2 1

- 1263 KLS Diversified Master Fund, L.P. v. McDevitt



## UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT


# SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT ’ S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION “ SUMMARY ORDER ” ). A P ARTY CITING TO A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.
At a stated term of the United States Court of Appeals for the Second Circuit, 1 held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of 2 New York, on t he 13 th da y of July , two thousand twenty

- two

. 3 4 PRESENT: 5 MICHAEL H. PARK , 6 STEVEN J. MENASHI , 7 MYRNA P É R E Z , 8 Circuit Judges. 9

_____________________________________ 10 11 KLS DIVERSIFIED MASTER FUND, L.P. , 12 13 Plaintiff

- Appellee , 14 15

v. 2 1

- 1263 16 17 S EAN MCDEVITT , 18 19 Defendant

- Appell ant

. 20

_____________________________________ 21 22 F OR DEFENDANT

- APPELLANT : C HRISTOPHER J. S EUSING ( Michelle M. 23 Arbitrio, Sameer P. Ponkshe, on the brief ), 24 Wood Smith Henning & Berman LLP, 25 White Plains, NY. 26 27 F OR PLAINTIFF

- APPELLEE : E UGENE R. L ICKER ( Marjorie Peerce, on the 28 brief ), Ballard Spahr LLP, New York, NY. 29 30 31 322 Appeal from a judgment of the United States District Court for the Southern District of 1
New York (Liman
, J .). 2

UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND 3

DECREED that the judgment of the district court is AFFIRMED

. 4
Defendant Sean McDevitt was the CEO of Sensei, Inc. (“Sensei”), which operated a 5

healthcare

- related “digital engagement platform” and “mobile application.” Short on cash, Sensei 6
entered into an agreement ( the “T ransaction”) on January 9, 2017 with Plaintiff KLS Diversified 7
Master Fund, L.P. (“KLS”) whereby KLS paid Sensei $2 million in exchange for a $3.33 million 8
convertible promissory note , with a 4% annual coupon and a maturity date of two years from the 9

date of execution

. 10
Three documents governed the terms of the T ransaction. First, the Note Purchase 11

Agreement provided that KLS would purchase the promissory note from Sensei for $2 million, 12
and Sensei made certain representations and warranties to KLS. Se cond, the Secured Convertible 13
Promissory Note (“Note”) provided that Sensei would pay the $3.33 million value of the N ote plus 14

coupon after two years and that Sensei covenanted to: (1) make to KLS “[a] prompt report of any 15
legal actions pending or threaten ed in writing against the Company” and (2) “[t]imely file all 16
required tax returns and reports and timely pay all foreign, federal, state, and local taxes

. ” App’x 17

at 79. Third, McDevitt also signed a Conditional Guaranty, in which he agree d to be “fully and 18
personally liable for the payment and performance of any then remaining obligations of [Sensei] 19
set forth in the Note . . . only in the event” that a “Recourse Event” occurs. App’x at 150. The 20
recourse events relevant to this appeal are : (1) “any intentional or willful failure to disclose a 21
material fact in connection with the issuance of the Note or at any time the Note is outstanding” 223 (“Recourse Event A”); and (2) “any material breach of the material terms of the Note . . . directly 1

or indirectly caused by [McDevitt]” (“Recourse Event C”). App’x at 150

– 51. 2
Sensei failed to pay the $3.33 million principal and accrued interest owed to KLS at the 3

two

- year maturity date. KLS thus foreclosed on Sensei’s assets and obtained title to the m. KLS 4
then sued McDevitt for a breach of guaranty claim alleging that he was liable for Sensei’s 5
obligations under the Note because he triggered various recourse events in the Conditional 6
Guaranty. The district court granted KLS’s motion for summary jud gment as to McDevitt’s 7
liability, finding that : (1) McDevitt triggered Recourse Event A by failing to disclose a litigation 8
threat by Porter Wright Morris & Arthur (“Porter Wright”); and (2) McDevitt triggered Recourse 9
Event C by failing to disclose pendin g litigation against Sensei by Porter Wright and Jonathan 10
Schwartz, and failing to timely file and pay federal and state taxes. The district court granted in 11
part and denied in part KLS’s motion for summary judgment as to damages, finding that : (1) KLS 12

co uld recover the full amount due under the Note from McDevitt without offsetting the value of 13
the collateral in KLS’s possession; (2) McDevitt’s claim that the Transaction was unconscionable 14

was waived and failed on the merits; and (3) KLS’s request for att orneys’ fees of 30% of the 15

amount recovered was reasonable. 1 McDevitt appealed. W e assume the parties ’ familiarity with 16
the underlying facts, the procedural history of the case, and the issues on appeal. 17
“We review the district court’s grant of summary judgment de novo , construing the facts 18
in the light most favorable to the non

- moving party and drawing all reasonable inferences in its 19

favor.” Ashley v. City of New York , 992 F.3d 128, 136 (2d Cir. 2021). We also review the court’s 20
interpretation of the Transaction documents de novo. See Compagnie Financiere de C IC et de 21

1 The only part of KLS’s motion for summary judgment that the court denied was its request for “fees on fees” or “payment of fees in connection with the collection of attorney’s fees.” Special App’x at 116

– 17.4 L’Union Europeenne v. Merrill Lynch, Pierce, Fenner & Smith Inc. , 188 F.3d 31, 34 (2d Cir. 1
1999). 2

I. Recourse Events 3

Any one Recourse Ev ent is sufficient to establish McDevitt’s liability and therefore to 4
affirm the judgment of the district court. 2 We affirm the district court’s grant of summary 5
judgment on the basis that Sensei’s failure to file and pay taxes on time triggered Recourse Event 6
C, which requires “a material breach of the material terms of the Note . . . directly or indirectly 7
caused by [McDevitt].” App’x at 150

– 51. 3 Recourse Event C provides an i nexhaustive list of 8

terms that are “material ,” each of which protected KLS’s investment in Sensei

. T he Note’s 9

affirmative covenant that Sensei file and pay taxes on time is a material term because , like those 10

terms listed in Recourse Event C, the failure to timely pay taxes can result in penalties
, including 11

liens, which affect KLS’s investment

. 12
Sensei’s failure to file and pay federal and state taxes on time was also a material breach. 13
Sensei failed to file federal taxes for the first and second quarters of 2018, resulting in about $5,500 14

in late fees and penalties, and it also owed about $44,000 in federal taxes and $4,250 in state taxes 15
halfway through 2018. 4 These liabilities were significant in and of themselves for a cash

- strapped 16
company, but they were even more significant as indicia of Se nsei’s problems in light of the 17

hundreds of thousands of dollars of back taxes Sensei owed because of its failure to file and pay 18

2 See App’x at 150 (“[I]n the event any of t he following occurs ,” “ Guarantor shall be fully and personally liable for the payment and performance of any then remaining obligations of Company set forth in the Note

. ” (emphasis added) ) ; App’x at 151 (“Upon the occurrence of a Recourse Event, Guarantor shall pay the Guaranteed Obligations in full in cash upon demand by Holder.” (emphasis added) )

.
3 Because we hold that the breach of the tax covenant triggered Recourse Event C
, we need not decide whether the district court properly concluded that McDevitt triggered Recourse Events A and C by failing to disclose the Porter Wright and Schwartz litigations.

4 McDevitt was replaced as CEO in May 2018.5 taxes before the Transaction. KLS ultimately advanced $570,000 in credit so Sensei could pay off 1

its tax liabilities. 2

McDev itt argues that the tax

- related breach was not material because he paid off the state 3
tax liabilities. Even so, Sensei was still liable for the unpaid federal taxes and penalties. McDevitt 4
also argues that because his tax advisor instructed him not to fi le federal taxes in order to pursue 5
an Offer in Compromise with the IRS, that there was no breach, and even if there was a breach, it 6
was not caused by him. The Note, however, does not provide any exception to the taxes covenant

. 7

And McDevitt cannot avoi d responsibility by blaming his tax advisor

— the tax advisor testified 8
that he did not know about the KLS financing, much less the covenants in the Note, and whatever 9

the tax advisor’s advice, McDevitt had ultimate control over whether and when taxes were f iled. 10

In sum, we affirm the district court’s grant of summary judgment to KLS because McDevitt 11
triggered Recourse Event C and is therefore liable to KLS under the Conditional Guaranty. 12

II. Unconscionability 13

T he district court found that (1) McDevitt forfeited his unconscionability defense because 14

he failed to raise the argument at the liability stage of summary judgment and instead raised it at 15
the damages stage
, and (2) McDevitt contractually waived the argument when he agreed to a broad 16

waiver of de fenses in the Conditional Guaranty, which included waiving “any legal or statutory 17
provision or legal or equitable principle of law which would discharge [McDevitt’s] obligations 18
for the Guaranteed Obligations. ” 5 App’x at 152

– 54. McDevitt d id not challe nge the district 19

court’s finding that he contractually waived the unconscionability defense , and he thus abandoned 20

5 McDevitt also waived his argument tha t the value of the collateral that KLS currently possesses should offset the judgment against him. McDevitt devotes only two sentences to this argument in his briefs and fails to provide any factual or legal analysis. The issue is thus “not sufficiently argued in the briefs
, ” and we decline to consider it. Norton v. Sam’s Club , 145 F.3d 114, 117 (2d Cir. 1998).6 the issue on appeal

. 1
In any event, McDevitt’s unconscionability argument fails on the merits. “The doctrine of 2
unconscionability seeks to prevent sophisticated parties with grossly unequal bargaining power 3
from taking advantage of less sophisticated parties.” NML Capital v. Republic of Argentina , 621 4
F.3d 230, 237 (2d Cir. 2010) (citation omitted). “In general, a provision will be deemed 5
unenforceable on unconscionability grounds only where it is both procedurally and substantively 6

unconscionable when made. . . . [T]here are some exceptional cases where a provision of a contract 7
is so outrageous as to warrant holding it unenforceable on the ground of substantive 8
unconscionability alone.” Id. (cleaned up). 9
Here, there was no procedural unconscionability. Even though Sen sei was running low on 10
cash and had limited financing options, both parties in the transaction were sophisticated 11
commercial entities represented by counsel who negotiated at arm ’ s length. See NML Capital , 621 12

F.3d at 237 ; Westinghouse Elec. Corp. v. N.Y. C. Transit Auth. , 623 N.E.2d 531, 535 (N.Y. 1993)

. 13

T he contract was not “so outrageous” that it would be unenforceable on substantive 14
unconscionability alone

. NML Capital , 621 F.3d at 237 (citation omitted). A lthough many of the 15

terms of the Transaction were highly favorable to KLS
, they were not unreasonable given the large 16
risk KLS took lending to Sensei. 6 See Westinghouse Elec. Corp. , 623 N.E. 2d at 535 ( “The bedrock 17
of the doctrine of unconscionability is the prevention of oppression and unfair surprise . . . and not 18
of disturbance of allocation of risk.” (cleaned up) ). 19

We have considered the remainder of McDevitt’s arguments and find them to be without 20

6 McDevitt argues on appeal that the Transaction is substantively unconscionable because it violates New York’s criminal usury laws. McDevitt forfeited this argument because he raised it for the first time on appeal, and we decline to consider it. See Harrison v. Republic of Sudan , 838 F.3d 86, 96 (2d Cir. 2016) (“It is a well

- established general rule that an appellate court will not consider a n issue raised for the first time on appeal.” (cleaned up)).7 merit. 7 Accordingly, we affirm the judgment of the district court. 1

FOR THE COURT: 2 C atherine O ’ Hagan Wolfe, Clerk of Court 3 4

7 We reject McDevitt’s argument that the court abused its discretion in its award of attorneys’ fees. McDevitt contends that the fee award was unreasonable because the number of hours KLS’s co unsel billed was inflated. The court did not abuse its discretion in finding that the number of hours billed was justified given the complexity of the case and efforts required by counsel. And in any event, the 30% contingency fee that the court awarded was lower than the fee for the actual time billed.