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Iafrate v. Angelo Iafrate, Inc.

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

April 25, 2019

Angelo Iafrate, Sr., et al., Plaintiffs,
v.
Angelo Iafrate, Inc., et al., Defendants.

          R. Steven Whalen U.S. Magistrate Judge

          ORDER GRANTING IN PART DEFENDANTS' MOTION TO DISMISS [25]; AND REMANDING CASE TO STATE COURT

          Arthur J. Tarnow Senior United States District Judge

         Before the Court is Defendant Angelo Iafrate, Inc. and Defendant Robert Adcock's Motion to Dismiss [25] filed on September 19, 2018. On April 16, 2019, the Court held a hearing on the Motion. For the reasons explained below, the Court GRANTS in part Defendants' Motion with respect to Plaintiffs' securities fraud claims and REMANDS Plaintiffs' state law claims to the 16th Judicial Circuit Court in Macomb County.

         Factual Background

         In 1969, Plaintiff Angelo Iafrate, Sr. (“Angelo Sr.”) established the Angelo Iafrate Construction Company (“AICC”), a road-building construction company serving metro-Detroit. AICC issued shares to Angelo Sr. and to his three sons, Plaintiff Dominic Iafrate, Plaintiff Angelo E. Iafrate (“Angelo Jr.”), and John Iafrate, [1] all of whom had worked for the business at different times.

         Around the year 2000, Angelo Sr., Dominic, and John moved to Florida. Angelo Jr. remained in Michigan to run AICC. In 2002, Angelo Jr. became AICC's President and Executive Director. At the time, Defendant Robert Adcock was serving as AICC's Executive Vice President.

         In 2011, Plaintiffs began to discuss the possibility of selling AICC. After consulting with AICC's CPA and corporate counsel, Plaintiffs agreed to sell their interest in AICC to the Company's employees via an Employee Stock Ownership Plan (“ESOP”).

         In March 2013, AICC established an ESOP Exploratory Committee of which Adcock was a member. In July 2013, Plaintiffs were given a presentation outlining the terms on which the ESOP would purchase their stock in AICC, the proposed fair market value price, and the risks involved with seller financing an ESOP transaction.

         The presentation also provided information regarding an internal rate of return, which included the issuance of warrants as additional compensation. “[T]he Warrant[s] entitle[d] the holder to its proportional share of the increase in value, if any, of the per share price of common stock in excess of the Exercise Price.” Amend. Compl. ¶ 26.

         Ultimately, Plaintiffs agreed to finance 100% of the purchase price at below bank market interest rates. Plaintiffs' loan to the Company was secured by a stock pledge. The parties negotiated a purchase price of $36.7 million. A new company was formed to which Plaintiffs contributed their stock in AICC in exchange for 30, 000 shares. Thereafter, the new company (“the Company”) formed an ESOP which purchased all 30, 000 of Plaintiffs' shares in exchange for $36.7 million. On December 6, 2013, to finalize the transaction, the Company delivered Senior and Junior Promissory Notes (“Notes”) to each Plaintiff, which totaled $36.7 million and provided for quarterly interest payments over ten a period of years. Defs.' Ex. B; Ex. C.

         The Notes contained mandatory prepayment provisions, § 1.3, which required partial prepayments on an annual basis if the Company had excess funds. The Notes also contained discretionary prepayment provisions, § 1.4, which allowed for prepayment of all or part of the principal at any time. These prepayment provisions authorized only pro rata payments to each Plaintiff.

         In addition to the Notes, the Company issued Common Stock Warrants (“Warrants”) to each Plaintiff. The Warrants entitled each Plaintiff, as holder, the option to: purchase shares from the Company at the $225.00 Exercise Price per share; or, redeem shares for cash payment in the amount of the share price in effect as of such date (“Strike Price”) less the Exercise Price. The Warrants also contained a Warrant Term provision which provided that they “terminate on, and may no longer be exercised on or after, the date that is 60 days after the date that the Company has paid in full both the Senior Promissory Note and Junior Promissory Note issued by the Company in favor of the Holder.” Common Stock Warrant, Defs.' Ex. A, ¶ 3.

         Plaintiffs also entered into an Intercreditor Agreement between themselves which provided that their security interests would have equal priority and would be equally enforced for their pro rata benefit.

         After closing, Adcock became the president of the Company and co-Trustee of the ESOP. Plaintiffs Dominic and Angelo Jr. ...


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