F.2d 1151, 1159 (10th Cir. 1989) (citing Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 731-33 (1975)). “[I]t is not the case that plaintiffs must allege some direct communication with [the defendants] to state a claim under § 10(b).” Benedict v. Cooperstock, 23 F.Supp.2d 754, 758 (E.D. Mich. 1998). Rather, “[s]ection 10(b) specifically provides that persons may not engage in prohibited conduct ‘directly or indirectly.'” Id. In short, “plaintiffs must allege that [the defendants] made a false or misleading statement (or omission) in connection with the sale of a security that [they] knew or should have known would reach investors, and that the plaintiffs relied on it and were damaged.” Id. (citing Anixter v. Home-Stake Prod. Co., 77 F.3d 1215, 1226 (10th Cir. 1996)).

         Here, Defendants cannot dispute that Plaintiff was the purchaser of Avomeen's securities. Indeed, Plaintiff holds a majority interest in the company and incurred over $16 million in debt in connection with the transaction. See Dkt. No. 32, p. 8 (Pg. ID 888). While Defendants argue that Plaintiff is simply a holding company, and that High Street Capital (private equity fund) was the underlying financer, the cases on which Defendants rely do not support their position that Plaintiff lacks standing. To the contrary, these cases, at best, stand for the proposition that a de facto investing entity may have standing to bring suit in addition to a holding company. See, e.g., Grubb, 868 F.2d at 1159-62, n.11 (recognizing for purposes of standing a suit filed on behalf of holding company and underlying shareholders).

         In addition, Plaintiff has alleged facts suggesting Defendants made misleading statements in connection with the sale of Avomeen, and that Plaintiff relied on those statements and was damaged as a result. Though Defendants argue that the alleged misrepresentations were made to High Street Capital, and not directly to Plaintiff, a claim under Rule 10b-5 does not require proof of direct communication. See Benedict, 23 F.Supp.2d at 758. Plaintiff can rely on Defendants' communications with High Street Capital because Defendants knew their ...

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