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Prassas Capital, LLC v. Blue Sphere Corp.

United States District Court, W.D. North Carolina, Charlotte Division

July 3, 2019




         THIS MATTER comes before the Court on three pending motions: (1) Defendant Blue Sphere Corporation's (“BSC”) Motion to Exclude Expert Testimony, (Doc. No. 98); (2) BSC's Motion in Limine, (Doc. No. 100); (3) Plaintiff Prassas Capital, LLC's (“PC”) Motion in Limine, (Doc. No. 102); and the parties' associated briefs and exhibits. The motions are ripe for adjudication.

         This is a contract dispute case. At summary judgment, the Court entered partial summary judgment and dismissed PC's counterclaim for indemnification and BSC's counterclaim for fraud in the inducement. The remaining claims for trial are (1) PC's claim for breach of contract and (2) BSC's counterclaim for breach of contract.


         Relevant evidence-that which has a tendency to make a consequential fact more or less probable-is generally admissible. Fed.R.Evid. 401-02. Relevant evidence is excludable if its probative value is substantially outweighed by a danger of “unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence.” Fed.R.Evid. 403.


         A. Broker-Dealer (“B-D”) Defense

         Most of the pending motions revolve around the dispute of admitting the testimony of BSC's expert William Jannace (“Jannace”). The majority of Jannace's thirty-five-page report discusses the B-D defense and alleges that PC violated securities laws. Therefore, a threshold issue to adjudicating the pending motions is deciding whether BSC can present any evidence, argument, or reference to the B-D defense.

         1. The Court's Prior Rulings Regarding the B-D Defense

         Initially, BSC argued that the Agreements between the parties were voided from the moment of their execution because they violated the Securities Exchange Act (“SEA”). Section 15(a)(1) of the SEA mandates that brokers and dealers must be registered with the Securities and Exchange Commission (“SEC”). 15 U.S.C. § 78o(a)(1).[1] Citing this provision, Defendant alleged that, because Plaintiff was not a registered broker-dealer, the agreements between the two parties were void from the start. Defendant relied on Section 29(b) of the SEA to make this argument, which provides that contracts made in violation of the SEA and contracts in which its performance would involve a violation of the SEA shall be void. 15 U.S.C. § 78cc(b).2 The Court was not persuaded by BSC's argument.

         In the Court's earlier Order on BSC's Motion to Dismiss, the Court “delved into the agreements' validity” and “agreed with Plaintiff that, under the Supreme Court's ruling in Mills v. Electric Auto-Lite Co., 396 U.S. 375, 386-87 (1970), contracts violating the SEA are not void per se.” (Doc. No. 42 at 7). Rather, the Court noted that “Section 29 renders the ‘contract merely voidable at the option of the innocent party.'” (Id. (quoting Mills, 396 U.S. at 386-87)).[3] Subsequently, the Court held that “[e]ven if Plaintiff's actions in executing the Agreement were to exceed the excused conduct of [an exemption to the Section 15 registration requirement], Defendant at no point rescinded the contract under Section 29(b) of the SEA, ” and concluded that Defendant “fundamentally misconstrued Section 29(b) of the SEA.” (Id. at 9, 16). The Court echoed this finding in its Order on BSC's Motion for Judgment on the Pleadings. (Doc. No. 43).

         And again, at the summary judgment stage, the Court held, “to narrow the issues for trial, . . . Section 29(b) of the [SEA] does not bar PC from recovering on its breach of contract claim.” (Doc. No. 97 at 2). “Because the Court has already found that BSC ‘at no point rescinded the contract,' . . . this affirmative defense is of no avail to BSC and should be stricken.” (Id.). The Court also held that the affirmative defense was time-barred because BSC's alleged right to seek rescission expired nearly eleven months before this action was filed, and as such, held that “BSC cannot plead this defense at trial.” (Id. at 2-3 (citing Alpha Capital Anstalt v. Oxysure Sys., Inc., 216 F.Supp.3d 403, 408 (S.D.N.Y. 2016)).

         2. B-D Defense as it Relates to Illegality

         Despite not pleading illegality as an affirmative defense initially, at the status conference held on May 29, 2019, BSC indicated that, as it understood the Court's Summary Judgment Order, it still had the option of raising the defense of illegality. BSC indicated that this defense would involve the same underlying misconduct which would be a violation of the broker-dealer rule. And now, in its briefing on the pending motions in limine and motions to exclude expert testimony, it has resurrected the B-D defense, arguing that “[a]lthough the parties' agreement itself does not violate the [SEA], per se, PC's performance under that agreement did violate the Exchange Act” and contends that the only way PC can recover for breach of contract is to establish that it performed under the contract- something BSC alleges would entail violation of securities laws. (Doc. No. 104 at 4). In support of this argument, BSC regurgitates, in large part, the same case law that it included in its summary judgment briefing.

         BSC should not be allowed to resurrect the B-D defense the Court has found inapplicable by relabeling it as an “illegality” defense. The Court now finds that (1) BSC was required to affirmatively plead the defense of illegality under Federal Rule of Civil Procedure 8 but failed to do so, and (2) the law-of-the case doctrine[4]prevents B-D from relitigating the B-D defense. Additionally, the Fourth Circuit has held that a plaintiff should not be precluded from maintaining its action for breach of contract due to its own violation of securities laws. Occidental Life Ins. Co. of N.C. v. Pat Ryan & Assocs., Inc., 496 F.2d 1255, 1265-67 (4th Cir. 1974). In reaching this conclusion, the Fourth Circuit noted that it did “not think Section 29(b) has such a devastating meaning, ” as to render void all contracts the performance of which involves the violation of securities laws. Id. at 1265-66 (citing Mills, 396 U.S. at 386-87, the Supreme Court case the Court relied on in its prior orders to find that the contract was voidable, not void).

         The Court will EXCLUDE all evidence regarding BSC's prior claim or defense that PC violated the SEA by not being a registered broker-dealer.

         B. Expert Testimony

         BSC claims that, even if the Court chooses to exclude Jannace's testimony regarding the illegality of the contract (i.e., the B-D defense), Jannace's testimony regarding (a) the security industry requirements for operating as a finder, (b) the distinction between a finder and a financial adviser or broker-dealer, and (c) other material aspects of the regulated financial industry that bear upon how the contract was (or was not) performed would inform and assist the jury.

         1. Jannace's Report

         Rule 26(a)(2) of the Federal Rules of Civil Procedure governs the disclosure of expert testimony and requires, among other things, the production of a written report setting forth “a complete statement of all opinions the witness will express and the basis and reasons for them.” Fed.R.Civ.P. 26(a)(2)(B)(i). It is well-established that “expert testimony exceeding the bounds of the expert's report is excludable ...

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