Ricatto v. M3 Innovations Unlimited, Inc.

Background

Michael Ricatto and M3 Innovations Unlimited, Inc. discussed a partnership to buy and develop California property for a cannabis-related facility. They signed a September 2017 memorandum of understanding, an October 2017 line-of-credit agreement, a promissory note, and a lease. The memorandum contemplated that Ricatto would provide M3 with a revolving line of credit of up to $2 million and that the parties would share property and development costs. It also stated that the memorandum was not binding unless and until the parties signed a final partnership agreement.

Ricatto advanced M3 $800,000 under the line of credit. He alleged that M3 did not use the money to develop the property and instead used it for the benefit of its officers, directors, and shareholders. In April 2018, M3 requested another $200,000 advance. Ricatto refused, stating that M3 had misused the earlier funds and that its failure to contribute its own money made him believe M3 might be insolvent.

Ricatto sued M3, Kyle Kietrys, and identified John and Jane Does, asserting claims for breach of contract, anticipatory repudiation, and fraudulent inducement. Defendants asserted, among other counterclaims, that Ricatto breached the line-of-credit agreement by refusing to provide the additional $200,000. Defendants moved for judgment on the pleadings under Federal Rule of Civil Procedure 12(c), which permits judgment based on the pleadings when the undisputed pleadings establish that a party is entitled to relief.

Plaintiff’s Claims

The court granted judgment for Defendants on Ricatto’s breach-of-contract claim. Ricatto argued that the agreements required M3 to use the advanced funds only to develop the property. The court found that the memorandum’s phrase “business expenses” was ambiguous, so it accepted Ricatto’s interpretation for purposes of the motion. But the court held that the memorandum was not binding: it was only an agreement to agree and expressly stated that the parties would not be finally bound until a partnership agreement was executed. Ricatto did not allege that such an agreement was executed.

The court also held that the later line-of-credit agreement superseded any earlier restriction concerning use of the funds. The line-of-credit agreement did not restrict how the funds could be used and contained a merger clause stating that it was the parties’ entire agreement concerning the line of credit and superseded prior agreements and understandings. Because no contractual obligation required M3 to use the funds for property development, Ricatto failed to state a breach-of-contract claim.

The court also granted judgment for Defendants on Ricatto’s anticipatory-repudiation claim. Anticipatory repudiation occurs when a party clearly and unequivocally indicates, before performance is due, that it will not perform. The court found that statements that M3 had no money left and no way to obtain further funding did not clearly establish that M3 would refuse to make payments due later under the line-of-credit agreement and promissory note. The court also noted that Ricatto had not alleged that he was ready, willing, and able to perform his own obligations, and his refusal to provide the additional $200,000 indicated otherwise.

The court granted judgment for Defendants on Ricatto’s fraudulent-inducement claim as well. Ricatto alleged that Defendants represented that they would use the funds for property development and would be able to make the required payments. The court held that the line-of-credit agreement and promissory note did not make the alleged property-development restriction, and that the nonbinding memorandum could not itself serve as a binding representation of future conduct. The alleged representation about M3’s ability to make payments was also part of the contractual promise to pay, not a separate duty or collateral representation that could support a fraud claim. Because the court rejected all three claims, it did not decide whether Ricatto had adequately pleaded grounds for holding Kietrys personally liable by disregarding M3’s corporate form.

Counterclaim and Disposition

The court denied Defendants’ motion for judgment on their breach-of-contract counterclaim. Defendants alleged that M3 had performed its obligations and that Ricatto breached the line-of-credit agreement by refusing the $200,000 advance. Ricatto admitted refusing the advance but denied that M3 had fully performed. Because the court had to accept that denial as true at this stage, Defendants could not show beyond doubt that they were entitled to judgment. The court concluded that a motion for judgment on the pleadings was not suitable for the counterclaim because the parties disputed the underlying conduct.

The final disposition was that Defendants’ motion was granted as to Ricatto’s claims for breach of contract, anticipatory repudiation, and fraudulent inducement, and denied as to Defendants’ breach-of-contract counterclaim. The court ordered the parties to submit a joint letter and proposed case-management plan by December 27, 2019.