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Gruber v. Xactis Corp.

Superior Court of New Jersey, Appellate Division

September 5, 2013

KENNETH GRUBER and MURRAY GRUBER, Plaintiffs-Respondents,
XACTIS CORPORATION, Defendant, and ALAN S. KAPLAN, Defendant-Appellant.


Argued March 12, 2013

On appeal from the Superior Court of New Jersey, Law Division, Essex County, Docket No. L-8044-07.

Alan S. Kaplan, appellant, argued the cause pro se.

David J. Gruber argued the cause for respondents (Gruber, Schwartz & Posnock, LLP, attorneys; Mr. Gruber, of counsel and on the brief).

Before Judges Messano and Lihotz.


Following a non-jury trial, judgment was entered in favor of plaintiffs Kenneth and Murray Gruber against defendants Alan Kaplan (defendant) and Xactis Corporation (Xactis) in the amount of $300, 000, together with prejudgment interest in the amount of $209, 582.29, for a total judgment of $509, 582.29. Defendants' subsequent motion for reconsideration was denied.

The testimony at trial revealed that, in June 2005, defendant approached plaintiffs and solicited their investment in Xactis, a company providing computer programming services to other corporations. At a meeting defendant arranged at the home of Arthur Lester, he made a detailed presentation and provided plaintiffs with a private placement offering memorandum and disclosure statement (offering statement). Defendant represented that Lester was someone who had already invested $100, 000 in Xactis. The offering statement asserted that "[m]anagement's initial valuation for [Xactis] is [$]20, 000, 000 and [it] is issuing a total of 5, 000, 000 shares [of stock]." The offering statement also explained the speculative and potentially risky nature of any investment in Xactis.

Defendant also represented orally and in the offering statement that Xactis had a direct and on-going relationship with Sun Microsystems (Sun) and Electronic Data Systems. Defendant also stated that Xactis was selling its proprietary software to Sun and other large companies and the company had contracted, or was about to contract with, Nextel, the Department of Homeland Security, the Internal Revenue Service, the United States Department of Agriculture, Hewlett-Packard, and Banco Popular, among others. Defendant projected revenues of $6 million for 2005, $36 million for 2006, $72 million in 2007, and $130 million in 2008.

Defendant stated that Xactis would be purchasing the intellectual property rights held by another corporation, Internet Now Technologies (INow), portrayed as a predecessor to Xactis. However, defendant never disclosed that INow was involved in significant litigation involving claims by Sun seeking more than $1 million, or that INow was bankrupt. Defendant failed to disclose that Xactis did not have any cash on hand, or that he had several judgments and tax liens against him personally, including an IRS lien of approximately $400, 000, no assets and was nearly $1 million in debt. Defendant asked plaintiffs to invest $300, 000, which would fund the existing and imminent contracts with Sun and other entities.

On June 10, 2005, plaintiffs each executed convertible promissory notes with Xactis for $50, 000. Under the terms of the notes, an "[e]vent of [d]efault" included: a failure by Xactis to pay principal, interest, or other amounts due; a failure to perform its obligations; and the making of any false representations, warranties, or certifications. Upon an "event of default, plaintiffs were entitled "at [their] option . . . [to] declare the entire unpaid principal balance of th[e] Note, together with all accrued but unpaid interest, due and payable . . . . " Payment of interest was to commence on the one-year anniversary of the notes. On October 18, 2005, defendant requested and received an additional $100, 000 from each plaintiff. Additional promissory notes were executed that included similar provisions.

Plaintiffs claimed that thereafter defendant would routinely deny their requests for financial documents relating to Xactis. Defendant's claims of promising prospects bore no fruit.

Plaintiffs also established that defendant and his wife, Rebecca, used the investments for personal expenses. Rebecca used the initial $100, 000 to write checks from Xactis to herself, defendant, and another defunct corporation, RBI, Inc. (RBI).[1] The additional $200, 000 was used to pay for household expenses, food, alcohol, clothing, and a car. On August 29, 2007, due to the failure of Xactis to make interest payments under the notes, plaintiffs declared Xactis in default.

Arnold Mytelka testified that in December 2004, he was appointed as fiscal agent to oversee litigation surrounding INow. His March 2005 report to the court revealed that INow was insolvent, had no assets and was not conducting business. INow owed Sun $1.2 million, and Sun had terminated their relationship. Mytelka recommended INow file for bankruptcy.

By early May 2005, Mytelka had been discharged from his duties. Yet, the offering statement shown to plaintiffs in June 2005 claimed that Mytelka was overseeing INow's litigation and was supportive of transferring INow's contracts to Xactis. Mytelka was not aware of defendant's efforts to raise money for Xactis, was unaware of any effort by ...

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