Court Opinion

ID: 9916497
Source: CourtListenerOpinion
Date Created: 2024-01-10 01:08:27.326849+00
Date Added: 2024-06-11T13:25:30.628177
License: Public Domain

Mule v Sillerman
               2024 NY Slip Op 30002(U)
                     January 1, 2024
           Supreme Court, New York County
        Docket Number: Index No. 654984/2016
                  Judge: Andrea Masley
Cases posted with a "30000" identifier, i.e., 2013 NY Slip
 Op 30001(U), are republished from various New York
 State and local government sources, including the New
  York State Unified Court System's eCourts Service.
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                       publication.
                                                                                                                         INDEX NO. 654984/2016
  NYSCEF DOC. NO. 198                                                                                              RECEIVED NYSCEF: 01/01/2024

            SUPREME COURT OF THE STATE OF NEW YORK
            COUNTY OF NEW YORK: COMMERCIAL DIVISION PART 48
            ----------------------------------------------------------------------------------- X

                ANDREW MULE,                                                                         INDEX NO.         654984/2016

                                                          Plaintiff,
                                                                                                     MOTION DATE
                                                - V -
                                                                                                     MOTION SEQ. NO.        009
                ROBERT F.X. SILLERMAN, PETER C. HORAN, MICHAEL
                MEYER, MITCHELL J. NELSON, FRANKE. BARNES, and
                BIRAME SOCK, and FUNCTION(X), INC.,                                                   DECISION+ ORDER ON
                                                                                                            MOTION
                                                          Defendants.
            ----------------------------------------------------------------------------------- X

            HON. ANDREA MASLEY:

            The following e-filed documents, listed by NYSCEF document number (Motion 009) 171, 172, 173, 174,
            175, 176, 177, 178, 179, 180, 183, 184, 185, 186, 189, 191
            were read on this motion to/for                                                         RENEWAL

            Upon the foregoing documents, it is

                      In motion sequence number 009, defendant Robert F.X. Sillerman, 1 moves

            pursuant to CPLR 2221 (e) for an order granting leave to renew his motion to dismiss

            and, upon renewal, dismiss the Amended and Supplemental Complaint (ASC) pursuant

            to CPLR 3211(a) (1) and (7).

                      In motion sequence number 005, Sillerman joined motion sequence number 004,

            the Director Defendants' motion to dismiss. (NYSCEF 77, Handler aff ,i 2.) However,

            motion sequence number 005 was dismissed without prejudice due to Sillerman's

            bankruptcy. (NYSCEF 108, Decision and Order [mot. seq. no. 005].) Motion sequence

            number 004 was granted, and the action was dismissed against the Director

            Defendants based on the exculpatory provision in the Company's articles of

            1
             Sillerman is deceased. On consent, Yann Geron, the Chapter 7 Trustee substituted in
            as defendant. (NYSCEF 157, March 17, 2-21, Stipulation),
                654984/2016 MULE, ANDREW vs. SILLERMAN, ROBERT F.X.                                                      Page 1 of 6
                Motion No. 009

                                                                            1 of 6
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                                                                                             INDEX NO. 654984/2016
  NYSCEF DOC. NO. 198                                                                 RECEIVED NYSCEF: 01/01/2024

            incorporation. (NYSCEF 97, Decision and Order [mot. seq. no. 004], affd Mule v

            Sillerman, 180 AD3d 600 [1st Dept 2020].) Accordingly, it was unnecessary for the

            court to evaluate plaintiff's purported entrenchment claim raised for the first time in

            plaintiff's opposition to the Director Defendants' motion to dismiss. (NYSCEF 94,

            Plaintiff's Opposition Memo [mot. seq. no. 004] at 26-27 2 .) The court rejects plaintiff's

            proposition that the court "expressly addressed the entrenchment claim." (NYSCEF

            183, Plaintiff's Opposition Memo [mot. seq. no. 009] at 6.) Rather, plaintiff confuses the

            court's recitation in the background section of the decision with an analysis of an

            entrenchment claim - a more complex endeavor. (NYSCEF 97, Decision and Order

            [mot. seq. no. 004], affd Mule v Sillerman, 180 AD3d 600 [1st Dept 2020].)

                      The entrenchment claim is not clearly alleged in the ASC. Indeed, the word

            "entrenchment" does not appear in the ASC. (NYSCEF 44, ASC.) Rather, there are

            two causes of action:

                      "COUNT I Breach of Fiduciary Duty For Entering Into the Exchange Agreement
                      Defendants have violated their fiduciary duties including their duty of care and
                      duty of loyalty by placing defendant Sillerman's interests ahead of the interests of
                      Function(x)'s minority shareholders as set out herein. These breaches include,
                      among other things, engaging in wrongful conduct that has resulted in the
                      conversion of Sillerman's Debt and preferred securities into Common Stock at
                      terms most favorable to him and highly dilutive to the minority shareholders of the
                      Company."

            (NYSCEF 44, ASC at 46.)

                      "COUNT II Breach of Fiduciary Duty For the Failure to Maintain Adequate
                      Internal Controls: Defendants have a duty to oversee its CEO and ensure that he
                      is not breaching his fiduciary duties to the Company's shareholders. The Board's
                      failure to have adequate internal controls allowed Defendant Sillerman to, among
                      other things, withdraw money from the Company's bank account without any
                      supporting documentation and to repay himself more than the amount owed to
                      him under his Line of Credit to the Company."

            2
                NYSCEF pagination.
                654984/2016 MULE, ANDREW vs. SILLERMAN, ROBERT F.X.                          Page 2 of 6
                Motion No. 009

                                                              2 of 6
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                                                                                            INDEX NO. 654984/2016
  NYSCEF DOC. NO. 198                                                                RECEIVED NYSCEF: 01/01/2024

            (Id. at 49-50.)

                   The Director Defendants did not seek to dismiss entrenchment in motion

            sequence number 004 because it was not clearly alleged as an independent claim.

            Rather, the court addressed entrenchment in the 004 decision because plaintiff raised it

            in plaintiff's opposition to motion 004 and the Director Defendants addressed

            entrenchment on reply. (NYSCEF 94, Plaintiff's Opposition Memo [mot. seq. no. 004];

            NYSCEF 95, Director Defendants' Reply Memo [mot. seq. no. 004] at 16-17.) Likewise,

            Sillerman did not raise entrenchment in motion sequence numbers 005 or 006.

            (NYSCEF 77, Handler aff [mot. seq. no. 005]; NYSCEF 136, Sillerman's Memo of Law

            [mot. seq. no. 006].) If anything, an entrenchment claim is folded into the first cause of

            action which was dismissed. However, when the court dismissed the first cause of

            action against the Director Defendants, based on the exculpatory provision, plaintiff did

            not appeal to question the court's failure to analyze the purported entrenchment claim or

            challenge if the exculpatory provision applied to the purported entrenchment claim.

                   Sillerman filed motion sequence number 006, a new motion to dismiss when the

            bankruptcy stay was lifted. Plaintiff raised one argument: that plaintiff failed to

            adequately allege unfair price. (NYSCEF 161, Sillerman's Amended Memo of Law

            [mot. seq. no. 006].) Motion sequence number 006 was denied, and the court allowed

            plaintiff's direct claim for unfair dilution to proceed based on Gentile v Rossette, 906

            A2d 91 (Del 2006). (NYSCEF 165, Decision and Order [mot. seq. no. 006].) However,

            on September 20, 2021, Gentile was overruled by Brookfield Asset Mgt., Inc. v Rosson,

            261 A3d 1251 (Del 2021 ). Sillerman appropriately filed this motion to renew pursuant to

            CPLR 2221 (e) based on a change in the law. Plaintiff agrees that Sillerman's direct
             654984/2016 MULE, ANDREW vs. SILLERMAN, ROBERT F.X.                             Page 3 of 6
             Motion No. 009

                                                           3 of 6
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                                                                                               INDEX NO. 654984/2016
  NYSCEF DOC. NO. 198                                                                  RECEIVED NYSCEF: 01/01/2024

            claim must be dismissed based on Brookfield. Therefore, the first cause of action is

            dismissed.

                      However, in motion sequence number 006, Sillerman did not mention the issue

            of entrenchment though by the time that motion was filed on September 27, 2019,

            Sillerman was aware of plaintiff's purported entrenchment claim. (See NYSCEF 97,

            Decision and Order [mot. seq. no. 004].) This is a 2221(e) motion for reargument, but

            Sillerman fails to identify any new facts or change in the law about entrenchment.

            Accordingly, the court is compelled to deny the motion allowing the action to proceed on

            entrenchment.

                      While the court is procedurally precluded from assessing the viability of plaintiff's

            purported entrenchment claim, it should be clear to the parties by now that the court

            would be unlikely to sustain such a claim as currently pied. A plaintiff bears a heavy

            burden to successfully assert entrenchment, but plaintiff has not satisfied that burden.

            (See Nomad Acquisition Corp. v Damon Corp., 1988 WL 383667, at *1 [Del.Ch. Sept. 20,

            1988].)

                      "Corporate fiduciaries may not utilize corporate machinery for the purpose of
                      perpetuating themselves in office .... A successful claim of entrenchment
                      requires plaintiffs to prove that the defendant directors engaged in action which
                      had the effect of protecting their tenure and that the action was motivated
                      primarily or solely for the purpose of achieving that effect. 219 Where a board's
                      actions are shown to have been taken for the purpose of entrenchment, they may
                      not be permitted to stand. 220 The fact that a plan has an entrenchment effect,
                      however, does not mean that the board's primary or sole purpose was
                      entrenchment."

            (Benihana of Tokyo, Inc. v Benihana, Inc., 891 A2d 150, 185-86 [Del Ch 2005], affd,

            906 A2d 114 [Del 2006] [citations omitted].)

             654984/2016 MULE, ANDREW vs. SILLERMAN, ROBERT F.X.                               Page 4 of 6
             Motion No. 009

                                                           4 of 6
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                                                                                              INDEX NO. 654984/2016
  NYSCEF DOC. NO. 198                                                                 RECEIVED NYSCEF: 01/01/2024

                    In the ASC, plaintiff alleges that the purpose of the Exchange Agreement was to

            "mitigate the potentially negative impact on Sillerman's controlling equity stake," from

            the Company's acquisition of Rant, Inc., private placement of debentures, and the

            issuance of shares to retire debt owed by the Company to MGT Sports, Inc. in

            connection with the purchase of MGT Sports. (NYSCEF 44, ASC ,i,i36, 40-47.)

            However, the Exchange Agreement's stated purpose was "in furtherance of the

            Company's plan to (i) remain listed on the NASDAQ Global Market, and (ii) upon

            consummation, improve its balance sheet and capital structure." (NYSCEF 11,

            Exchange Agreement at 1 [Whereas Clause].) In the ASC, plaintiff rejects the

            Exchange Agreement's stated purpose in favor of an entrenchment theory that requires

            an inference that the "primary or sole purpose" of the Exchange Agreement instead was

            to maintain Sillerman's controlling interest. In support, plaintiff alleges that "[s]uch a

            result would have meant that Sillerman would no longer control the Company."

            (NYSCEF 44, ASC ,is.)        Since this inference is not supported by allegations of fact in

            the ASC, and it is inconsistent with the events that followed-maintaining the

            Company's NASDAQ listing and public offering on March 1, 2017 -- the court would

            dismiss the complaint without prejudice. (See Brookfield, 2021 Del. LEXIS 291 at *58-

            59 [affirming Chancery Court's dismissal of plaintiff's entrenchment claim for failing to

            allege facts supporting a reasonably conceivable inference that the primary or sole

            purpose of the private placement was to maintain the controlling shareholder's voting

            control].)

                   Accordingly, it is

             654984/2016 MULE, ANDREW vs. SILLERMAN, ROBERT F.X.                              Page 5 of 6
             Motion No. 009

                                                           5 of 6
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                                                                                                INDEX NO. 654984/2016
  NYSCEF DOC. NO. 198                                                                     RECEIVED NYSCEF: 01/01/2024

                      ORDERED that Sillerman's motion for leave to renew its motion to dismiss is

            granted in part; and it is further

                      ORDERED that, upon renewal, the court vacates its prior order (NYSCEF 165,

            Decision and Order [mot. seq. no. 006]) in part, and grants Sillerman's motion to

            dismiss only as to the first cause of action, which is dismissed on consent; and it is

            further

                      ORDERED that this motion is otherwise denied as to renewal as to the

            entrenchment claim.

                      1/1/2024
                       DATE                                                   ANDREA MASLEY, J.S.C.

                                     ~
             CHECK ONE:                  CASE DISPOSED                NON-FINAL DISPOSITION

                                         GRANTED         □ DENIED     GRANTED IN PART          □ OTHER
             APPLICATION:                SETTLE ORDER                 SUBMIT ORDER

             CHECK IF APPROPRIATE:       INCLUDES TRANSFER/REASSIGN   FIDUCIARY APPOINTMENT    □ REFERENCE

             654984/2016 MULE, ANDREW vs. SILLERMAN, ROBERT F.X.                                Page 6 of 6
             Motion No. 009

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