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February 7, 2003


The opinion of the court was delivered by: Robert W. Sweet, District Judge.


Plaintiffs Boat Basin Investors, LLC ("Boat Basin"), Papell Holdings, Ltd. ("Papell"), Marc Siegel ("Siegel"), David Stefansky ("Stefansky") and Richard Rosenblum ("Rosenblum") (collectively, the "Sellers") have moved pursuant to Rule 65 of the Federal Rules of Civil Procedure for an injunction ordering the delivery of 7,707,332 free-trading shares of Freestar Technologies, Inc. ("Freestar") by the defendants, First American Stock Transfer ("First American"), Paul Egan ("Egan"), Phillip Young ("Young"), Margaux Investment Management Group, S.A. ("Margaux") and ten John Does 1-10.

The Sellers, while complaining of potential bankruptcy in the absence of equitable relief, are hoist on their own petard. In the absence of Freestar, a necessary party under Rule 19(a) of the Federal Rules of Civil Procedure, the merits may not be reached and a preliminary injunction may not be granted. Yet Freestar is currently mired in involuntary bankruptcy proceedings — initiated by the Sellers — and thus cannot be joined to this action at this time due to the involuntary stay in place pursuant to 11 U.S.C. § 326. Therefore, and for the following reasons, the motion is denied.


The following facts are drawn from the parties' moving papers and oral arguments and do not constitute findings of fact by the Court.


The Plaintiffs

Boat Basin is a Nevis, West Indies Company with its principal place of business in Nevis, West Indies.

Papell is a Turks & Caicos Islands Company with its principal place of business in the Turks & Caicos Islands.

Siegel is an individual who resides in Boca Raton, Florida.

Stefansky is an individual who resides in Lakewood, New Jersey.

Rosenblum is an individual who resides in Wayne, New Jersey.

The Defendants

First American is an out-of-state corporation with its principal place of business at 1717 East Bell Road, Suite 3, Phoenix, Arizona 85022. At all relevant times, First American acted as the stock transfer agent for Freestar.

Egan is an individual who resides in the Dominican Republic. At all relevant times, Egan was the President, Chief Executive Officer and most substantial shareholder of Freestar. Egan claims that he has a personal net worth of $600,000.

Young is an individual who resides in Phoenix, Arizona. At all relevant times, Young was the president of First American.

Margaux is a European corporation with its principal place of business located at 9 Rue de Commerce, Geneva, Switzerland.

John Does 1-10 are individuals and/or entities presently unknown who participated in a purported market manipulation of Freestar's stock.


Freestar is a Nevada corporation that maintains its principal corporate headquarters in Santo Domingo, Dominican Republic. It also has offices in Dublin, Ireland and Helsinki, Finland. It does not currently have any offices in the United States. Freestar is in the business of enabling security-enhanced financial transactions over the Internet using credit, debit, ATM and smart cards.

Freestar's common stock is publicly traded on the Over-the-Counter Electronic Bulletin Board Market of the National Association of Security Dealers ("NASD"). Freestar's market capitalization is in excess of $13 million. As of its most recent filing, Freestar had approximately 48 million shares of common stock issued and outstanding.

Freestar claims that it generally pays its creditors in a timely manner. For instance, Heroya Investments, which is owed $2 million, has attested that Freestar has been meeting its obligations. Freestar's largest creditor, Heroya also opposes the bankruptcy filing.

The March 2002 Convertible Notes

Prior to entering into the June 2002 Convertible Notes leading to the stock transfer at issue, Freestar had earlier sought similar financing from the Sellers.

On March 25, 2002, Freestar entered into a $270,000 financing agreement, under which Freestar issued 8% promissory notes to Papell and Boat Basin for $200,000 and $70,000, respectively. The March 2002 Convertible Notes matured in March 2003 and were convertible into equity under certain circumstances. In exchange, Freestar received funds totaling $228,000. The remaining $42,000 represented brokerage commissions and fees. Egan personally guaranteed the March 2002 Convertible Notes and secured them with a stock pledge of 4 million shares of Freestar common stock.

On July 3, 2002, Egan notified the Sellers' counsel that the 4 million shares of stock were restricted and stated that the the holding period described by Rule 144 would expire in September 5, 2002.

Freestar defaulted on the March 2002 Convertible Notes. About the time of default, on May 29, 2002, Papell and Boat Basin notified Freestar of their right to proceed against Egan and convert their debt into the pledged stock. They foreclosed on the 4 million shares of common stock.

On June 7, 2002, 4 million restricted shares of Freestar common stock were irrevocably transferred out of Egan's name and into the names of Papell and Boat Basin on four certificates, 1711, 1712, 1713 and 1714. First American's record show that the 4 million shares were issued with the restriction.

In a letter dated June 10, 2002, Sellers' counsel wrote to First American and asked that the shares be reissued as unrestricted because she claimed that the 4 million shares had been registered on SEC Form S-8. Freestar now claims that the shares were not so registered.

On June 12, 2002, First American reissued the stock as unrestricted in response to the letter.

Freestar claims that Papell and Boat Basin over-converted the stock at issue, resulting in overpayment of $188,352 to Papell and $56,488 to Boat Basin.

The $60,000 Short Term Loan

Freestar claims that on June 12, 2002, plaintiffs Rosenblum, Stefansky and Siegel each loaned Freestar $20,000, for a total of $60,000. Freestar asserts that the loan was made without documentation and was intended to serve as a short-term bridge loan until the terms for a large convertible note could be agreed upon by the parties.

Freestar claims that it pledged one million shares, divided equally among the three plaintiffs, as collateral for the $60,000. After Freestar issued the one million shares, counsel for the three plaintiffs notified Freestar that they were treating the shares as commission and/or interest.

As of June 12, 2002, the market value of the shares was approximately $142,000.

June 2002 Boat Basin Loan

Freestar claims that also on June 12, 2002, Boat Basin loaned Freestar $50,000 as a short term bridge ...

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