Securities fraud claims fail but plaintiff succeeds with related corporate transaction claims

In AJZN, Inc v. Yu, et al (2015 U.S. Dist. LEXIS 8407) the plaintiff brought various claims relating to corporate transactions after he transferred intellectual property rights to the defendants who subsequently failed to honor the terms of their agreements. AJZN held numerous patents, trademarks, and copyrights relating to wireless audio and internet radio technology.  In 2007, AJZN entered into a senior secured note purchase agreement with defendant Great American Life Insurance Company (“GALIC”) securing AJZN’s assets for a debt obligation.  When AJZN received a $1.5 million settlement of a patent lawsuit, GALIC demanded to be paid the proceeds, and insisted that AJZN appoint defendant Yu as CEO of AJZN.  In 2009, GALIC formed Aerielle with Yu acting as CEO.  In the following year, AJZN entered into an asset purchase agreement with Aerielle and sold all of its assets and its ownership of Aerielle subsidiary ATI for the assumption of certain debt and a warrant.  The warrant gave AJZN an option to acquire membership units of Aerielle and was to further compensate AJZN for its assets.  As part of the agreement, AJZN also entered into a confidential mutual release and settlement agreement. Problems began when AJZN attempted to exercise its rights under the warrant.  Aerielle initially failed to respond to AJZN’s request, but subsequently offered to terminate the warrant in exchange for an earnout agreement.  The earnout agreement would provide AJZN a percentage of the gross revenues generated by ATI if ATI merged with Aerielle.  AJZN rejected the offer, which went through, but ultimately failed to generate any revenue for AJZN. The plaintiff then brought suit for violations of the Securities Exchange Act, Cal. Corp. Code §25401 and §25501, breach of warranty, promissory fraud, recission of release, breach of fiduciary duty, civil conspiracy, tortious interference with contractual relations, fraudulent transfers, unjust enrichment, and successor liability. For the securities fraud, AJZN alleged that the defendants knew the warrant was worthless, would never be honored, and was used to induce AJZN to transfer its assets and eliminate its interest in Aerielle.  The Court however, held that AJZN failed to allege any misrepresentation or omission by the defendants, and dismissed the securities fraud, state corporate fraud claims under §§25401 and 25501, promissory fraud, and recission of release claims.  The Court also dismissed the civil conspiracy claim, finding the violation alleged only by one defendant, and dismissed the claims for unjust enrichment in part against Aerielle. The Court sustained the claims for breach of fiduciary duty, tortious interference with contractual relations, fraudulent transfers, and successor liability.  Breach of fiduciary duty was upheld against Yu for compensation increases and personal expenses he approved to himself.  Yu argued that the release removed any liability from him, but the release specifically excluded intentional fraud.  AJZN alleged tortious interference sufficiently, claiming that GALIC instructed Yu to withhold payments to Aerielle to prevent earned payments to AJZN.  The Court also accepted AJZN’s claim for fraudulent transfers, as it was purported that the transfer rendered Aerielle insolvent, Aerielle received no value for the transfer, and the subsequent company was controlled by GALIC and Yu.  Finally, the Court upheld successor liability because AJZN alleged that Aerielle’s transfer of assets resulted in the successor conducting the same business as Aerielle, using the same assets, and being controlled by the same defendants. The Court granted and denied the motion as described above.