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Klinek v. Luxeyard, Inc.

Court of Appeals of Texas, Fourteenth District

October 29, 2019

LUXEYARD, INC., Appellee

          On Appeal from the 113th District Court Harris County, Texas Trial Court Cause No. 2012-54501

          Justice Panel consists of Justices Christopher, Jewell, and Hassan.


          Tracy Christopher Justice

         In this appeal from the judgment rendered after a non-jury trial, appellant Robert Klinek challenges the judgment ordering him to disgorge to appellee Luxeyard, Inc. the profits he obtained by conspiring in shareholder Kevan Casey's breach of fiduciary duty. Klinek also contends the trial court miscalculated the amount of those profits, as well as the damages awarded to him in his successful counterclaim for breach of contract.

         Regarding Klinek's appeal of the disgorgement judgment against him, we conclude that

(a) LuxeYard sufficiently alleged that Klinek conspired in a breach of fiduciary duty,
(b) the claim is not barred by LuxeYard's failure to sue Casey in this lawsuit,
(c) LuxeYard's answer to a contention interrogatory did not restrict the tort underlying its conspiracy claim to common-law fraud,
(d) there is legally sufficient evidence that Casey breached his fiduciary duties to LuxeYard,
(e) there is legally sufficient evidence that Klinek conspired in Casey's breach, and
(f) the trial court correctly calculated the profits Klinek was ordered to disgorge.

         As for Klinek's counterclaim, we find no error in the trial court's calculation of Klinek's damages. Thus, we affirm the judgment.

         I. Background

         In the summer of 2010, Khaled Alattar rented office space from Amir Mireskandari, who was in the business of liquidating retail merchandise. Alattar and Mireskandari became friends, and Alattar suggested that that it would be profitable to liquidate luxury merchandise through online "flash sales" to subscribers to a website. The following spring, Alattar and Mireskandari began the business by forming LY Retail LLC ("LY"), through which they planned to do business as "" Alattar focused on the technology while Mireskandari handled the business plan and financials.

         For help with the latter, Mireskandari contacted his friend and financial advisor Frederick "Rick" Huttner, who introduced him to Kevan Casey. Huttner and Casey suggested taking the company public so it could be capitalized through the sale of shares. As part of that plan, LY entered into a "Term Sheet" with Casey's company, Far East Strategies, LLC. The Term Sheet contemplated LY's reverse merger with a publicly traded shell company to be provided by Far East Strategies. The parties agreed that only the Term Sheet's "No Shop" and "Governing Law" provisions were binding. Under the no-shop provision, LY agreed that for ninety days it would not solicit or encourage any other proposals relating to the sale or issuance of any stock in LY or of its stock or assets. The "Governing Law" provision states that Texas law applies.

         Casey introduced Jonathan Friedlander and Lawrence Isen to LY as people who would help with marketing the company's shares. Although Casey admitted that he may then have known that Isen had a judgment against him for securities fraud, Casey did not disclose this to the company.

         Casey also recommended the law firm of Anslow & Jaclin (A&J) to LY and negotiated the terms of its representation.

         A. The Merger with Top Gear, Inc. and the First Subscription Agreement

         The public company that Casey selected for the merger was Top Gear, Inc. As part of the merger, Top Gear offered investors a Subscription Agreement, under which investors bought restricted shares together with restricted warrants to purchase an equal number of shares. A&J prepared the Subscription Agreements, and Casey reviewed and revised them.

         The restricted shares under the Subscription Agreement bore a legend preventing their sale or transfer for the period of time prescribed by Rule 144 of the Securities Act of 1933. See 17 C.F.R. § 230.144. The same restrictions applied to the exercise of the warrants. Under Rule 144, if the company issuing the shares has never been a shell company, then the restricted shares can be sold six months after the shareholder acquired them, but if the issuing company previously was a shell company, then the restricted shares cannot be sold for one year after the company files "Form 10 information" with the SEC. See id. In one of Top Gear's SEC filings, it identified itself as a shell company, but in all of its other SEC filings, Top Gear represented that it was not a shell company.

         The merger closed in November 2011, after which LY was Top Gear's wholly owned subsidiary. In early 2012, Top Gear changed its name to LuxeYard. Together, Alattar and Mireskandari owned more than 50% of LuxeYard's voting shares.

         B. Klinek's Connection with Top Gear/LuxeYard

         LuxeYard still needed capital after the merger, and in December 2011, Casey reached out to additional contacts, who were to offer the investment opportunity to their friends and family. One of these contacts was David Bahr, who purchased free-trading shares but did not buy restricted shares and warrants pursuant to the Subscriber Agreement. Bahr offered Robert Klinek the same deal that investors were offered in November, that is, to purchase restricted shares and warrants pursuant to a Subscriber Agreement, coupled with the purchase of free-trading shares from Top Gear's pre-existing shareholders pursuant to a separate Stock Purchase Agreement to which LuxeYard was not a party. Klinek agreed.

         C. LuxeYard's Share Price Rise and Fall

         LuxeYard alleges that Casey, Klinek, and others participated in a "pump-and-dump" scheme in which the price of LuxeYard's shares was artificially increased through aggressive marketing and matched sales of free-trading shares before the co-conspirators liquidated their holdings, driving the share price down to near worthlessness.

         Casey had given Friedlander, through Friedlander's company Equity Highrise, a large block of shares to sell to finance a "marketing blitz." One sale was to Klinek. Phone records showed that although Friedlander and Klinek did not communicate directly, they called Bahr on the days preceding, and the day of, Klinek's purchase. LuxeYard argued that this was an illegal "matched order."

         By selling shares given to him by Casey, Friedlander was able to engage a company called NextMedia and pay it $2.8 million to market LuxeYard. Friedlander admits that he did so without LuxeYard's authority or approval; that he "did have controls over [NextMedia's] marketing campaign"; and that he knew when the campaign would run. Some of the information in the campaign was misleading, including statements that LuxeYard was expected to reach a million members in less time than Facebook did. Isen disseminated the same misleading information in his blog, OTC Journal.

         The marketing campaign ran in April 2012, and Casey's alleged co-conspirators sold the overwhelming majority of their shares during that time. Klinek had bought about 250, 000 shares through the Share Purchase Agreement for about $147 and bought 100, 000 shares from Friedlander in March for about $52, 000; Klinek sold 325, 000 of his 350, 000 shares while the marketing blitz was running in April, and he sold the rest on two days in early May. The difference between the free-trading shares' total sales price and total purchase price was nearly $400, 000.

         D. Klinek's Attempts to Remove Restrictions from the Subscription Shares and Warrants

         Before the marketing campaign's effects dissipated, Klinek attempted to have the restrictions removed from the shares and warrants he purchased through the Subscription Agreement. On May 8, 2012, he sent LuxeYard notice that he was performing a cashless exercise of his warrants and instructed LuxeYard to have unrestricted shares sent to him. LuxeYard responded that the restrictions were not yet eligible to be lifted under Rule 144.

         On November 14, 2012, Klinek again tried to have the restrictive legend removed from his shares, this time supporting his request with an opinion letter from his attorney that the company's prior status as a shell company was "cured" as of November 15, 2012. Klinek no longer sought to exercise the warrants because the share price had dropped below the cost of exercising them. Based on its belief in Klinek's wrongdoing, LuxeYard refused to issue unrestricted shares until January 24, 2013.

         E. The Federal and State Lawsuits

         The pump-and-dump scheme resulted in federal and state lawsuits involving dozens of parties and shifting alignments. In the federal suit, LuxeYard sued Casey for breach of fiduciary duty, but a few days after this suit was filed in state court, LuxeYard and Casey settled those claims.

         In this lawsuit, LuxeYard sued Klinek for common-law fraud, unjust enrichment, and for conspiring in a breach of fiduciary duty, [1] it but asserted no claims for breach of fiduciary duty against any defendant in state court. Klinek counterclaimed for LuxeYard's failure to promptly lift the restrictions from his Subscription shares and warrants after the restrictive period ended.

         After a lengthy bench trial, the trial court ordered Klinek to pay LuxeYard $395, 146.63 as equitable disgorgement of Klinek's profits from the sale of free-trading shares; the trial court did not expressly identify the cause of action on which the judgment for LuxeYard was based. On Klinek's counterclaim, the trial court awarded Klinek $36, 503.30 in breach-of-contract damages calculated as the decline in share price from November 15, 2012 (the date a twelve-month restriction should have been lifted), to January 24, 2013 (the date the restrictions actually were lifted), together with statutorily required attorney's fees.

         On appeal, Klinek seeks rendition of a take-nothing judgment on LuxeYard's claims. As for his counterclaim, Klinek seeks rendition of actual damages of $1, 316, 059.68, or alternatively, remand solely for recalculation of damages measured by the change in share price from June 11, 2012, to January 24, 2013.

         II. Issues Presented

         Klinek presents five compound issues on appeal. In his first three issues, he challenges the judgment in LuxeYard's favor for disgorgement of Klinek's profits from the sale of his free-trading shares. Klinek argues in his fourth issue that the trial court miscalculated the damages on his successful counterclaim for breach of contract. In his fifth issue, he contends that certain of the trial court's findings related to his counterclaim are immaterial or are based on legally or factually insufficient evidence.

         III. Appeal of the Judgment on LuxeYard's Tort Claims

         In his first and third issues, Klinek contends that if the trial court's judgment against him is based on conspiring in a breach of fiduciary duty, then the judgment must be reversed or modified because (a) LuxeYard did not plead breach of fiduciary duty as the tort underlying its conspiracy claim, (b) a defendant cannot be held liable for conspiring in an intentional tort that was not asserted against a named co-defendant, (c) LuxeYard swore in a discovery response that the tort underlying its conspiracy claim was fraud rather than breach of fiduciary duty, (d) there is no evidence that Casey owed and breached a fiduciary duty to LuxeYard, (e) there is no evidence that Klinek knowingly participated in a breach of fiduciary duty, and (f) the trial court miscalculated Klinek's profits. We address each of these arguments in turn.

         A.LuxeYard's Pleadings are ...

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