Court Opinion

ID: 9959899
Source: CourtListenerOpinion
Date Created: 2024-04-12 20:11:41.818984+00
Date Added: 2024-06-11T08:18:59.253476
License: Public Domain

S3 Partners, LLC v Fidessa Corp.
               2024 NY Slip Op 31199(U)
                      April 8, 2024
           Supreme Court, New York County
        Docket Number: Index No. 653132/2023
                  Judge: Andrew Borrok
Cases posted with a "30000" identifier, i.e., 2013 NY Slip
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                       publication.
                                                                                                                         INDEX NO. 653132/2023
  NYSCEF DOC. NO. 113                                                                                              RECEIVED NYSCEF: 04/08/2024

            SUPREME COURT OF THE STATE OF NEW YORK
            COUNTY OF NEW YORK: COMMERCIAL DIVISION PART 53
            ----------------------------------------------------------------------------------- X

             S3 PARTNERS, LLC                                                                        INDEX NO.         653132/2023

                                                          Plaintiff,                                                    07/27/2023,
                                                                                                                        09/21/2023,
                                                - V -                                                MOTION DATE        12/20/2023
             FIDESSA CORPORATION,
                                                                                                     MOTION SEQ. NO.    001 004 006
                                                          Defendant.
                                                                                                       DECISION+ ORDER ON
                                                                                                             MOTION
            ----------------------------------------------------------------------------------- X

            HON. ANDREW BORROK:

            The following e-filed documents, listed by NYSCEF document number (Motion 001) 4, 5, 6, 7, 8, 9, 10,
            11, 12, 13, 14, 15,24,30,33,47,48,49,50,51,52,53,54,55,57,58, 64,65,66
            were read on this motion to/for                                                  MISCELLANEOUS

            The following e-filed documents, listed by NYSCEF document number (Motion 004) 35, 36, 37, 38, 56,
            59, 60, 61, 62, 63, 67, 68, 69, 70, 71
            were read on this motion to/for                                                         DISMISSAL

            The following e-filed documents, listed by NYSCEF document number (Motion 006) 81, 82, 83, 84, 85,
            86, 87, 88, 89, 90, 91, 92, 93, 94, 97
            were read on this motion to/for                                                    LEAVE TO FILE

            Upon the foregoing documents, the motion (Mtn. Seq. No. 001) seeking to strike allegations in

            the now superseded original complaint (the Original Complaint; NYSCEF Doc. No. 1) by the

            amended complaint (the AC; NYSCEF Doc. No. 28) and for costs in having to bring the motion

            is denied. The motion (Mtn. Seq. No. 004) seeking to dismiss the AC is denied. The motion

            (Mtn. Seq. No. 006) seeking to amend the AC is granted.

                                                             THE RELEVANT FACTS

             653132/2023 S3 PARTNERS, LLC vs. FIDESSA CORPORATION                                                       Page 1 of 10
             Motion No. 001 004 006

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            Reference is made to an Investment Agreement, dated as of August 4, 2021 (the Agreement;

            NYSCEF Doc. No. 7), by and between S3 Partners, LLC (S3) and Fidessa Corporation (Fidessa)

            pursuant to which Fidessa agreed to provide approximately $40 million of funding to S3 in two

            traunches. In this lawsuit, S3 claims that Fidessa failed to provide the second traunch of

            financing in the amount of approximately $6,250,000 asserting causes of action sounding in

            breach of contract, specific performance, breach of the implied covenant of good faith and fair

            dealing, and a declaratory judgment to determine the parties' rights and obligations under the

            Agreement. As relevant, in the Original Complaint, S3 alleged that Fidessa and ION Group

            lacked the financial ability to provide $6.25 million in financing to S3. Fidessa claims that these

            allegations were frivolous and that the attorney's representing S3 knew that they were false and

            only asserted them to hurt Fidessa' s reputation. To wit, among other things, Fidessa had already

            claimed that it had not provided the second traunch of funding to S3 because it had claimed that

            S3 had breached the Agreement and as a showing of its ability to make the second traunch

            funding, Fidessa offered to place the $6.25 million in escrow. In fact, Fidessa alleges that it was

            only after S3 made a motion (Mtn. Seq. No. 001) to strike the offending allegations that S3 filed

            the Amended Complaint (AC; NYSCEF Doc. No. 28) removing these allegations. As such, and

            as discussed below, Fidessa has moved for costs and fees associated with having to bring the

            motion pursuant to 22 NYCRR Section 130-1.1.

            In the AC, and without the offending allegations that Fidessa has not funded the second traunch

            contemplated by the Agreement because it lacks the financial wherewithal to do so, S3 asserts

            the same four causes of action.

             653132/2023 S3 PARTNERS, LLC vs. FIDESSA CORPORATION                                Page 2 of 10
             Motion No. 001 004 006

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            Subsequently, Fidessa filed a motion (Mtn. Seq. No. 4) seeking dismissal of the AC pursuant to

            CPLR 321 l(a)(7) for failure to state a cause of action (and without asserting that any allegations

            in the AC must be struck as irrelevant or prejudicial) and S3 opposes that motion and otherwise

            moved (Mtn. Seq. No. 006) seeking leave to file an amendment to its AC. Fidessa opposes that

            motion.

                                                         Discussion

               I.       Fidessa's Motion (Mtn. Seq. No. 001) Seeking Sanctions is Denied

            CPLR 3024(b) provides that "[a] party may move to strike any scandalous or prejudicial matter

            unnecessarily inserted in a pleading." In applying this rule, the Appellate Division has stated

            that "[a] motion to strike scandalous or prejudicial material from a pleading will be denied if the

            allegations are relevant to a cause of action" (New York City Health and Hasps. Corp. v St.

            Barnabas Community Health Plan, 22 AD3d 391, 391 [1st Dept 2005] [citations omitted], cited

            by Patrick M. Connors, Prac Commentaries, McKinney's Cons Laws of NY, CPLR C3024:4

            ["[W]e may conclude that 'unnecessarily' means 'irrelevant' .... Generally speaking, if the item

            would be admissible at the trial under the evidentiary rules of relevancy, its inclusion in the

            pleading, whether or not it constitutes ideal pleading, should not ordinarily justify a motion to

            strike under CPLR 3024[b ]"]).

            22 NYCRR Section 130-1. l(a) authorizes the award of "costs in the form ofreimbursement for

            actual expenses reasonably incurred and reasonable attorney's fees, resulting from frivolous

            conduct." Under subsection (c) of that Rule, "conduct is frivolous if:

                    (1) it is completely without merit in law and cannot be supported by a reasonable
                    argument for an extension, modification or reversal of existing law;
                    (2) it is undertaken primarily to delay or prolong the resolution of the litigation, or
                    to harass or maliciously injure another; or
             653132/2023 S3 PARTNERS, LLC vs. FIDESSA CORPORATION                                   Page 3 of 10
             Motion No. 001 004 006

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  NYSCEF DOC. NO. 113                                                                      RECEIVED NYSCEF: 04/08/2024

                   (3) it asserts material factual statements that are false.

                   Frivolous conduct shall include the making of a frivolous motion for costs or
                   sanctions under this section. In determining whether the conduct undertaken was
                   frivolous, the court shall consider, among other issues the circumstances under
                   which the conduct took place, including the time available for investigating the
                   legal or factual basis of the conduct, and whether or not the conduct was
                   continued when its lack of legal or factual basis was apparent, should have been
                   apparent, or was brought to the attention of counsel or the party."

            In its moving papers (NYSCEF Doc No. 14, at 13), Fidessa identifies four discrete allegations

            that S3 made in the Original Complaint, in ,i,i 2, 6, and 11, which it asserts are false, unnecessary

            to the Original Complaint, and damaging to its reputation. Assuming without deciding that such

            "unnecessary" allegations would fall within the ambit of CPLR 3024(b), Fidessa's motion to

            strike is nonetheless denied. S3 amended the Original Complaint as of right pursuant to CPLR

            Section 3025(a) during the pendency of this motion and removed the offending allegations.

            Inasmuch as "'the amendment cure[d] the defect, the motion should be deemed to abate"'

            (Cassissi v Yee, 46 Misc3d 552,555 [Sup Ct, Westchester County 2014], quoting David D.

            Siegel, Prac Commentaries, McKinney's Cons Laws of NY, CPLR 3024:7). To be clear, the

            record before the Court with respect to the allegations in the Original Complaint to which

            Fidessa objects does not   w amount to the kind of frivolous conduct warranting sanction because
            S3 abandoned those allegations (22 NYCRR § 130-1.1 [c]) when it filed the AC which AC

            "supersede[d] the original complaint and [become] the only complaint in the case" (id., quoting

            Halmar Distribs. v Approved Mfg. Corp., 49 AD2d 841, 841 [1st Dept 1975]). Should however

            S3 reassert those allegations or other allegedly baseless allegations, Fidessa may renew its

            motion. Thus, the motion is denied without prejudice.

             653132/2023 S3 PARTNERS, LLC vs. FIDESSA CORPORATION                                  Page 4 of 10
             Motion No. 001 004 006

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               II.      Fidessa's Motion (Mtn. Seq. No. 004) is denied

            "On a motion to dismiss a complaint pursuant to CPLR 3211, we must liberally construe the

            pleading and 'accept the facts as alleged in the complaint as true, accord plaintiffs the benefit of

            every possible favorable inference, and determine only whether the facts as alleged fit within any

            cognizable legal theory"' (Himmelstein, McConnell, Gribben, Donoghue & Joseph, LLP v

            Matthew Bender & Co. , Inc., 37 NY3d 169, 175, rearg denied,. 37 NY3d 1020 [2021], quoting

            Leon v Martinez, 84 NY2d 83, 87-88 [1994]). "Modem pleading rules are designed to focus

            attention on whether the pleader has a cause of action rather than on whether he has properly

            stated one" (Rovella v Orofino Realty Co., Inc. , 40 NY2d 633, 636 [1976] [internal quotation

            marks and citations omitted]).

            "Dismissal under CPLR 321 l(a)(7) is [only] warranted if the plaintiff fails to assert facts in

            support of an element of the claim, or if the factual allegations and inferences to be drawn from

            them do not allow for an enforceable right of recovery" (Himmelstein, 27 NY3d at 175 [internal

            quotation marks and citation omitted]). "Statements in a pleading shall be sufficiently particular

            to give the court and parties notice of the transactions, occurrences, or series of transactions or

            occurrences, intended to be proved and the material elements of each cause of action or defense"

            (CPLR 3013).

            In its moving papers, and relying principally on Avalon Constr. Corp. v Kirch Holding Co. (256

            NY 137, 141 [1931]) which affirmed the Second Department's affirmance of a judgment of

            Special Term after trial, that "a breach of contract to make a loan, standing by itself, involves no

            legal damage" (emphasis added), reasoning that the borrower, being denied the loan, is also

             653132/2023 S3 PARTNERS, LLC vs. FIDESSA CORPORATION                                  Page 5 of 10
             Motion No. 001 004 006

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            relieved of its repayment obligation, Fidessa argues that the breach of contract cause of action

            (first cause of action) must be dismissed because the $6.25 million second traunch funding is a

            loan, not an investment, such that there are no direct or consequential damages. The argument

            fails at this stage of the litigation. The plain language of the Agreement which must govern its

            construction (see R/S Assocs. v New York Job Dev. Auth., 98 NY2d 29, 32 [2002] ["when parties

            set down their agreement in a clear, complete document, their writing should as a rule be

            enforced according to its terms"] [internal quotation marks and citations omitted]) appears to be

            at odds with this interpretation such that dismissal at this stage is not appropriate. For clarity, the

            fact that the Agreement provides that "[t]he ION Investor has agreed to subscribe for Shares and

            the Company has agreed to issue Shares on the terms and subject to the conditions of the

            Agreement" (Agreement, Recitals [affirmation of Alexander B. Lees, Esq., ex A [NYSCEF Doc

            No. 37]) does not on its face mean that the $6.25 million second traunch funding was a loan

            requiring dismissal. Indeed, the substance of the Agreement appears to provide for an up to $40

            million investment from Fidessa in exchange for a substantial share in S3 's equity and control of

            its business. More specifically, Fidessa paid the first tranche of $33.75 million, defined as the

            "Subscription Amount," to S3 in exchange for S3's issuance of"(i) the Ordinary Shares ... of the

            Company ... , (ii) the Redeemable Shares, and (iii) the Warrants" (id. ,J2.1.28 [emphasis added]).

            Fidessa also received the right to appoint two "Investor Directors" to S3' s Board of Managers

            (id. ,i 9.1 et seq.) and agreed to invest the second tranche of up to $6.25 million at any time in the

            two years following "Completion" (i.e., closing of the Agreement) "upon written request by

            [S3]," in exchange for the Redeemable Shares (id. ,i 3.3).

             653132/2023 S3 PARTNERS, LLC vs. FIDESSA CORPORATION                                   Page 6 of 10
             Motion No. 001 004 006

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            For clarity, S3's assertion that it is due $6.25 million in direct damages for Fidessa's breach of

            contract claim does not appear to be correct because had it received that amount, S3 would have

            been required to issue the Redeemable Shares for Fidessa' s later redemption with interest (id.,

           ,i,i 3.3, 7.5-7.9). Consequential damages however are another matter. Paragraph 46 of the AC

            asserts that Fidessa' s breach allegedly impaired operations and caused additional costs in

            securing replacement funding which costs were the foreseeable consequences ofFidessa's

            alleged breach and were allegedly within the parties' contemplation at the time they entered the

            Agreement (D.K. Prop., Inc. v National Union Fire Ins. Co. of Pittsburgh, PA, 168 AD3d 505,

            506-07 [1st Dept 2019]). This may be correct. Dismissal at this time is premature.

            Fidessa is also not entitled to dismissal of S3' s cause of action sounding in breach of the implied

            covenant of good faith and fair dealing (second cause of action) at this stage of the litigation. As

            alleged, it is not duplicative of its breach of contract claim (AEA Middle Mkt. Debt Funding LLC

            v Marblegate Asset Mgt., LLC, 214 AD3d 111, 133 [1st Dept 2023]). Here, S3 alleges that

            Fidessa breached the implied covenant of good faith and fair dealing by demanding that S3 meet

            extra-contractual reporting duties, interfering with S3 's auditors and delaying completion of their

            audit, and then refusing to "accept" the audit (citing AC, ,i 62 [NYSCEF Doc No. 60]; cf id.,

           ,i,i 43-47). This is different and separate from the alleged breach by Fidessa in failing to fund the

            $6.25 million second traunch.

            Fidessa is also not entitled to dismissal of S3' s cause of action for specific performance (third

            cause of action). S3 may not have an adequate remedy at law and it would be error to deprive S3

            of its right to allege inconsistent or contradictory causes of action at the pleading stage

             653132/2023 S3 PARTNERS, LLC vs. FIDESSA CORPORATION                                   Page 7 of 10
             Motion No. 001 004 006

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            particularly where Fidessa argues that S3 has not suffered consequential recoverable damages

            (see Levy v Franklin Natl. Bank, 52 AD2d 769, 769 [1st Dept 1976]).

            Finally, Fidessa is not entitled to dismissal at this stage of the declaratory judgment (fourth cause

            of action) because S3 must be permitted to argue in the alternative and S3 is entitled to a

            declaration from this Court as to whether there are reciprocal enforceable obligations under the

            agreement under the circumstances of this case (Kevin Spence & Sons, Inc. v Boar's Head

            Provisions Co., 5 AD3d 352, 353-54 [1st Dept 2004]; Hyde Park Landing, Ltd. v Town ofHyde

            Park, 130 AD3d 730, 731 [2d Dept 2015], quoting Matter ofMorgenthau v Erlbaum, 59 NY2d

            143, 148 [1983] ["declaratory relief 'is not an extraordinary remedy,' as it 'only provides a

            declaration of rights between the parties' and 'cannot be executed upon so as to compel a party

            to perform an act"']). Accordingly, the motion to dismiss the AC is denied.

               III.      S3's motion (Mtn. Seq. No. 006) seeking leave to amend the AC is granted

            CPLR 3025(b) provides:

                      "[a] party may amend his or her pleading, or supplement it by setting forth
                      additional or subsequent transactions or occurrences, at any time by leave of court
                      or by stipulation of all parties. Leave shall be freely given upon such terms as may
                      be just including the granting of costs and continuances. Any motion to amend or
                      supplement pleadings shall be accompanied by the proposed amended or
                      supplemental pleading clearly showing the changes or additions to be made to the
                      pleading."

            The Appellate Division has been clear"' [l]eave to amend pleadings should be freely granted in

            the absence of prejudice or surprise so long as the proposed amendment is not palpably

            insufficient as a matter of law"' ( Olam Corp. v Thayer, 202 I WL 408232, 2021 NY Slip Op
             653132/2023 S3 PARTNERS, LLC vs. FIDESSA CORPORATION                                  Page 8 of 10
             Motion No. 001 004 006

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  NYSCEF DOC. NO. 113                                                                      RECEIVED NYSCEF: 04/08/2024

            30345[U], *2 [Sup Ct, NY County 2021], quoting Mashinsky v Drescher, 188 AD3d 465,465

            [1st Dept 2000] [emphasis in original]). In other words, "[a] proposed amended complaint that

            would be subject to dismissal as a matter of law is, by definition, 'palpably insufficient or clearly

            devoid of merit' and thus should not be permitted under CPLR 3025" (Olam Corp., 2021 NY

            Slip Op 30345[U], *3-4 [emphasis in original]). Simply put, Fidessa is not correct that the

            proposed Second Amended and Supplemental Complaint (the SAC) is palpably insufficient or

            utterly devoid of merit as a matter oflaw. The additional allegations in the SAC, including the

            December 30, 2022 e-mail from Kunal Gullapalli, are relevant and bolster S3' s allegations as to

            nature of Fidessa's second tranche investment - i.e., that Fidessa viewed it as an investment and

            not a loan (ex D [NYSCEF Doc No. 86] to affirmation of A.J. Monaco, Esq. in support

            [NYSCEF Doc No. 82]). In addition, paragraphs 70 and 89 of the SAC include more detailed

            allegations regarding the harm Fidessa' s alleged breach caused to S3 's operations and the

            ensuing efforts and expenditures incurred obtain replacement financing in August 2023. Thus,

            the motion must be granted.

            The Court has considered Fidessa' s remaining arguments and finds them unavailing.

            Accordingly, it is hereby

            ORDERED that defendant Fidessa' s motion to strike, pursuant to CPLR 3024(b ), and for

            reimbursement of costs and fees, pursuant to 22 NYCRR Section 130-1.1, is denied; and it is

            further

             653132/2023 S3 PARTNERS, LLC vs. FIDESSA CORPORATION                                 Page 9 of 10
             Motion No. 001 004 006

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            ORDERED that defendant Fidessa's motion to dismiss plaintiff S3's AC is denied; and it is

            further

            ORDERED that plaintiff S3's motion for leave to amend the amended complaint is granted, and

            that the SAC shall be deemed served upon service of a copy of the decision and order with notice

            of entry thereof; and it is further

            ORDERED that defendant Fidessa shall serve an answer to the SAC or otherwise respond

            thereto within 20 days from the date of said service; and it is further

            ORDERED that counsel are directed to appear for a preliminary conference in Room 238 of this

            Court, at 60 Centre Street, on April 15, 2024, at 11: 30am.

                      4/8/2024
                       DATE                                                      ANDREW BORROK, 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

             653132/2023 S3 PARTNERS, LLC vs. FIDESSA CORPORATION                                  Page 10 of 10
             Motion No. 001 004 006

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