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Cinema Scene Marketing & Promotions, Inc. v. Calidant Capital, LLC

United States District Court, D. Kansas

August 30, 2017

CINEMA SCENE MARKETING & PROMOTIONS, INC, BRAD DERUSSEAU, MICHAEL HOLMES, JOSEPH ROSS, AND BRUCE SIMS, Plaintiffs,
v.
CALIDANT CAPITAL, LLC, DREW N. BAGOT, AND DAVID LAI, Defendants.

          MEMORANDUM AND ORDER

          JULIE A. ROBINSON, UNITED STATES DISTRICT JUDGE.

         Plaintiffs filed this action alleging Defendants lied to induce them to sign a buy-out letter of intent with Defendants, who neither had the money to buy Plaintiffs' business nor the intent to follow through with the purchase. This caused Plaintiffs to reject another potential buyer and ultimately sell their business for less than what Defendants had promised. Before the Court is Defendants' Motion to Dismiss Counts I and II of Plaintiffs' First Amended Complaint (Doc. 16).[1] The motion is fully briefed and the Court is prepared to rule. For the reasons stated below, the Court denies the motion as to Count I, but grants dismissal as to Count II.

         I. Factual Background

         The following facts are alleged in the First Amended Complaint (“FAC”) and assumed to be true for purposes of deciding this motion.

         Plaintiff Cinema Scene Marketing & Promotions, LLC (“Cinema Scene”) is in the theater electronic screen and menu business. Its principals are Plaintiffs Brad Derusseau, Michael Holmes, Joseph Ross, and Bruce Sims (“CS Principals”; collectively with Cinema Scene, “Plaintiffs”), all of whom are residents of Johnson County, Kansas.

         Defendant Calidant Capital, LLC (“Calidant”) is a Texas capital investment limited liability company with two members, Defendants Drew Bagot and David Lai.

         In the fall of 2015, Calidant first told Cinema Scene that it wanted to invest in Cinema Scene and buy-out Cinema Scene's principals. The CS Principals interviewed a number of consultants who sought to purchase and/or finance the acquisition of the CS Principals' ownership of Cinema Scene, including Defendants. Recognizing that they had significant competition to secure a deal, Lai and Bagot made three major misrepresentations to induce Plaintiffs to enter a buy-out letter of intent (“LOI”) with them: 1) Defendants had secured all necessary financing to complete the transaction under the LOI; 2) Defendants could “deliver” Studio Movie Grill (“SMG”) as a partner in Plaintiffs' operations; and 3) Defendants would facilitate meetings between Plaintiffs and Cinemark USA, Inc. (“Cinemark”) and deliver Cinemark as a client and/or partner.

         Prior to entering into the LOI, the parties met in person at their respective offices or at a restaurant. They also had telephone conferences. Cook Jordan and David Kakareka, brokers serving as Plaintiffs' representatives, were present at some of these meetings. The alleged misrepresentations were made on various dates, including August 15, 2015, September 17, 2015, October 6, 2015, October 7, 2015, and October 26, 2015.

         On or around November 11, 2015, the parties executed a LOI, which generally outlined some of the basic terms of a future deal, the precise terms of which were to be later negotiated and finalized and thoroughly documented, as is customary in such complicated transactions. The LOI obligated the parties to negotiate in good faith toward a purchase agreement-and other documents incident to such purchase agreement-in conformance with guidelines provided in the LOI. The LOI also contained an exclusivity term whereby Cinema Scene agreed to not negotiate with parties other than Calidant regarding transactions alternative to the transaction contemplated by the LOI for a period of ninety days following execution of the LOI.

         After signing the LOI, the parties began negotiating Calidant's investment contemplated by the LOI (the “Transaction”). In January and February 2016, the parties corresponded on countless occasions, both directly through their principals and indirectly through their attorneys and brokers.

         Prior to the LOI's original ninety-day exclusivity period expiring in early February 2016, Plaintiffs agreed to extend the exclusivity period through February 29, 2016 to close the Transaction. When this extended period expired, Plaintiffs again agreed to extend the exclusivity period to March 15, 2016.

         In late February 2016, Defendants and their would-be financial partner Saratoga presented to Plaintiffs several one-sided documents-including a credit agreement and management services agreement-that severely favored Defendants. Plaintiffs responded, requesting changes, and reiterating its desire to close the Transaction. Defendants did not respond to the requested changes.

         On or about March 3, 2016, AMC made public its acquisition of Carmike Cinemas. Within approximately eight hours of AMC's announcement, Defendants informed Plaintiffs that their financial partner, Saratoga, backed out of the Transaction in light of AMC's announcement.

         Plaintiffs believe Defendants and Saratoga were aware of AMC's acquisition of Carmike Cinemas prior to the announcement.

         The parties continued to talk after the LOI's exclusivity period lapsed on March 15, 2016, but Defendants' new proposals contained terms substantially different and less favorable than the LOI.

         In mid-April 2016, Plaintiffs attended CinemaCon and made contacts that eventually led to a sale of their business to a third party. That sale closed on terms substantially inferior to those offered in the LOI.

         Shortly before the closing on the third-party sale, Calidant demanded Cinema Scene pay it $385, 000 for attorneys' fees allegedly incurred in connection with the Transaction. Calidant asserted that Cinema Scene breached the LOI by failing to negotiate in good faith, by failing to close the Transaction, by breaching the LOI's exclusivity obligations, and by failing to execute documents associated with the Transaction. Plaintiffs filed this suit in response. Defendants now move to dismiss the fraudulent and negligent misrepresentation claims (Counts I and II, respectively).

         II. Legal Standards

         Defendants move to dismiss Counts I and II of the FAC under Fed.R.Civ.P. 12(b)(6). To survive a motion to dismiss for failure to state a claim, a complaint must present factual allegations, assumed to be true, that “raise a right to relief above the speculative level, ” and must contain “enough facts to state a claim to relief that is plausible on its face.”[2] To state a claim for relief, “the complaint must give the court reason to believe that this plaintiff has a reasonable likelihood of mustering factual support for these claims.”[3] The plausibility standard does not require a showing of probability that a defendant has acted unlawfully, but requires more than “a sheer possibility.”[4] “[M]ere ‘labels and conclusions, ' and ‘a formulaic recitation of the elements of a cause of action' will not suffice; a plaintiff must offer specific factual allegations to support each claim.”[5] Finally, the Court must accept the nonmoving party's factual allegations as true and may not dismiss on the ground that it appears unlikely the allegations can be proven.[6]

         The Supreme Court has explained the analysis as a two-step process. For the purposes of a motion to dismiss, the court “must take all the factual allegations in the complaint as true, [but] we ‘are not bound to accept as true a legal conclusion couched as a factual allegation.'”[7] Thus, the court must first determine if the allegations are factual and entitled to an assumption of truth, or merely legal conclusions that are not entitled to an assumption of truth.[8] Second, the court must determine whether the factual allegations, when assumed true, “plausibly give rise to an entitlement to relief.”[9] “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”[10]

         III. Analysis

         A. Choice of Law: Kansas Law Governs Counts I and II

         Defendants argue that because the LOI contains a choice-of-law provision adopting Texas state law, Texas law governs all claims arising from the LOI, including Plaintiffs' claims for fraudulent and negligent misrepresentation.[11] The Court disagrees.

         A federal court sitting in diversity must apply the choice-of-law rules of the state in which it sits.[12] Thus, the Court will apply Kansas choice-of-law rules. Two of these rules support applying Kansas law to these claims.

         First, where the outcome of a dispute would be the same under the laws of either state, the Court need not decide the conflict and may apply Kansas law.[13] In this case, both parties have argued the results will be the same whether the Court follows Kansas or Texas law. Thus, the Court may apply Kansas law to these claims.

         Second, “[w]here the parties to a contract have entered an agreement that incorporates a choice of law provision, Kansas courts generally effectuate the law chosen by the parties to control the agreement.”[14] Counts I and II, however, are not based on the LOI, but are tort claims based on Defendants' alleged breach of common law duties not to induce reliance by misrepresentations. For tort claims, Kansas follows the lex loci delicti approach, meaning the law of the “place of the wrong” controls.[15] In a misrepresentation claim, “the place of wrong is where the loss is sustained, not where the misrepresentations were made.”[16] Because Plaintiffs sustained their injuries in Kansas, the Court concludes Kansas law governs these claims.

         B. Economic Loss Doctrine

         Defendants argue the economic loss doctrine bars Counts I and II because Plaintiffs suffered no independent injury apart from those they allegedly suffered with respect to performance of the LOI.[17] They insist that tort damages are not recoverable for economic losses resulting from a party's failure to perform under a contract.

         The economic loss doctrine is “‘a judicially created doctrine that sets forth the circumstances under which a tort action is prohibited if the only damages suffered are economic losses.'”[18] “In its original form, the economic loss doctrine simply prohibited a commercial buyer of defective goods from suing in negligence or strict liability when the only injury consisted of damage to the goods themselves.”[19] Courts have extended the doctrine's application beyond the commercial product liability sphere to preserve the distinctions between contract and tort law.[20] Although its scope is still unfolding, the Kansas Supreme Court (“KSC”) has held that negligent misrepresentation claims are not subject to the economic loss doctrine.[21]

         In Rinehart, Kenneth and Beverly Rinehart contracted with Morton Buildings for a pre-engineered building for their home and company, Midwest Slitting LLC. Disputes arose during construction over the structure's quality. The Rineharts refused to pay due to dissatisfaction with Morton's attempts at repair. They sued the builder for damages under several theories, including breach of contract and warranty and negligent misrepresentation.[22] Midwest Slitting, not a party to the contract, alleged Morton misrepresented that the building would be completed in a timely manner, accommodate its needs to relocate the business, and meet or exceed all industry standards.[23] It sought economic damages for rent at an alternate facility, lost production, relocation costs, and interest expenses on their line of credit. A jury awarded Midwest Slitting damages for negligent misrepresentation.[24] Morton appealed, and the Kansas Court of Appeals upheld the misrepresentation award, finding that the economic loss doctrine ...


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