830 F. Supp. 2d 1083
W.D. Wash.2011Background
- Aventa Learning, Inc. was founded in 2002 by Micheál J. Axtman and James J. Benitez, who remain its principal shareholders and officers.
- KCDL acquired substantially all of Aventa’s assets on January 10, 2007 via an Asset Purchase Agreement (APA), including earnouts and an Additional Earnout based on KCDL’s Assumed Equity Value.
- After the APA, Axtman and Benitez joined KCDL as Vice Presidents overseeing the Aventa Learning business and participated in weekly executive meetings and budgeting projections.
- Disagreements arose over multiple EBITDA projections (October 2006 Buy Model vs. August 2006 Buy Model vs. February 2007 Model) and the associated Earnouts, which led to a dispute over the Additional Earnout.
- On July 26, 2010, K12 announced its purchase of KCDL, triggering a change of control and triggering the dispute over the Additional Earnout; Plaintiffs filed suit on June 2, 2010 alleging WSSA violations, misrepresentation, breach of implied covenant of good faith and fair dealing, declaratory relief, and equitable relief.
- Defendants moved for summary judgment; the court granted in part and denied in part, including denial of summary judgment on statute of limitations, misrepresentation, and good faith claims, and granted a protective order; the court dismissed the individual plaintiffs’ claims and granted the protective order on privilege issues.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the WSSA claim is viable against the APA and Additional Earnout | Axtman/Benitez contend misrepresentations and securities invasion from the earnout. | K12/KCDL argue the APA/earnout do not qualify as securities under WSSA. | WSSA claim dismissed against defendants. |
| Whether the three-year statute of limitations bars WSSA and misrepresentation claims | Plaintiffs allege tolling due to reassurances and ongoing discovery. | Defendants contend discovery occurred by Feb 2007; claims filed 2010 are time-barred. | Question of accrual/t tolling reserved for jury; not dismissed on statute of limitations. |
| Whether misrepresentation claim survives given the evidence on model projections | Projections were misrepresented as good-faith estimates. | Disputed methods; insufficient to dismiss at summary judgment. | Misrepresentation claim survives summary judgment. |
| Whether the individual plaintiffs have standing and claims can proceed | Individual plaintiffs assert direct injury independent of Aventa. | No standing; injuries are derivative as shareholders. | Individual plaintiffs’ claims dismissed on summary judgment. |
| Whether the privilege issues and waiver affect the protective order | Attorneys’ communications on KCDL laptops may be privileged. | Policy and Asia Global factors show waiver due to consent/monitoring. | Protective order granted; privilege waiver established for several materials. |
Key Cases Cited
- Cellular Eng’g, Ltd. v. O’Neill, 820 P.2d 946 (Wash. 1991) (definition and treatment of security under Washington law; substance over form)
- ItoInt’l Corp. v. Prescott, Inc., 921 P.2d 566 (Wash. Ct. App. 1996) (modified Howey test for investment contracts in Washington)
- Far West Fed. Bank v. Office of Thrift Supervision-Director, 119 F.3d 1358 (9th Cir. 1997) (relevance of fiduciary and remedial standards in securities context)
- Asia Global, Ltd. v. Reserve Fund, Ltd., 322 B.R. 247 (Bankr. S.D.N.Y. 2005) (factors for attorney-client privilege waiver in corporate context)