Auctus Fund, LLC v. Verus International, Inc.
440 F.Supp.3d 84
D. Mass.
2020
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Docket
Case Information

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UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS

YOUNG, D.J. February 25, 2020

ORDER

Auctus Fund, LLC ("Auctus") alleges that Verus International, Inc. ("Verus"), formerly known as RealBiz Media Group, Inc., materially misrepresented its corporate prospects before Auctus invested in the company, and further аlleges that Verus failed to honor a settlement agreement that was supposed to end the first dispute. In moving to dismiss, Verus claims that the case is moot and that a release signed by Auctus in that settlement agreеment bars the claims now before the Court. As briefly explained below, the Court agrees with Verus that Auctus is bound by the release. Nonetheless, Auctus also brings several claims that are not barred by the release, some of which may go forward.

*2 The following facts are drawn from Auctus's amended complaint. Pl. Auctus's First Am. Compl. Dem. Jury Trial ("Am. Compl."), ECF No. 29. Auctus and Verus executed two initial transactions as part of Auctus's "investment" in Verus, eaсh of which contained a Securities Purchase Agreement and a Convertible Promissory Note: the first set of transactions occurred on May 7, 2017 and the second set on July 26, 2018. Id. III 9-10. When a dispute arose between Auсtus and Verus -in part due to Verus's "spin-off transaction" in the summer of 2018 of its former real-estate division, Nesbuilder.com Corporation ("Nestbuilder"), id. II 42 -- the two companies negotiated. Id. II 48. On February 8, 2019, Auctus and Verus reachеd an agreement ("Inducement Agreement") under which Verus agreed to pay Auctus 200 , 000 a n d " f a c i l i t a t e t h e d e l i v e r y " o f 201 , 153 s h a r e s o f N e s t b u i l d e r s t o c k b y M a r c h 8 , 2019 , a n d a l s o t h a t V e r u s w o u l d p a y a 10,000 monthly penalty if it failed to deliver the shares. Id. III 50-53. In exchange, Auctus signed a release id., Ex. M., Release ("Release"), ECF No. 29-14, which relеased Verus from all claims except "those arising from or related to the Releasor's rights under Section 1.6 of the Notes with respect to shares of common stock of Nestbuilder.com Corp." Am. Compl. II 53. Auctus alleges that the Inducement Agreement and Release were obtained by fraud because Verus never intended to comply. Id.

*3 The amended complaint alleges nine causes of action agаinst Verus: violations of federal securities laws (count I), id. 88 67-69; violations of Massachusetts securities laws (count II), id. 88 70-73; breaches of contract (count III), id. 88 74-81; breaches of implied covenant of good faith and fair dealing (count IV), id. 88 82-88; unjust enrichment (count V), id. 88 89-93; breach of fiduciary duty (count VI), id. 88 94-97; fraud and deceit (count VII), id. 88 98-100; negligent misrepresentation (count VIII), id. 88 101-103; violations of Massachusetts Consumer Protection Act, Mass. Gen. Laws ch. 93A, $ $ 2 , 11 (count IX), id. 88 104-107.

On Octobеr 24, 2019, Verus moved to dismiss the amended complaint. ECF No. 35. Verus argues that the amended complaint is moot because Auctus already received 201,157 (a few extra due to a rounding error, Verus says) shares of Nestbuildеr. Mem. Law Supp. Mot. Dismiss Pl.'s Am. Compl. ("Def.'s Mem.") 3-4, ECF No. 37. Verus further argues that the alleged misrepresentations described in the amended complaint are not actionable for a variety of reasons, id. at 5-14, and that thе amended complaint is otherwise deficient, id. at 14-20. In particular, Verus argues that Auctus is barred from bringing several of its claims due to the Release. Id. at 17.

Verus's mootness argument is unavailing. "A case becomes moot ‍​‌‌​‌‌‌‌​‌​‌‌‌​​‌‌​‌‌​​‌​‌​‌​‌‌​‌​​‌​​‌​​‌‌​‌​​​‍. . . 'only when it is impossible for a court to grant any

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effectual relief whatever to the prevailing party.'" CampbellEwald Co. v. Gomez, 136 S. Ct. 663, 669 (2016) (quoting Knox v. Service Emps. Int'l Union, 567 U.S. 298, 307 (2012)). This impossibility arises only when a plaintiff has "received complete relief." Bais Yaakov of Spring Valley v. ACT, Inc., 798 F.3d 46, 51 (1st Cir. 2015) (quoting Cruz v. Farquharson, 252 F.3d 530, 533 (1st Cir. 2001)). Auctus has not "received complete relief" here, for the simple reason that Auctus also seeks "consequential damages and losses, costs, interest, plus multiрle and/or punitive damages, attorneys' fees." Am. Compl. 𝕀 3; id. 𝕀 51 ("Defendant has refused and has failed to pay Auctus $ 10 , 000.00 on or before March 8, 2019, and is liable for an additional penalty of $ 10 , 000.00 to the Plaintiff on each and every monthly anniversary thereafter as to such сontinuing Default."). Verus's rebuttal turns on its factual assertion that Auctus did not suffer any losses and has therefore been made completely whole. Def.'s Mem. 4, 18. For the time being, however, the Court must accept Auctus's factual account. Thus, because the Court could still award relief should Auctus prevail, the case is not moot.

Yet the Court agrees with Verus that many of the claims are barred by the Release. Auctus argues that thе Release should not ‍​‌‌​‌‌‌‌​‌​‌‌‌​​‌‌​‌‌​​‌​‌​‌​‌‌​‌​​‌​​‌​​‌‌​‌​​​‍be enforced because Verus procured it through fraudulent inducement by promising to deliver shares of Nestbuilder -- a

*5 [^0] [^0]: Case 1:19-cv-10641-WGY Document 51 Filed 02/25/20 Page 5 of 9 promise it had no intention to kеep. Am. Compl. II 49. Under Nevada law, which governs the Release pursuant to a choice-oflaw clause in the document, fraud in the inducement is grounds to rescind the contract. Pacific Maxon, Inc. v. Wilson, 96 Nev. 867, 870, 619 P.2d 816, 818 (1980). "Whether rescission [for fraud in the inducement] shall be granted rests largely in the sound discretion of the court," and "[f]raud . . . must be clearly and satisfactorily proved." Havas v. Alger, 85 Nev. 627, 631, 461 P.2d 857, 860 (1969). Here, Auctus has sufficiently alleged facts from which it may be inferred that Verus fraudulently induced Auctus to sign the Release. 

Nevertheless, the Court exercises its discretion to deny rescission and thus enforces the Release. This is because Auctus has already prоcured the $200,000 and the Nestbuilder shares that formed its benefit of the bargain under the Release in a follow-up agreement with Nestbuilder, Pl.'s Mem. Opp'n Verus's Mem. ("Pl.'s Opp'n"), Ex. A, Settlement Agreement, ECF No. 46-1, and Auctus evinces no intention of giving those shares and cash back. During oral argument on January 13, 2010, ECF No. 50, the Court put the question directly to Auctus if it would return the cash and stock. Counsel for Auctus declined to make that commitment, asking instead for pаrtial rescission. Informed by the Court that under Nevada law "there can be no partial rescission," Bergstrom v. Estate of DeVoe, 109 Nev. 575,

*6 Case 1:19-cv-10641-WGY Document ‍​‌‌​‌‌‌‌​‌​‌‌‌​​‌‌​‌‌​​‌​‌​‌​‌‌​‌​​‌​​‌​​‌‌​‌​​​‍51 Filed 02/25/20 Page 6 of 9

854 P.2d 860, 861 (1993), [1] Auctus still would not commit to return the money and shares. So be it. The Court declines to rescind the Release, which bars all claims (other than those expressly preserved) prior to February 8, 2019. All unpreserved claims relating to the initial transactions are еxtinguished, including the securities law claims (counts I and II).

What remains are the various state law claims (fraud, negligent enrichment, breach of contract, unjust enrichment, and chapter 93A) insofar as they relate to second series of contracts in which the parties sought to settle their differences. The Court now turns to these claims.

With regard to breach of contract and breach of implied covenant of goоd faith, Verus argues that any claims arising from actions predating the Release are barred, except for claims [1] As the Nevada Supreme Court explained: When a contract has been partiаlly performed, and one of the parties to it makes default, the other has a choice of remedies. He may and he must rescind or affirm the contract, but he cannot do both. If he would rescind it, he must immediately return whatever of value he has received under it, and then he may defend against an action for specific performance . . . and he may recover back whatever he has paid. . . . He сannot at the same time affirm the contract by retaining its benefits and rescind it by repudiating its burdens.

Bergstrom, 854 P.2d at 861 (emphasis in original) (quoting German Sav. Inst. v. De La Vergne Refrigerating Mach. Co., 70 F. 146, 149-50 (8th Cir. 1895) &; 5 Arthur Linton Corbin, Corbin on Contracts $ 1114 (1964)).

*7 arising from the Nestbuilder shares as expressly provided in the Release. This is correct, for the reasons given above. Verus further argues that even with respect to the claims not barred by the Release, Auctus suffered no loss since it eventually received the shares and, furthermore, Verus did not technically breach because it was only required "to facilitate" the transfer of the shares but not actually to procure and ‍​‌‌​‌‌‌‌​‌​‌‌‌​​‌‌​‌‌​​‌​‌​‌​‌‌​‌​​‌​​‌​​‌‌​‌​​​‍deliver them. Def.'s Mem. 17-18. The distinction that Vеrus seeks to draw between facilitating the transfer of the shares and actually delivering them does not persuade the Court. It is plain what Verus's contractual obligation was and it did not initially perform. As for the loss, Auctus sufficiently alleged loss in the form of costs and expenses in negotiating for the shares on its own, and further in the unpaid $ 10 , 000 monthly penalty that the Inducement Agreement imposes on Verus. Accordingly, the Court DENIES the motion to dismiss with respect to counts III and IV, save for those claims barred by the Release.

As for unjust enrichment, Verus argues that no such claim is possible when there is a written contract. Def.'s Mem. 19; Leasepartners Corр. v. Robert L. Brooks Trust Dated November 12, 1975, 113 Nev. 747, 942 P.2d 182, 187 (1997) ("An action based on a theory of unjust enrichment is not available when there is an express, written contract, because no agreement can be implied when there is an express agreement."). Auctus replies

*8 that, because it seeks to void the Inducement Agreement, there in fact is no contract and thus the unjust enrichment count reemerges. Pl.'s Opp'n 20, ECF No. 46. Auctus's argument is sound as far as it goes, but for the reasons given above the Court rules that the Inducement Agreement and Release are not rescinded and thus the contract exists. Accordingly, the Court ALLOWS the motion to dismiss as to the unjust enriсhment claim (count V).

Verus next argues that Auctus has not stated a claim for breach of fiduciary duty because Nevada does not recognize a fiduciary duty owed by a corporation (as oppоsed to the individual directors and officers) to its shareholders. Def.'s Mem. 19 (citing Brignand v. Van Wagoner Funds, Inc., No. 3:07-CV-242-ECR-VPC, 2009 WL 2175623, at *6 (D. Nev. July 16, 2009)). Auctus has no response to this other than to accuse the director of breach of fiduciary duty -- but the director ‍​‌‌​‌‌‌‌​‌​‌‌‌​​‌‌​‌‌​​‌​‌​‌​‌‌​‌​​‌​​‌​​‌‌​‌​​​‍is not a named defendant in this case. Accordingly, the motion to dismiss the breach of fiduciary duty claim (count VI) is ALLOWED.

Finally, the amended complaint asserts several claims that sound in tort law, including fraud and deсeit (count VII), negligent misrepresentation (count VIII), and chapter 93A violations (count IX). Verus's main arguments in rebuffing these allegations are similar to those it offered in responding to the securities law claims; namely, that Auctus has not met

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the clarity and particularity requirements to plead fraud under Rule 9(b) of the Federal Rules of Civil Procedure; that the alleged misrepresentations were not materially misleading; that Auctus could not have reasonably relied on them; and that Auctus suffered no loss. These are largely fact-bound determinations, however, and Auctus has sufficiently alleged fraud, negligent misrepresentation, and violations of chapter 93A with respect to the Inducement Agreement. Accordingly, the motion to dismiss is DENIED as to these counts, but only for allegations that are not barred by the Release.

In sum, this Court ALLOWS the motion to dismiss, ECF No. 35, as to counts I, II, V, and VI. Yet the Court DENIES the motion to dismiss as to counts III, IV, VII, VIII, and IX.

SO ORDERED.

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