United States District Court, N.D. Illinois, Eastern Division
For John Fife, an individual, Plaintiff, Counter Defendant: Barry N. Johnson, LEAD ATTORNEY, Brigman Harman, Bennett Tueller Johnson & Deere, Salt Lake City, UT; Ellen Frances Wetmore, Franczek Radelet, Chicago, IL; Jeremy C. Reutzel, PRO HAC VICE, Bennett Tueller Johnson & Deere, Salt Lake City, UT; Peter G. Land, Franczek Radelet P.C., Chicago, IL; Scott L. Warner, Franczek Radelet PC, Chicago, IL.
For mPhase Technologies, Inc., a New Jersey Corporation, Defendant: Darrell J. Graham, Peter S. Roeser, Roeser Bucheit & Graham LLC, Chicago, IL.
MEMORANDUM OPINION AND ORDER
AMY J. ST. EVE, United States District Court Judge.
Plaintiff, John Fife (" Fife" or " Plaintiff") has moved for summary judgment pursuant to Federal Rule of Civil Procedure 56 on his breach of contract claim. For the following reasons, the Court grants Plaintiff's motion.
Fife filed a complaint against Defendant, mPhase Technologies, Inc. (" mPhase" or " Defendant"), related to a Convertible Note (the " Note") issued by mPhase to St. George Investments LLC (" St George") in the principal amount of $557, 000.00. (R.1, Complt, ¶ ¶ 6-7.) St George subsequently assigned the Note to Fife. (Id., ¶ ¶ 8-9.) Fife, a citizen of Illinois, alleges that after the assignment of the Note, he entered into a Standstill and Restructuring Agreement (the " Standstill Agreement") with mPhase whereby he " agreed to not convert any portion of the balance of the Note into shares of mPhase's common stock ... in exchange for certain payments." (Id., ¶ 10.) Fife further alleges that mPhase did not make the first payment as required by the Standstill Agreement, which resulted in termination of the Standstill Agreement. (Id., ¶ ¶ 11-13.) As alleged, Fife retained his rights and remedies under the Note and subsequently delivered a Conversion Notice to mPhase to convert a portion of the Note's balance into shares of mPhase's common stock. (Id., ¶ ¶ 14, 15.) Fife asserts that mPhase defaulted on its obligations and failed to convert and deliver the shares which provided Fife the right to submit a Redemption Notice to redeem the entire balance of the Note. (Id., ¶ ¶ 16, 21.) Fife's complaint alleges breach of contract (Count I), or alternatively, quasi contract, unjust enrichment, and/or quantum meriut (Count II),  and specific performance (Count III). (Id.)
Relevant to this summary judgment motion, mPhase asserts affirmative defenses and counterclaims of breach of contract and fraud. ( See R.16, Answer.) mPhase asserts that Fife's failure to disclose a Consent Decree from 2007 relating to a prior litigation with the Securities and Exchange Commission (" SEC") allegedly caused the Depository Trust Company (" DTC") to impose a chill on mPhase's stock and made it impossible for mPhase to convert the Note's balance to shares. (R.16, ¶ 12.) Fife moves for summary judgment as to his breach of contract claim and mPhase's counterclaims of breach of contract and fraud. The crux of the dispute between the parties revolves around the reasons for mPhase's non-performance under the contract.
I. Northern District of Illinois Local Rule 56.1
Northern District of Illinois Local Rule 56.1 " is designed, in part, to aid the district court, 'which does not have the advantage of the parties' familiarity with the record and often cannot afford to spend the time combing the record to locate the relevant information, ' in determining whether a trial is necessary." Delapaz v. Richardson, 634 F.3d 895, 899 (7th Cir. 2011) (quoting Waldridge v. Am. Hoechst Corp., 24 F.3d 918, 924 (7th Cir. 1994)). Local Rule 56.1(a)(3) requires the moving party to provide " a statement of material facts as to which the moving party contends there is no genuine issue." Cracco v. Vitran Exp., Inc., 559 F.3d 625, 632 (7th Cir. 2009) (quoting L.R. 56.1(a)(3)). The nonmoving party must file " a response to each numbered paragraph in the moving party's statement, including, in the case of any disagreement, specific references to the affidavits, parts of the record, and other supporting materials relied upon." Id. (quoting L.R. 56.1(b)(3)(B)). The nonmoving party also may submit a separate statement of additional facts that require the denial of summary judgment, including references to the affidavits, parts of the record, and other supporting materials relied upon to support those facts. See L.R. 56.1 (b)(3)(C); see also Ciomber v. Coop. Plus, Inc., 527 F.3d 635, 643-44 (7th Cir. 2008).
The purpose of Rule 56.1 statements is to identify the relevant admissible evidence supporting the material facts, not to make factual or legal arguments. See Cady v. Sheahan, 467 F.3d 1057, 1060 (7th Cir. 2006) (finding Rule 56.1 statements incompliant when they fail to adequately cite the record and are filled with irrelevant information, legal arguments, and conjecture.") The Court may disregard statements and responses that do not properly cite to the record. See Cichon v. Exelon Generation Co., LLC, 401 F.3d 803, 809-810 (7th Cir. 2005.) Moreover, the requirements for responses under Local Rule 56.1 are " not satisfied by evasive denials that do not fairly meet the substance of the material facts asserted." Bordelon v. Chicago Sch. Reform Bd. of Trs., 233 F.3d 524, 528 (7th Cir. 2000). " [D]istrict courts are entitled to expect strict compliance with Local Rule 56.1." Raymond v. Ameritech Corp., 442 F.3d 600, 604 (7th Cir. 2006).
Fife argues that many of mPhase's responses to Fife's Rule 56.1 Statement of Facts are insufficient to establish genuine issues of material facts as they are not compliant with the Local Rules and do not constitute admissible evidence. Many of mPhase's responses either do not reference any affidavits, parts of the record, or other supporting materials as required by Local Rule 56.1(b)(3)(B) or reference materials that do not support the factual allegation ( see e.g., R.132, ¶ ¶ 9, 11, 16, 21, 41). See Jupiter Aluminum Corp. v. Home Ins. Co., 225 F.3d 868, 871 (7th Cir.2000) (" An answer that does not deny the allegations in the numbered paragraph with citations to supporting evidence in the record constitutes an admission."); See Smith v. Lamz, 321 F.3d 680, 683 (7th Cir. 2003) (ruling that the district court acted within its discretion when it deemed defendant's statement of facts admitted because the plaintiff failed to support controverted or additional facts with citations to admitted evidence); In addition, mPhase provides legal arguments that do not suffice to establish genuine issues of material dispute ( see e.g., R.132, ¶ ¶ 3, 16, 20-29). See Cady v. Sheahan, 467 F.3d 1057, 1060 (7th Cir. 2006) (explaining that it is inappropriate to make legal arguments in Rule 56.1 statements and responses).
mPhase also attempts to dispute facts with evasive allegations that either misstate the evidence relied on or do not directly address the issue asserted ( see e.g., R.132, ¶ ¶ 13-15). See Nat'l Inspection & Repairs v. George S. May Int'l Co., No. 03-CV-5529, 2008 WL 4389834, at *2 (N.D.Ill. Sept. 24, 2008) (" The court agrees that certain of [the plaintiffs'] responses or additional facts improperly state legal conclusions, assert facts not supported by the record, or misstate the evidence"). mPhase further provides attorney argument related to additional facts, however, the Local Rules provide that such facts are to be asserted in a Statement of Additional Facts ( see e.g., R.132, ¶ ¶ 5, 10-12, 21-24, 26-29). See L.R. 56.1(b)(3)(C); see also Ammons v. Aramark Unif. Servs., Inc., 368 F.3d 809, 817 (7th Cir. 2004) (ruling that the non-moving party should place additional facts in a separate statement, not in his responses to a moving party's statement); Schwab v. N. Ill. Med. Ctr., F.Supp.2d, 2014 WL 2111124, at *1 (N.D.Ill. May 20, 2014) (disregarding the plaintiff's Local Rule 56.1 (b)(3)(B) response to the extent it included " facts that go beyond what is fairly responsive to the corresponding paragraphs of [the defendant's] Local Rule 56.1(a)(3) statement"); Malec v. Sanford, 191 F.R.D. 581, 584 (N.D.Ill. 2000) (" Rule 56.1(b)(3)(B) 'provides the only acceptable means of ... presenting additional facts.'" (quoting Midwest Imports, Ltd. v. Coval, 71 F.3d 1311, 1317 (7th Cir. 1995))). As such, paragraphs 3, 5, 6, 9-16, 20-29, and 41 of Fife's Rule 56.1 Statement of Facts are deemed admitted.
Furthermore, Fife takes issue with mPhase's Statement of Additional Facts and the underlying Smiley Affidavit. Fife argues that mPhase's Statement of Additional Facts constitutes improper expert opinion testimony or lack the appropriate foundation for the factual assertions made. mPhase's Statement of Additional Facts is problematic in at least two respects: (1) it relies on improper expert testimony and (2) its factual assertions are contradicted by the pleadings and affiant's prior deposition testimony in this case. First, mPhase asserts facts relating to Fife's obligations to disclose his Consent Decree, specifically relying on spreadsheets to establish shareholder ownership to prove Fife is a " control person." These spreadsheets are inadmissible evidence as there is a lack of foundation for the data relied upon and there is no basis provided for where the numbers were obtained, how the calculations were completed, and who conducted the computations ( see e.g., R.131, ¶ ¶ 26, 27, 28, 30, 36; R.131-2, Ex. L; R.131-3, Ex. P.) See Curry v. City of Chicago, No. 10 CV 8241, 2013 WL 1283477, at *8 (N.D.Ill. Mar. 25, 2013) (striking supplemental exhibits for failure to comply with Local Rule 56.1, lack of foundation, and hearsay); see also Smith v. Allstate Ins. Corp., No. 99 C 0906, 2002 WL 485374, at *4 (N.D.Ill. Mar. 29, 2002) (striking portions of plaintiff's affidavit that provide no foundation for her statements). Evidence must be admissible in order for the Court to consider it when determining summary judgment and improper opinion testimony or testimony that does not refer to supporting evidence or provide a foundation for personal knowledge of the facts asserted is improper and should not be relied on by the Court. See Judson Atkinson Candies, Inc. v. Latini-Hohberger Dhimantec, 529 F.3d 371, 382 (7th Cir. 2008) (citing Malec v. Sanford, 191 F.R.D. 581, 585 (N.D.Ill. 2000) (" The evidence supporting a factual assertion must represent admissible evidence")).
mPhase also relies on the affidavit of Martin Smiley, mPhase's General Counsel and Chief Financial Officer, to provide legal opinions and opinions related to public trading of securities generally and to the details surrounding this dispute specifically. ( See e.g., R.131-1, Ex. A, Smiley Aff., ¶ ¶ 5, 10, 25, 35, 37, 38; R.132-1, Ex. A, Smiley Aff., ¶ ¶ 5, 10, 25, 35, 37, 38). Mr. Smiley, however, has not been disclosed as a legal expert, nor has he been disclosed as a securities expert. Additionally, some of the factual assertions of the Smiley Affidavits contradict other factual assertions, mPhase's pleadings, and Mr. Smiley's prior deposition testimony. The Smiley Affidavits, for example, assert that " [i]n early October 2012, mPhase was advised by outside counsel that it would be impossible for the DTC to remove the chill if mPhase permitted any stock conversions and/or sales to the public by any person who name appeared in the DTC Letter." (R.131-1, ¶ 31; R.132-1, ¶ 31.) In its Answer, however, mPhase asserted that " [i]n early October 2012, mPhase was advised in a telephone discussion with the DTC that any large conversions by its large convertible securities holders prior to the removal of the DTC chill would make it almost impossible for DTC to ever remove the DTC Chill." (R.16, ¶ 35.)
Mr. Smiley also asserts that " [a]fter Fife filed this lawsuit, mPhase first learned in discovery about Fife's Consent Decree that he had concealed from mPhase for the four years of their relationship." (R.131-1, ¶ 37; R.132-1, ¶ 37.) A copy of Fife's Consent Decree, however, is attached as an exhibit to mPhase's Answer, filed on February 27, 2013, the same day the parties proposed a discovery schedule to the Court. ( See R.16-1; R.17.) Furthermore, Mr. Smiley previously testified, on behalf of mPhase, that he learned of Fife's Consent Decree in a telephone conversation with the DTC held prior to October 24, 2012. ( See R.119-8, Smiley Deposition, 5:12-6:7; id., 49:1-51:21.) The contradictory assertions in paragraphs 31 and 37 of the Smiley Affidavits are therefore stricken. See Bordelon v. Chicago Sch. Reform Bd. of Trustees, 233 F.3d 524, 527 (7th Cir. 2000) (upholding district court's decision to entirely strike the non-moving party's statement where it " contained evasive and contradictory answers and legal arguments"); see also Long v. Teachers' Retirements Sys. of State of Ill., 566 F.Supp.2d 851, 855-56 (C.D. Ill. 2008), aff'd, 585 F.3d 344 (7th Cir. 2009) (striking paragraphs in a witness's affidavit that were inconsistent with her prior deposition testimony).
For the reasons explained above, the Court strikes paragraphs 26, 27, 28, 30, and 36 of mPhase's Rule 56.1 Statement of Additional Facts and strikes paragraphs 5, 10, 25-28, 31-35, 37, and 38 and Exhibits L and P from the Smiley Affidavits.
II. Relevant Facts
Fife is an individual, a citizen of Illinois who resides in Cook County, Illinois. (R.119 & R.132, Stmt. of Undisputed Facts,  ¶ 1.) mPhase is a New Jersey corporation with its principal place of business in Norwalk, Connecticut. (Stmt. of Undisputed Facts, ¶ 2.) mPhase is a publically-held, micro-cap, technology company with approximately 23, 000 shareholders. (Stmt. of Addt'l. Undisputed Facts,  ¶ 1.) Its stock is traded on the Pink Sheets as a public reporting company. (Id.) mPhase was in the product-development and pre-marketing phase for a battery during the relevant time period and had received funding by issuing convertible debt. (Stmt. of Addt'l. Undisputed Facts, ¶ 4, 6.) All stock issued by mPhase to shareholders who hold such securities in broker street names is deposited in DTC's depository arm to allow, among other things, electronic trading of the issuer's securities. (Stmt. of Addt'l. Undisputed Facts, ¶ 7.)
A. The Securities Purchase Agreement
On September 13, 2011, mPhase, as seller, entered into a Securities Purchase Agreement with St. George,  as buyer. (Stmt. of Undisputed Facts, ¶ 5; R.16, ¶ 6.) Pursuant to the Securities Purchase Agreement, St George paid $500, 000.00 to mPhase in exchange for a Convertible Note (the " Note") issued and signed by mPhase with a face amount of $557, 500.00. (Stmt. of Undisputed Facts, ¶ 5; R.16, ¶ 6.)
In signing the Securities Purchase Agreement, mPhase specifically acknowledged that it (1) " agrees that the attorney that prepared this Agreement and all of the other Transaction Documents acted as legal counsel to the Buyer only" and (2) " has been, and hereby is, advised to seek legal counsel and to review this Agreement and all of the other Transaction Documents with legal counsel of his/her/its choice, and . . . either has sought such legal counsel or hereby waives the right to do so." (Stmt. of Undisputed Facts, ¶ 7.) The parties also agreed that if an action was brought " to enforce or interpret the terms of th[e Security Purchase Agreement] or any of the other Transaction Documents, the Prevailing Party . . . shall be entitled to reasonable attorneys' fees, court costs and collection costs . . . ." (Stmt. of Undisputed Facts, ¶ 8.)
B. The Note
Fife's predecessor, St George, paid the Note in two installments. ( See Stmt. of Undisputed Facts, ¶ ¶ 30, 31; see also R.16, ¶ 32.) The $500, 000.00 purchase price for the Note reflected the face value of $557, 500.00 minus an original issue discount of $50, 000.00 and an additional $7, 500.00 dollar reduction to cover " the Buyer's legal fees, accounting costs, due diligence, monitoring and other transaction costs incurred in connection with the purchase and sale of [securities associated with the Note.]" (Stmt. of Undisputed Facts, ¶ ¶ 6, 30.) Fife's predecessor, St George, funded the first Tranche of the Note in the amount of $300, 000.00 (including the original issue discount and transaction expenses) on September 13, 2011. (Stmt. of Undisputed Facts, ¶ 30.) On October 14, 2011, Fife provided the second Tranche of the Note in the amount of $200, 000.00. (Stmt. of Undisputed Facts, ¶ 31.) The delivery of the Second Tranche of the Note was contingent on mPhase filing a Registration Statement within 30 days of the Issuance Date of the Note. (Stmt. of Addt'l. Undisputed Facts, ¶ 19.) On October 17, 2011, St George assigned the Note and its rights thereunder to Fife, pursuant to an Assignment of the Note (the " Assignment"). (Stmt. of Undisputed Facts, ¶ 11; R.16, ¶ 8.) mPhase approved and agreed to the Assignment. (Stmt. of Undisputed Facts, ¶ 12; R.16, ¶ 9.) mPhase filed a Registration Statement for Fife's shares that was declared effective on January 17, 2012. (Stmt. of Addt'l. Undisputed Facts, ¶ ¶ 26, 27.)
The Note contained terms pertaining to payment of principal on Installment Dates ( see R.119-3, § 1), interest rates on the Outstanding Balance ( see id., § 2), conversion of the Note to Common Stock ( see id., § 3), rights upon event of default ( see id., § 4), and conditions surrounding payment of Installment Amounts ( see id., § 8). (Stmt. of Undisputed Facts, ¶ 9.) The initial interest rate on the Note, compounded daily, was 8% per annum. (Stmt. of Undisputed Facts, ¶ 32.)
Under the Note, mPhase was required to deliver a Company Installment Notice on October 27, 2011 (23 trading days prior to the Initial Installment Date). (Stmt. of Undisputed Facts, ¶ 13.) mPhase failed to deliver the Company Installment Notice on that date, and pursuant to Section 8(a) of the Note, mPhase " was deemed to have delivered on [October 27, 2011] an irrevocable Company Installment Notice." (Stmt. of Undisputed Facts, ¶ 14.) Following the deemed delivery of mPhase's Company Installment Notice, the Note required that mPhase deliver to St George and/or Fife the Pre-Installment Conversion Shares no later than October 31, 2011 (two Trading Days after October 27, 2011). (Stmt. of Undisputed Facts, ¶ 15.) mPhase did not deliver the Pre-Installment Conversion Shares on October 31, 2011, or at anytime thereafter. (Stmt. of Undisputed Facts, ¶ 16.) On April 13, 2012, Fife issued a Conversion Notice to execute a sale under the Note, in which he converted $47, 541.61 of the principal amount due under the Note into 50, 422, 919 shares of mPhase common stock. (Stmt. of Addt'l. Undisputed Facts, ¶ 29.)
C. The Deposit Chill
In June 2011, mPhase was notified that the DTC imposed a chill on mPhase's common stock (" the Deposit Chill"), under which the DTC refused to settle any trades of mPhase's stock electronically, but instead, required the delivery of physical stock certificates to settle such trades. (Stmt. of Undisputed Facts, ¶ 38; Stmt. of Addt'l. Undisputed Facts, ¶ 17.) The DTC did not tell mPhase the reason for the Deposit Chill at that time. (Stmt. of Addt'l. Undisputed Facts, ¶ 17.) On September 17, 2012, mPhase received a letter from the Depository Trust and Clearing Corporation (the " DTCC") " in response to [mPhase's] recent inquiries to the [DTC] regarding the imposition by the DTC of a deposit transaction restriction (the 'Deposit Chill')" on stock issued by mPhase. (Stmt. of Addt'l. Undisputed Facts, ¶ ¶ 32, 40.) The letter states that " DTC has imposed the Deposit Chill, as of June 23, 2011, in order to prevent additional deposits of the Issue for depository and book-entry transfer services for the reasons set forth below." (R.119-12, Ex. L, DTCC Letter dated Sept. 17, 2012.) The DTCC Letter further explains that the Deposit Chill had been imposed due to:
unusually large deposits of the Issue [mPhase stock] during the period of August 18, 2010 to the date of the Deposit Chill. More particularly, 414, 385, 628 shares of the Issue, representing a substantial percentage of the outstanding float, where deposited at the DTC during this period. (a list of the deposits is attached hereto as Exhibit A.) The volume and timing of the deposits raise substantial questions as to whether those shares are tradeable without restriction under the Securities Act of 1933, as amended . .., a prerequisite for shares being deposited into the DTC for depository and book-entry services.
(Stmt. of Undisputed Facts, ¶ 40.) The list of deposits referred to in and attached to the DTCC Letter as Exhibit A (the " Deposits") included some deposits made by John Fife. (Stmt. of Undisputed Facts, ¶ 41.) On October 23, 2012, mPhase responded to the DTCC, explaining through its outside counsel, that the Deposits and shares associated with the Deposits were " duly authorized, validly issued and fully paid and are nonassessable" and were otherwise proper transactions in compliance with applicable laws. (Stmt. of Undisputed Facts, ¶ 42; see also id., ¶ 43 (October 23, 2012 letter to DTC, Martin Smiley, mPhase's in-house counsel, representing that the Deposits were proper transactions in compliance with applicable laws); id., ¶ 44 (September 12, 2013 letter to DTC, stating that the Deposits and associated shares " were, at the date of deposit at the DTC, eligible under the Rules and Procedures of DTC to be deposited for the Services").) On September 16, 2013, the DTCC sent a letter to mPhase stating " that the [DTC] has determined to lift the Deposit Chill and has resumed accepting deposits of [mPhase's stock] for depository and book-entry transfer services." (Stmt. of Undisputed Facts, ¶ 45.) The DTCC representative for purposes of this lawsuit, Susan DeSantis, testified that the Deposit Chill was lifted because mPhase demonstrated that the Deposits in question were proper transactions in compliance with applicable laws. (Stmt. of Undisputed Facts, ¶ ¶ 46-47.)
D. The Standstill Agreement
On May 31, 2012, during the imposed Deposit Chill, mPhase and Fife entered into a Standstill and Restructuring Agreement (the " Standstill Agreement"). (Stmt. of Undisputed Facts, ¶ 17.) Under the terms of the Standstill Agreement, Fife agreed not to convert any portion of the Outstanding Balance of the Note into common stock for a specific period of time. (Stmt. of Undisputed Facts, ¶ 18.) In exchange, mPhase increased the Outstanding Balance of the Note by $57, 612.52 (the " Standstill Fee"), and promised to begin making monthly payments to Fife beginning on October 1, 2012. (Stmt. of Undisputed Facts, ¶ 19; see also R.119-6, at 10 (Loan Amoritization Schedule showing monthly payment dates).) If mPhase failed to perform under the Standstill Agreement, mPhase acknowledged and agreed that " the Standstill shall terminate immediately . . . and that upon such breach of any material term or provision in this Agreement, Lender [Fife] may seek all recourse and remedies available to it under the terms of the Note, the other Loan documents, or applicable law." (Stmt. of Undisputed Facts, ¶ 20.) The Standstill Agreement stated that mPhase " is unconditionally obligated to pay the Outstanding Balance of the Note pursuant to its terms, " and that " [t]he Outstanding Balance of the Note upon execution of this Agreement, . . . shall be deemed and affirmed to be $777, 769.08." (Stmt. of Undisputed Facts, ¶ 21.) The Standstill Agreement also contained a waiver provision, stating:
[mPhase] has no defenses, affirmative or otherwise, rights of setoff, rights of recoupment, claims, counterclaims, actions or causes of action of any kind or nature whatsoever against [Fife], directly or indirectly, arising out of, based upon, or in any manner connected with, the transactions contemplated hereby, whether known or unknown, which occurred, existed, was taken, permitted, or begun prior to the execution of this Agreement and occurred, existed, was taken, permitted, or begun in accordance with, pursuant to, or by virtue of any of the terms or conditions of the Loan Documents. To the extent any such defenses, affirmative or otherwise, rights of setoff, rights of recoupment, claims, counterclaims, actions or causes of action exist or existed, such defenses, rights, claims, counterclaims, actions and causes of action are hereby waived, discharged and released.
(Stmt. of Undisputed Facts, ¶ 22; R119-6, § 8(e).) In addition, Fife did not waive any prior claims for breach of the Note by entering into the Standstill Agreement. (Stmt. of Undisputed Facts, ¶ ¶ 22-23.) Further, mPhase acknowledged its free and voluntary entry into the Agreement and that the Agreement was " negotiated, prepared, and executed without fraud, duress, undue influence, or coercion of any kind or nature whatsoever having been exerted by or imposed upon any party by any other party." (Stmt. of Undisputed Facts, ¶ 23; R.119-6, § 8(f).) As with the Securities Purchase Agreement, the Standstill Agreement contained a provision that the prevailing party is entitled to those attorneys' fees and costs associated with any litigation or dispute ...