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Dragon Jade International, Ltd. v. Ultroid, LLC

United States District Court, M.D. Florida, Tampa Division

January 23, 2018

DRAGON JADE INTERNATIONAL, LTD., Plaintiff,
v.
ULTROID, LLC, ULTROID MARKETING DEVELOPMENT CORP., and ULTROID TECHNOLOGIES, INC., Defendants.

          Honorable James D. Whittemore, United States District Judge

          REPORT AND RECOMMENDATION

          THOMAS B McCOUN III UNITED STATES MAGISTRATE JUDGE

         THIS CAUSE is before the Court on referral for a Report and Recommendation on Defendants' Motion to Dismiss (Doc. 11). Plaintiff filed a response in opposition (Doc. 17), to which Defendants were permitted a reply (Doc. 28).

         I. A.

         Plaintiff Dragon Jade International, Ltd. (“Dragon Jade”) initiated this action on October 13, 2017, filing a five-count complaint against Defendants Ultroid, LLC, Ultroid Marketing Development Corp., and Ultroid Technologies, Inc. (collectively, “the Ultroid Defendants”). (Doc. 1). According to the Complaint, Dragon Jade and Ultroid Technologies initially entered into an International Distribution Agreement in June 2015 in connection with Ultroid's Hemorrhoid Management System. Following the breakdown of that distribution agreement, Dragon Jade began arbitration proceedings. In addition, the U.S. Food and Drug Administration issued a warning letter to Defendants regarding its product.

         Apparently in an effort to resolve arbitration and to assist Defendants with remediation of the product, the parties entered into two agreements in January 2017: the Exclusive Option and Remediation Agreement (the “Option Agreement”) and the Security Agreement (the “Security Agreement”). Pursuant to the Security Agreement, Dragon Jade also filed several UCC Financing Statements against assets of the Defendants. The Option Agreement, the Security Agreement, and the UCC Financing Statements are the subject of this action.

         Dragon Jade alleges that the Option Agreement (see Doc. 1-1) grants to it an exclusive option to purchase the Ultroid Assets provided that Dragon Jade supplied remediation funding and certain remediation tasks were performed. It asserts that, as defined in the Option Agreement, the Option Period expires thirty days after the completion of “Milestone 2” (as defined in the Option Agreement at Exhibit C). Because Milestone 2 performance is not yet complete (e.g., the Design History File is not complete and the Design Master Record has not been populated), it claims that the Option Period is not yet triggered. Notwithstanding that the Option Period has not yet run and that Dragon Jade has continued to honor its contractual obligations, it alleges that on September 22, 2017, the Ultroid Defendants sent a letter to Dragon Jade indicating that they were terminating the exclusive option effective immediately (see Doc. 1-4). Dragon Jade asserts that this letter is contrary to the plain language of the Option Agreement and constitutes a breach, and/or anticipatory breach, of the Agreement. In addition, Dragon Jade alleges that the Ultroid Defendants have made clear that they have no intention of honoring the Option Agreement and, it believes, the Ultroid Defendants are attempting to sell or otherwise encumber or hypothecate the assets subject to the parties' agreements.

         In order to secure the remediation payments, outstanding debts owed, and the liquidated damages provided for in the Option Agreement, Dragon Jade and the Ultroid Defendants also entered into a Security Agreement (see Doc. 1-2). Through the Security Agreement, the Ultroid Defendants pledged and granted a security interest, including a first priority lien, in:

all right, title and interest in and to the following, wherever located, whether now existing or hereafter from time to time arising acquired: (i) all Ultroid Assets and any and all claims, rights and interests in any of the Ultroid Assets; (ii) all guaranties and security for any items set forth in (i); (iii) all substitutions and replacements for, additions, accessions, attachments, accessories, and improvements to, and proceeds (including proceeds of any insurance policies, proceeds of proceeds and claims against third parties) of, any and all of the items set forth in (i) and (ii); and (iv) all of Ultroid's books relating to any and all of the items set forth in (i), (ii) or (iii) (collectively, the “Collateral”).

(Doc. 1-2 at ¶ 1).

         The security interest cannot be extinguished until the Secured Obligations have been paid and performed in full (which Dragon Jade alleges has not occurred), and the delivery of “a proper instrument” from Dragon Jade acknowledging that the obligations were satisfied. Id. at ¶ 2. Under the Security Agreement, in the event of breach, Dragon Jade is entitled to appointment of receiver and to foreclose upon the collateral. Dragon Jade alleges that “Although Dragon Jade does not believe that the Ultroid Entities have successfully terminated the Option Agreement, to the extent that they did, then Dragon Jade was entitled to return of the indebtedness owed, which did occur. As a result, under those circumstances, Dragon Jade would be entitled to foreclose under the terms of the Security Agreement as well [as] its rights under the Option Agreement.” (Doc. 1 at ¶ 36). In addition, in connection with the execution of the Option and Security agreements, Dragon Jade filed various UCC Financing Statements to secure the assets of the Ultroid Defendants (see Doc. 1-3). Again, it alleges that it believes the Ultroid Defendants are attempting to sell the collateral that is subject to the parties' agreements. It states that all conditions precedent have been performed or have been waived. (Doc. 1 at ¶ 41).

         Plaintiff sets out five counts: Breach of the Option Agreement (Count I); Anticipated Breach of the Option Agreement (Count II); Breach of the Security Agreement (Count III); Anticipated Breach of the Security Agreement (Count IV); and Foreclosure of Security Interests under Florida UCC (Count V). It seeks damages (compensatory and liquidated damages in the amount of $2 million); alternatively, foreclosure of its security interest; and declaratory and injunctive relief.[1]

         B.

         The Ultroid Defendants move to dismiss all five counts of the Complaint pursuant to Fed.R.Civ.P. 12(b)(6). (See Doc. 11). First, with regard to the Option Agreement, Defendants urge that the Option Period “was triggered upon delivery of the third payment under Phase 3, which as due no later than March 13, 2017.” Id. at 3. Because Dragon Jade did not exercise its option within this period, Defendants claim the option, and thus the Option Agreement, expired long before they sent their September 22, 2017, notice of termination. Because the Option Agreement has expired, they argue as a matter of law and pursuant to the plain language of the Option Agreement, there can be no breach or anticipatory breach of the Option Agreement. Alternatively, Defendants argue that to the extent the Option Agreement has not expired, their September 22, 2017, letter does not constitute a material or anticipatory breach of the agreements. They assert that the letter does not address their obligations under the Agreement or otherwise suggest their intention to default on those obligations. Further, they claim that any alleged breach or anticipatory breach by virtue of an attempt to sell or transfer assets is based on nothing more than vague, conclusory, and unsupported allegations.

         Next, with regard to any alleged breach of the Security Agreement, the Ultroid Defendants argue that, while the expiration of the Option Agreement triggered their obligation to repay Dragon Jade, the Security Agreement is silent as to when such payments are to be made. They argue that because time is not of the essence under the Agreement, there is not a fixed time for repayment, and, in any event, Dragon Jade has not even demanded repayment, there can be no claim for breach. Alternatively, again Defendants argue that to the extent the Option Agreement has not expired, they do not yet have an obligation to repay Dragon Jade and the Security Agreement is not yet triggered.

         With regard to Count V, Defendants argue that foreclosure of the security interest under the UCC filings is premature as there has been no finding of default.

         In its response to the motion to dismiss, Dragon Jade disputes that the Option Period has expired, accusing Defendants of conflating Phase 2 and Milestone 2, which are separate and distinct in the Option Agreement. It claims it has sufficiently pleaded its claims for breach of both agreements, to wit: “Ultroid breached the Option Agreement by attempting to terminate it without a legal basis, advising Dragon Jade that it was attempting to sell the assets secured in the Option Agreement, refusing to stop attempting to sell those assets, and refusing to provide assurances that the security interests were not being violated.” (Doc. 17 at 9). It claims the September 22, 2017, provides an adequate basis from which to conclude there has been a breach or an anticipatory breach (i.e., repudiation) of the Option Agreement and Security Agreement.

         As for its claim for foreclosure of the UCC liens, Dragon Jade argues that the Security Agreement specifically provide for such a remedy in the event that the Ultroid Defendants fail in their repayment obligations. Thus, it claims to the extent Defendants legally terminated the Option Agreement and have failed to repay their obligations, they are in default and it has sufficiently pleaded a claim under Florida law.

         Defendants reply that Plaintiff has not sufficiently refuted its contentions that dismissal is appropriate. In short, they argue Plaintiff is attempting to introduce argument or evidence outside the four corners of the Complaint; that a plain reading of the Option Agreement reveals such agreement expired thirty days after the final payment associated with “Phase 3” was made; thus, they argue there can be no breach of the Option Agreement. With regard to the Security Agreement, Defendants again argue Plaintiff fails to state a claim for breach because it does not allege that it ...


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