United States District Court, D. Kansas
Stanton E. Ross, Plaintiff/Counterclaim Defendant,
Adam Rothstein, Defendant/Counterclaimant.
MEMORANDUM & ORDER
JOHN W. LUNGSTRUM, District Judge.
Plaintiff Stanton E. Ross is the Chief Executive Officer of and a substantial shareholder in Infinity Energy Resources, Inc. ("Infinity"). Mr. Ross filed a petition in state court against defendant Adam Rothstein asserting claims of fraudulent misrepresentation, violations of the Kansas Consumer Protection Act and defamation arising out of a $210, 000 short-term loan made by Mr. Rothstein to Mr. Ross. Mr. Rothstein removed the petition to federal court on the basis of diversity jurisdiction and, thereafter, asserted seven counterclaims against Mr. Ross arising out of Mr. Ross's alleged breach of various agreements related to the loan. Shortly after the filing of his counterclaims, Mr. Rothstein filed a motion for preliminary injunction seeking the delivery and transfer to Mr. Rothstein of an aggregate total of 142, 310 shares of Infinity common stock constituting security, interest and consideration with respect to the loan and subsequent agreements between the parties. As a result of that hearing, 65, 000 shares of Infinity stock were transferred to Mr. Rothstein and 77, 310 shares of Infinity stock were issued in Mr. Rothstein's name and deposited into the court until further order of the court.
At the onset of discovery, Mr. Rothstein filed a motion for judgment on the pleadings or, alternatively, for summary judgment on each of Mr. Ross's claims for relief and for summary judgment as to three of Mr. Rothstein's counterclaims against Mr. Ross. In September 2013, the court granted summary judgment in favor of Mr. Rothstein on Mr. Ross's fraud and KCPA claims and granted in part and denied in part summary judgment on Mr. Ross's defamation claim. The court further entered judgment in favor of Mr. Rothstein on his claims for breach of the secured promissory note; breach of the forbearance agreement; and breach of the superseding pledge agreement and foreclosure of security interest in the amount of $210, 000, plus 18% default interest compounding monthly beginning September 5, 2012. Finally, the court ordered that Mr. Rothstein was entitled to obtain from the Clerk of the Court the original Infinity Energy Resource, Inc. Certificate No. 3287 representing 77, 310 shares of Infinity's common stock.
Shortly after obtaining the stock certificate from the Clerk of the Court, Mr. Rothstein filed a notice of disposition of collateral indicating that the stock shares were sold and liquidated. Mr. Rothstein's notice prompted the filing of Mr. Ross's motion to amend his complaint to add a claim for wrongful disposition of collateral under K.S.A. § 84-9-625. In the December 20, 2013 Amended Scheduling Order, the magistrate judge granted Mr. Ross leave to file an amended complaint on the grounds that Mr. Rothstein had not met his burden of showing that Mr. Ross's proposed claim was futile and that any prejudice to Mr. Rothstein could be minimized by the extension of discovery deadlines. Mr. Rothstein, pursuant to Federal Rule of Civil Procedure 72(a), has filed a motion for review of that order (doc. 125) and that motion is before the court at this time.
In addition, since the filing of the court's memorandum and order resolving Mr. Rothstein's motion for summary judgment, the parties have been engaged in the discovery process including the document production and the taking of depositions. Those efforts have triggered Mr. Rothstein's second motion for summary judgment on Mr. Ross's defamation claim (doc. 132) which, in turn, has triggered Mr. Ross's motion for reconsideration (doc. 159) of the court's September 2013 memorandum and order granting in part Mr. Rothstein's motion for summary judgment on Mr. Ross's defamation claim. Those motions are also before the court at this time. Finally, Mr. Rothstein has filed a motion for sanctions pursuant to Federal Rule of Civil Procedure 56(h) in which he contends that Mr. Ross, under penalty of perjury, knowingly submitted a false declaration in opposition to Mr. Rothstein's initial motion for summary judgment.
As explained in more detail below, the court denies the motion for review; denies the motion for reconsideration; grants the motion for summary judgment; and denies the motion for sanctions.
For purposes of Mr. Rothstein's motion for summary judgment, the following facts are either uncontroverted or related in the light most favorable to Mr. Ross, the non-moving party. Stanton Ross is a resident of Johnson County, Kansas and is currently the Chairman of the Board, President, Chief Executive Officer and a shareholder of Infinity, a publicly traded company having its principal place of business in Johnson County, Kansas. Prior to the financial collapse of 2008 and the resulting economic recession, Mr. Ross pledged substantial portions of his holdings of Infinity stock to one or more lenders as security for loans, the proceeds of which he used for personal, household and business purposes. When the value of that stock declined precipitously, loans were called and one or more lawsuits were filed against Mr. Ross. In connection with funding the settlements of those lawsuits, Mr. Ross required cash. According to Mr. Ross, a payment of $210, 000 was due to be made upon those settlements in the first quarter of 2012. Mr. Ross did not have the required cash.
Adam Rothstein is a Connecticut resident and currently the advisor to several funds concentrating in the technology, media and entertainment sectors. In March 2012, Mr. Rothstein agreed to and did loan Mr. Ross $210, 000 and the terms of the loan were set forth in a Secured Promissory Note and Pledge Agreement executed by the parties. Pursuant to those terms, the loan was to be repaid in full within 60 days, on or before May 31, 2012 and the interest for the loan was to be paid by the transfer of 15, 000 shares of Infinity stock. Under the terms of the Pledge Agreement, Mr. Ross pledged as security for the loan specifically identified certificates totaling, in the aggregate, 142, 310 shares of his Infinity stock. Mr. Ross failed to repay the loan by May 31, 2012 and did not transfer to Mr. Rothstein the 15, 000 "Interest Shares" or any of the shares pledged as security for the loan.
In August 2012, at Mr. Ross's request, the parties executed a written Forbearance Agreement pursuant to which Mr. Ross reaffirmed his obligations under the Secured Promissory Note and acknowledged that he was in default. The parties further agreed that the loan due date would be extended to January 1, 2013. In exchange for Mr. Rothstein's forbearance, Mr. Ross agreed to transfer 50, 000 shares of Infinity stock (the "Consideration Shares") and the original 15, 000 Interest Shares within seven days. At the time of the Forbearance Agreement, the parties also executed a Superseding Pledge Agreement whereby Mr. Ross pledged as security the remaining 77, 310 Infinity shares that he owned. The Forbearance Agreement provides for default interest "to accrue and compound monthly at the rate of eighteen percent (18%) per annum" upon Mr. Ross's failure to satisfy his obligations under the agreement.
Mr. Rothstein did not receive from Mr. Ross certificates representing the Pledged Shares or Interest Shares within the seven-day window provided for in the Forbearance Agreement and the Superseding Pledge Agreement. Moreover, Mr. Ross did not repay the loan on or before January 1, 2013. Shortly thereafter, the parties ended up in this court. Additional facts will be provided as they relate to the specific arguments raised by the parties in their submissions.
II. Motion for Review
After Mr. Rothstein filed a notice of disposition of collateral indicating that the stock shares were sold and liquidated, Mr. Ross filed a motion seeking leave to amend his complaint to add a claim for wrongful disposition of collateral under K.S.A. § 84-9-625. The magistrate judge granted Mr. Ross leave to file an amended complaint on the grounds that Mr. Rothstein had not met his burden of showing that Mr. Ross's proposed claim was futile and that any prejudice to Mr. Rothstein could be minimized by the extension of discovery deadlines. Mr. Rothstein, pursuant to Federal Rule of Civil Procedure 72(a), has filed a motion for review of that order (doc. 125). As will be explained, the motion is denied.
Mr. Ross sought to amend his complaint to add a claim for wrongful disposition of collateral. In opposing that motion before the magistrate judge, Mr. Rothstein urged that the claim was futile. According to Mr. Rothstein, his disposition of the stock was commercially reasonable as a matter of law under the Uniform Commercial Code because he sold it on a "recognized market." See K.S.A. § 84-9-627(b)(1) (disposition of collateral is commercially reasonable if the disposition is made in the usual manner on any recognized market). As noted in the Official UCC Comment, the concept of a "recognized market" is quite ...