15-920-cv; 15-1659-cv New Earthshell Corp. v. Jobookit Holdings Ltd.



### UNITED STATES COURT OF APPEALS **FOR THE SECOND CIRCUIT**



## SUMMARY ORDER

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**ON OR AFTER J** **ANUARY 1,**  **2007, IS PERMITTED AND IS GOVERNED BY**  **F EDERAL**  **R ULE OF**  **A PPELLATE**  **P ROCEDURE**  **32.1 AND THIS COURT**  **’ S**  **L OCAL**  **R ULE**  **32.1.1. W**  **HEN CITING A SUMMARY ORDER IN A**
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**At a stated term of the United States Court of Appeals** 1 **for the Second Circuit, held at the Thurgood Marshall United** 2 **States Courthouse, 40 Foley Square, in the City of New York,** 3 **on the 30 th** **day of December, two thousand fifteen.** 4 5 **PRESENT: DENNIS JACOBS,** 6 **PIERRE N. LEVAL,** 7 **GUIDO CALABRESI,** 8 **Circuit Judges**

**.** 9 10
- - - - - - - - - - - - - - - - - - - -X 11 **NEW EARTHSHELL CORP.,** 12 **Plaintiff-Appellant ,**  13 14 **-v.- 15-920-cv; 15-1659-cv** 15 16 **JOBOOKIT HOLDINGS LTD, VIUMBE LLC,** 17 **RAFI SHKOLNIK,** 18 **Defendants-Appellees**

**.** 19
- - - - - - - - - - - - - - - - - - - -X 20 21 **FOR APPELLANT:** NIKOLAS S. KOMYATI (Lawrence D. 22 Ross, on the brief ), Bressler, 23 Amery & Ross, P.C., New York, 24 NY. 25 26 **FOR APPELLEE:** A. Jeff Ifrah, Ifrah PLLC, 27 Washington, DC. 28

11 Appeal from a judgment of the United States District 2 Court for the Southern District of New York (Furman, J .). 3 4 **UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED** 5 **AND DECREED**that the judgment of the district court be, and 6 is hereby, **VACATED,** and the case **REMANDED**for further 7 proceedings. 8 9 New Earthshell Corp. appeals from the judgment of the 10 United States District Court for the Southern District of 11 New York (Furman, J .) dismissing its complaint against 12 Jobookit Holdings Ltd. (“Jobookit”), Rafi Shkolnik 13 (Jobookit’s CEO), and Viumbe, LLC, for breach of contract, 14 fraud, and breach of the implied covenant of good faith and 15 fair dealing. We assume the parties’ familiarity with the 16 underlying facts, the procedural history, and the issues 17 presented for review. 18 19 This appeal arises from a series of corporate 20 transactions concerning Viumbe, a digital media company that 21 earns revenue by selling advertising on its websites. New 22 Earthshell was in negotiations to sell Viumbe to Jobookit 23 for $2.5 million, of which $1 million would be paid up front 24 and the remaining $1.5 million would be a loan, the terms of 25 which were set forth in a Loan Agreement. This loan would 26 be secured by “Collateral,” defined as “[a]ll of the present 27 and future property and assets of [Viumbe],” including 28 Viumbe’s “[d]eposit accounts and accounts receivable” and 29 “all other contract rights or rights to the payment of 30 money.” 31 32 As negotiations continued, Digital Group Ybrant 33 (“Ybrant”) agreed to buy a $1 million equity stake in 34 Jobookit on the condition that Jobookit hire Ybrant to 35 manage Viumbe’s websites. Jobookit told New Earthshell that 36 Ybrant’s compensation for managing Viumbe’s websites would 37 be 35% of Viumbe’s revenues, which, according to New 38 Earthshell, would be in line with industry norms. In fact, 39 according to the allegations of the complaint, Jobookit’s 40 representation was false. Jobookit agreed that Ybrant would 41 be paid 70% of Viumbe’s revenues until Ybrant had received 42 $1 million, at which point it would receive 50% until two 43 years from the date of the agreement, and 35% thereafter. 44 New Earthshell alleges that it relied on the 45 misrepresentation when it entered into the agreement. 46 47

2New Earthshell brought suit against Jobookit, 1 Jobookit’s CEO, and Viumbe for breach of contract, fraud, 2 and breach of the implied covenant of good faith and fair 3 dealing based on Jobookit’s agreement with Ybrant and 4 Jobookit’s statements about it. The district court dismissed 5 all three claims. The court reasoned that New Earthshell 6 (i)had not plausibly pled reasonable reliance on Jobookit’s 7 fraudulent misrepresentation because New Earthshell failed 8 to demand to see the actual documents Jobookit was 9 negotiating with Ybrant, (ii) had not plausibly alleged 10 breach of contract because Viumbe’s revenues are not 11 “Collateral,” and (iii)could not maintain a claim for breach 12 of the implied covenant because New Earthshell’s pleading 13 failed to allege a breach that Jobookit was not complying 14 with the terms of its contract. The district court also 15 awarded Jobookit its attorney’s fees because the agreement 16 provided that the losing party would pay the prevailing 17 party’s attorney’s fees in any litigation related to the 18 Viumbe sale. 19 20 We review the grant of a motion to dismiss de novo

, 21 accept as true all factual allegations, and draw all 22 reasonable inferences in favor of the plaintiff. Fink v. 23 Time Warner Cable , 714 F.3d 739, 740-41 (2d Cir. 2013). We 24 typically review a district court’s award of attorney’s fees 25 for abuse of discretion, but when the fee award turns on the 26 proper interpretation of a contract, we review it de novo

. 27 Carco Grp., Inc. v. Maconachy , 718 F.3d 72, 79-80 (2d Cir. 28 2013). We conclude that the District Court erred in 29 dismissing the claims. 30 31 **1.** The District Court dismissed the contract claim 32 because, according to its interpretation of terms of 33 Jobookit’s contract with Ybrant, the payments Viumbe was to 34 make to Ybrant of 70% of Viumbe’s revenues did not impair 35 New Earthshell’s collateral because “revenues” were not 36 within the definition of “Collateral” in the Loan Agreement 37 between New Earthshell and Jobookit. This conclusion was 38 based on a misinterpretation of what Jobookit contracted to 39 have Viumbe pay to Ybrant. In exchange for Ybrant’s 40 services, Viumbe was to pay it a percentage of the 41 advertising revenues it “actually received in connection 42 with operation of [its] Websites.” The revenues Viumbe 43 “actually received” would, upon receipt, become its money. 44 Jobookit contracted that Viumbe would pay a (large) portion 45 of that money to Ybrant, potentially permitting Ybrant to 46

3recover its $1 million investment before New Earthshell was 1 repaid for its loan. 2 3 The definition of “Collateral” in the Loan Agreement 4 between New Earthshell and Jobookit included, among other 5 things, “present and future property and assets,” “[d]eposit 6 accounts and accounts receivable,” and “all proceeds of . . 7 . any and all of the above” (i.e., proceeds from Viumbe’s 8 other assets). Each of these terms encompassed Viumbe’s 9 money. Though the term “revenues” does not appear in the 10 definition of “Collateral,” it is clear that all of Viumbe’s 11 money, including money it derived from its advertising 12 revenues, fall within the scope of the definition of 13 “Collateral.” The payments Viumbe would make to Ybrant were 14 of money , which was part of the “Collateral,” 15 notwithstanding that the amount of money was to be set by 16 reference to the amount of its revenues. 17 18 The rest of the Agreement does not render this 19 provision ambiguous. The district court mistakenly concluded 20 that, if Viumbe’s revenues were Collateral, Jobookit’s 21 obligation to preserve that Collateral would prevent Viumbe 22 from paying ordinary business expenditures. But the Loan 23 Agreement explicitly allows Viumbe’s assets to be used in 24 the ordinary course of its business. Joint App’x at 93-94, 25 ¶¶ 7.1, 7.5, 8.1. 26 27 **2.** The district court dismissed New Earthshell’s fraud 28 claim because it concluded New Earthshell failed to plead 29 reasonable reliance on Jobookit’s alleged 30 misrepresentations. It reasoned that, as a sophisticated 31 party, New Earthshell should have insisted on documentation 32 of the terms of Jobookit’s deal with Ybrant, and that its 33 failure to do so would preclude a jury from finding 34 reasonable reliance. 35 36 New York courts have sometimes precluded sophisticated 37 parties that failed to exercise reasonable diligence in 38 verifying material representations that were within their 39 power to verify from claiming reasonable reliance on those 40 representations. See HSH Nordbank AG v. UBS AG , 941 N.Y.S.2d 41 59, 66 (App. Div. 1st Dep’t 2012); Global Minerals & Metals 42 Corp. v. Holme , 824 N.Y.S.2d 210, 215 (App. Div. 1st Dep’t 43 2006); see alsoLazard Freres & Co. V. Protective Life Ins. 44 Co. , 108 F.3d 1531 (2d Cir. 1997). The district court over45 read these cases; they do not stand for the proposition that 46 business corporations may never rely on the representations 47

4of a counter-party as to facts the plaintiff has no reason 1 to doubt or suspect, so long as more certain means of 2 verification are available. 3 4 Furthermore, New Earthshell discharged any duty to 5 protect itself by inserting appropriate contract language. 6 The Loan Agreement authorized Viumbe to contract for 7 management services like Ybrant’s “in the ordinary course of 8 [its] business.” Joint App’x at 93 ¶ 7.1. It also required 9 Viumbe and Jobookit to “use commercially reasonable efforts 10 to preserve the condition of the Collateral,” Joint App’x at 11 94 ¶ 8.1, and forbade them from “wast[ing] or destroy[ing] 12 the Collateral or any part thereof.” Id. at 93 ¶ 7.4. These 13 provisions prohibit Viumbe from licensing its websites in 14 transactions that depart from the ordinary course of 15 business. In its complaint, New Earthshell alleges that the 16 35/65 revenue split represented by Ybrant was consistent 17 with its historical business practices, but that the 70% 18 deal actually struck was not. 19 20 **3.** In light of our vacatur of the dismissal of New 21 Earthshell’s claims, we also vacate the dismissal of New 22 Earthshell’s breach of the implied covenant claim and the 23 award of attorney’s fees. 24 25 We therefore **VACATE**the judgment of the district court 26 and **REMAND**for further proceedings. 27 28 FOR THE COURT: 29 CATHERINE O’HAGAN WOLFE, CLERK 30 31

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