Taub v. Arrayit Corporation

Background

Reuben Taub, Irwin L. Zalcberg, and the Irwin Zalcberg Profit Sharing Plan sued Arrayit Corporation, Rena Schena, Mark Schena, and Todd Martinsky. The plaintiffs alleged breach of contract and fraudulent inducement relating to their investments. The dispute centered on an August 19, 2014 Contribution Agreement.

Under that agreement, the defendants were required to contribute assets and licenses related to a food-testing product to Array Molecular Corp.; issue, double, or modify certain shares and warrants; file a registration statement; and refrain from issuing equity securities for six months. In exchange, Taub dismissed a prior New York state lawsuit, and the plaintiffs released their existing claims. The agreement also stated that Z Investors LLC was responsible for raising and contributing funds to Array Molecular Corp.

The plaintiffs previously sought partial summary judgment. The court had found factual disputes about whether the plaintiffs substantially performed their obligations. The plaintiffs then moved for reconsideration, arguing that the court had improperly treated the plaintiffs as the same entity as Array Molecular Corp.

Reconsideration standard

The court explained that reconsideration under Local Rule 6.3 is an extraordinary remedy generally limited to an intervening change in controlling law, newly available evidence, or the need to correct clear error or prevent manifest injustice. It is not meant to give a party another opportunity to present new theories or relitigate issues already decided.

Breach-of-contract claims

Applying Illinois law, the court stated that a breach-of-contract claim requires a valid contract, the plaintiff’s performance, the defendant’s breach, and actual damages.

The court reconsidered its earlier view and held that the plaintiffs were not obligated to fund Array Molecular Corp. The agreement placed that responsibility on Z Investors LLC, a nonparty. Although the defendants stated that the plaintiffs controlled both entities, the defendants did not raise an argument to disregard the entities’ separate legal status. The court therefore held that the individual plaintiffs could not be treated as personally responsible for Array Molecular Corp.’s obligations. The plaintiffs had performed their own obligations by releasing prior claims and dismissing the earlier New York lawsuit with prejudice.

The court rejected the defendants’ argument that naming inconsistencies involving Z Investors LLC and Zalcberg Investors made the agreement unenforceable. It found that the defendants knew about the naming discrepancy, had not objected, and had not shown that the discrepancy affected their understanding of the agreement or caused prejudice.

The court then found that the defendants breached four contractual obligations:

The court nevertheless distinguished among the claims based on evidence of damages. It found evidence of actual damages concerning the missing product and the missing shares, including expert estimates that the product was worth $20,550,000 and that five million shares were worth $780,000. The court found no sufficient evidence of actual damages for the failure to file a registration statement or for issuing the convertible promissory notes. As a result, the court granted the plaintiffs’ motion for summary judgment on the claims concerning the product and the shares or warrants, but denied reconsideration as to the registration-statement and convertible-promissory-note claims.

Counterclaim

The defendants’ remaining counterclaim sought reimbursement for expenses Arrayit incurred in developing and commercializing the products. The court interpreted the agreement as placing responsibility for post-closing expenses on Array Molecular Corp., not the plaintiffs. Because Array Molecular Corp. was not a party to the lawsuit and the defendants had not sufficiently argued that the corporate separation should be disregarded, the court held that the reimbursement counterclaim had to be dismissed. It granted the plaintiffs’ motion for reconsideration and granted summary judgment on that counterclaim.

Disposition

The court granted the plaintiffs’ motion for reconsideration in part and denied it in part. It granted in part and denied in part the plaintiffs’ motion for summary judgment on the breach-of-contract claim, and granted the plaintiffs’ motion for summary judgment on the defendants’ remaining counterclaim.