Western Property Holdings, LLC v. Aequitas Capital Management, Inc.

Computer company Catcher Holding, Inc. (Catcher) was to be merged with wireless-technology company Vivato Networks, Inc. (Vivato). Aequitas Capital Management (Aequitas) (defendant) was an investment-management company, and one of its affiliates, Aequitas Investment Management (AIM), was part of a group that had loaned $4.8 million to Catcher, of which AIM contributed $500,000. Vivato was to merge into Catcher, and Catcher would then sell preferred stock to obtain $8 million. Aequitas agreed to loan Vivato $1 million as part of this process. Vivato’s main assets—patents—were transferred to a new company, Vivato Holdings, Inc. Aequitas received a security interest in the patents, but Vivato also agreed to grant Catcher an exclusive license and option to purchase the patents. Some of Vivato’s shareholders formed Western Property Holdings, LLC (Western) (plaintiff) to help with financing. Western entered into a loan participation agreement with Aequitas under which Western would contribute up to 30 percent of the funds loaned to Vivato, and Aequitas agreed to return a proportionate share of all repayments from Vivato back to Western, as well as grant Western a proportionate share of any proceeds from the sale of collateral after default. The loan-participation agreement gave Aequitas full and complete authority to enforce the loan documents, including commencing and managing foreclosures. From November 2007 to February 2008, Aequitas loaned Vivato $987,750, with Western paying $287,750. Vivato defaulted on the loan, and the stock offering was not successful. By December 2007, Vivato Holdings was negotiating a sale of the patents to another company, Intellectual Ventures (IV), for $1.8 million. That sale did not go through, in part because AIM expressed concern to the group that had loaned funds to Catcher about whether the title to the patents could be cleared without impairing Catcher’s rights. After much haggling, Aequitas ultimately filed a foreclosure action on the patents, obtaining clear title to them in 2009 at a sheriff’s sale. Aequitas ultimately sold the patents to XR Communications for $800,000. Western then filed this suit against Aequitas, arguing breach of contract, breach of the implied duty of good faith and fair dealing, breach of duties under a special relationship, and negligence. After the suit was filed, Aequitas paid Western $220,481.60, its share of the sale from XR Communications plus interest. Aequitas filed a motion for summary judgment, arguing that it had not breached the agreement or the duty of good faith and fair dealing, that there was no special relationship between the parties, and that the negligence claim was barred by the economic-loss rule. Western argued that Aequitas should be liable for blocking the sale of the patents to IV.