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DJRJ, LLC v. U-Swirl, Inc.

United States District Court, N.D. Oklahoma

July 11, 2017




         Before the court are the Motions for Summary Judgment of defendant U-Swirl, Inc. [Doc. No. 90] and defendant Rocky Mountain Chocolate Factory, Inc. [Doc. No. 89]. For the reasons set forth below, the motions are granted.

         I. Factual Background

         By Asset Purchase Agreement (“APA”) dated January 1');">1');">1');">17, 201');">1');">1');">14, U-Swirl acquired franchising, licensing, and other assets of various CherryBerry entities[1');">1');">1');">1" name="FN1');">1');">1');">1" id="FN1');">1');">1');">1">1');">1');">1');">1]-a group operating frozen yogurt stores across the country. [Doc. No. 90-1');">1');">1');">1]. In exchange for the assets, U-Swirl paid $4.25 million and 4 million shares of common stock, which were subsequently assigned to CherryBerry's principals, Dallas and Robyn Jones. [Id. at 3]. Those shares were subject to a lockup provision-Section 3.6(a) of the APA-which prevented their sale for one (1');">1');">1');">1) year. [Id. at 5]. After that, shares could be sold subject to: (1');">1');">1');">1) a buyback option held by U-Swirl and its parent company, Rocky Mountain, and (2) a trading volume limitation. [Id.]. That limitation prohibited any sale of shares in excess of the average daily trading volume of U-Swirl stock for the preceding 30 days. [Id.].

         The APA also provides for a “Shortfall Payment.” [Id.]. Specifically, Section 3.6(b) obligates U-Swirl to pay the difference between a proposed share price and $.50 for the number of shares sold. [Id.]. In other words, U-Swirl guaranteed a $.50 minimum return on any proper sale of its stock. [Id.]. Payment was due within 1');">1');">1');">10 days of receipt of a proof of sale. [Id.]. This dispute arises from the Joneses' sale of U-Swirl stock and the alleged non-payment of the Shortfall Payment described in Section 3.6(b) of the APA.

         Between July and August 201');">1');">1');">15, the Joneses sold 51');">1');">1');">18, 476 shares of U-Swirl common stock at prices ranging from $.252 to $.0727 per share. [Doc. No. 58, p. 4, ¶ 1');">1');">1');">13]; [Doc. No. 90, p. 2, ¶ 5]. As a result, they demanded a contractual Shortfall Payment in the amount of $204, 725.46. [Doc. No. 58, p. 4, ¶ 1');">1');">1');">13]. U-Swirl denied payment. And it did so on grounds that the Joneses' sales exceeded the average daily trading volume for the previous 30 days. This suit followed. On January 1');">1');">1');">13, 201');">1');">1');">16, CherryBerry sued U-Swirl for breach of contract; it also sought declaratory judgment against U-Swirl and Rocky Mountain for veil-piercing and recharacterization of certain debt as equity. CherryBerry filed an Amended Complaint on May 1');">1');">1');">19, 201');">1');">1');">16, alleging the same causes of action. U-Swirl and Rocky Mountain now move for summary judgment.

         II. Legal Standard

         Summary judgment shall be granted if “there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.p. 56(a). A dispute is “genuine” if the evidence permits a rational trier of fact to resolve the issue either way. Adler v. Wal-Mart Stores, Inc., 1');">1');">1');">144 F.3d 644');">1');">1');">1');">144 F.3d 644, 670 (1');">1');">1');">10th Cir. 1');">1');">1');">1998). A fact is “material” if it is essential to the outcome of the case. Id. On review, a court must examine the record in the light most favorable to the non-movant. Wolf v. Prudential Ins. Co. of Am., 50 F.3d 7983, 796 (1');">1');">1');">10th Cir. 1');">1');">1');">1995). But in a contract dispute, “if [ ] contractual language is unambiguous, ” “[s]ummary judgment . . . should be granted.” See Higby Crane Serv., LLC v. Nat'l Helium, LLC, 1');">1');">1');">1 F.3d 1');">1');">1');">11');">1');">1');">157');">751');">1');">1');">1 F.3d 1');">1');">1');">11');">1');">1');">157, 1');">1');">1');">11');">1');">1');">160 (1');">1');">1');">10th Cir. 201');">1');">1');">14).

         III. Analysis

         Colorado law governs the APA. [Doc. No. 90-1');">1');">1');">1, p. 30');">p. 30]. And in Colorado, courts “enforce unambiguous [contracts] in accordance with their terms.” McShane v. Stirling Ranch Prop. Owners Ass'n, Inc., 393 P.3d 978, 982 (Colo. 201');">1');">1');">17); see also LPG Holdings, Inc. v. Casino Am., Inc., 232 F.3d 901');">1');">1');">1 (Table) (1');">1');">1');">10th Cir. 2000) (unpublished). To that end, where payment depends upon a condition precedent, a failure of that condition defeats any contractual claim. See Dinnerware Plus Holdings, Inc. v. Silverthorne Factory Stores, LLC, 1');">1');">1');">128 P.3d 245');">1');">1');">1');">128 P.3d 245, 247-48 (Colo.App. 2004); W. Distrib. Co. v. Diodosio, 41');">1');">1');">1 P.2d 1');">1');">1');">1053');">841');">1');">1');">1 P.2d 1');">1');">1');">1053, 1');">1');">1');">1058-59 (Colo. 1');">1');">1');">1992); cf. Maranville v. Utah Valley Univ., 568 F.App'x 571');">1');">1');">1, 576 (1');">1');">1');">10th Cir. 201');">1');">1');">14) (applying Utah law). That is especially appropriate when the condition is within the claimant's control. See Dinnerware, 1');">1');">1');">128 P.3d at 24 (citing Restatement (Second) of Contracts § 227(1');">1');">1');">1) (1');">1');">1');">1981');">1');">1');">1)). Here, the Shortfall Payment is conditioned on the Joneses' compliance with the trading volume limitation.

         First, the Shortfall Payment applies only to sales authorized by the APA. By its plain terms, Section 3.6(b) calculates such payment in terms of sales “pursuant to Section 3.6(a).” [Doc. 91');">1');">1');">1-1');">1');">1');">1, p. 5]. Put differently, recovery is conditioned on conformity to that provision. See, e.g., Qwest Corp. v. Pub. Util. Comm'n of Colo., No. 04-D-2596-WYD-MJW, 2006 WL 771');">1');">1');">1223, at *4 (D. Colo. Mar. 24, 2006) (explaining the phrase “pursuant to” incorporates “the general and specific duties set forth” in a cross-referenced provision); Edgington v. R.G. Dickinson & Co., 1');">1');">1');">139 F.R.D. 1');">1');">1');">183, 1');">1');">1');">189 n.4 (D. Kan. 1');">1');">1');">1991');">1');">1');">1) (“‘Pursuant to' is typically used to connote some nexus between an action and a point of reference.”); Black's Law Dictionary 1');">1');">1');">1272 (8th ed. 2004) (defining “pursuant to” as “[i]n compliance with; in accordance with”). Thus, a claimant seeking a Shortfall Payment must comply with all material terms and conditions of Section 3.6(a), including limitations on sales. See [Doc. 91');">1');">1');">1-1');">1');">1');">1, p. 5].

         Trading volume is such a limitation. Indeed, Section 3.6(a) expressly qualifies any sale of stock as follows: “provided that [the Joneses] may not sell more shares of [U-Swirl's] [c]ommon [s]tock on any day than the average daily trading volume for [that stock] . . . over the previous thirty (30) days.” [Doc. No. 91');">1');">1');">1-1');">1');">1');">1, p. 5] (emphasis in original). The APA's use of the term “provided” is instructive; that word generally creates a condition precedent. See Dinnerware, 1');">1');">1');">128 P.3d at 247-48 (collecting cases); Black's Law Dictionary 1');">1');">1');">1261');">1');">1');">1 (8th ed. 2004) (defining “provided” as “[o]n the condition or understanding that”). Thus, any sale of U-Swirl stock-and by extension entitlement to a Shortfall Payment-depend upon adherence to the trading volume limitation set out in Section 3.6(a).

         Second, the Joneses violated that limitation. In their briefs, all parties assume trading volume is calculated on a “rolling” basis-that is, on the days immediately preceding a sale. See [Doc. No. 90, p. 3]. The court disagrees. Best read, the contract requires a fixed, block construction of the window used to calculate trading volume. The APA's text supports that conclusion. Section 3.6(a) permits sales “over the [ ] thirty (30) days” after U-Swirl and Rock Mountain decline to exercise their buyback option. [Doc. No. 90-1');">1');">1');">1, p. 5]. That stands in contrast to “the previous thirty (30) days” used to define U-Swirl's “average daily trading volume.” See [id.]. Section 3.6(a)'s use of the phrase “thirty (30) day period” confirms that construction. See [id.]. Indeed, the APA provides that if the Joneses “ha[ve] not sold all” of their shares in the 30 day “period” after the buyback option expires, Section 3.6(a) resets, and “again appl[ies]” to subsequent sales of U-Swirl stock. See [id.].

         To summarize: after expiration of U-Swirl and Rocky Mountain's buyback option, a 30-day window opens in which the Joneses may sell their shares; no such sale, however, may exceed the fixed, pre-option volume limitation; that volume is calculated based on the month preceding non-exercise of the APA buyback option, not the date of a sale; and the limitation governs the entire sale period; in the event the Joneses have not sold all of their ...

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