United States District Court, Southern District of New York
May 21, 2003
LAURUS MASTER FUND, LTD., PLAINTIFF, AGAINST VERSACOM INTERNATIONAL, INC., DEFENDANT.
The opinion of the court was delivered by: Laura Taylor Swain, United States District Judge.
Plaintiff Laurus Master Fund, Ltd. ("Laurus"), brings this motion seeking a default judgment against Defendant Versacom International, Inc. ("Versacom"). The Court has considered thoroughly all submissions related to this motion. For the following reasons, Plaintiff's motion is granted, Versacom is directed to issue and deliver certain common stock to Plaintiff, and damages and costs are awarded to the extent set forth below. This Memorandum Order constitutes the Court's findings of fact and conclusions of law to the extent such are required by Rule 52 of the Federal Rules of Civil Procedure.
On July 11, 2002, Laurus filed a complaint seeking injunctive relief and damages. Laurus also filed a motion for a preliminary injunction seeking an order directing Versacom to issue Laurus 34,000,000 shares of common stock. Versacom was served with the summons and complaint and the motion for injunctive relief on July 15, 2002. On August 19, 2002, the Court issued an order consolidating Laurus' motion for a preliminary injunction and the determination on the merits under Fed.R.Civ.P. 65(a)(1) and permitting Laurus to make a motion for a default judgment. On September 4, 2002, Laurus obtained a Certificate of Default. As required by the Court's August 19, 2002 Order, Laurus' motion was accompanied by evidentiary material. Laurus filed and served additional evidentiary material in response to a March 31, 2003 Order. Versacom has not responded to the complaint or any of the motions and has not otherwise appeared in this action.
Laurus is a private investment fund based in the Cayman Islands. (Affidavit of Daniel Laifer, sworn to September 12, 2002 ("Laifer Aff.") ¶ 1.) Versacom is a provider of telecommunication services throughout the United States. (Laifer Aff. ¶ 4.) In September and October of 2001, Laurus and Versacom negotiated a private equity financing agreement. (Laifer Aff. ¶ 5.) On October 17, 2001, Laurus and Versacom entered into certain agreements relating to the financing. (Laifer Aff. ¶ 6) The agreements include the Versacom International, Inc. Securities Purchase Agreement entered into October 17, 2001 ("Purchase Agreement") (Laifer Aff., Ex. A), a Convertible Note ("Note") (Laifer Aff., Ex. B), a security agreement dated October 17, 2001 relating to accounts receivable (Laifer Aff. Ex. C) and a security agreement concerning Versacom shares, dated October 17, 2001 (Laifer Aff., Ex. D). Each of these agreements provides that it is governed by New York Law. (See Purchase Agreement, section 12.1; Note, section 4.1; Security Agreement (accounts receivable), section 12; Security Agreement, (shares) section 12.6.)
In connection with the financing agreements, Laurus agreed to deliver to Versacom $300,000 in return for the Note, 50,000 shares of Versacom common stock and a security interest in Versacom's accounts receivable. (Laifer Aff. ¶ 8, Exs. A-D.)
The Note came due, with interest, on October 17, 2003. (Note, Laifer Aff., Ex. B.) The agreements also gave Laurus the right to convert the principal and interest under the Note into Versacom common stock. (Id.; Note, Section 2.1.) Under the financing agreements, Versacom was required to file a registration statement with the Securities and Exchange Commission (the "SEC") with respect to the shares of common stock within 45 days of the closing date of the transaction. (Purchase Agreement, Laifer Aff., Ex. A.) The registration statement was to be declared effective within 135 days of the closing date (the "Effective Date"). The Purchase Agreement provided that, if Versacom failed to meet either of these deadlines, Versacom would pay Laurus liquidated damages. The agreement further provided that the payment of liquidated damages did not relieve Versacom of its obligation to honor Laurus' notices to convert the principal and interest into stock. (See Purchase Agreement, Section 9.4.)
The Note provided that, on or after the Effective Date, Laurus had the absolute right to convert the principal and interest into Versacom common stock at the lower of $0.23/share or 80% of the average of the three lowest market prices for the 30 trading days prior to the conversion. (Note, 2.1(a) and (b), Laifer Aff. Ex. B.) Absent a default, Laurus could not effect a conversion would that result in Laurus having beneficial ownership of more than 4.99% of the outstanding shares. (Purchase Agreement, section 8.4, Laifer Aff. Ex. A). In the event of a default, however, this limitation could be voided. (Id.)
Under one of the security agreements between Versacom and Laurus, Laurus obtained a security interest in certain accounts receivable. (Security Agreement, section 4, Laifer Aff., Ex. C.) Under the terms of the security agreement concerning accounts receivable, Versacom was required to deliver funds in respect of paid receivables to Laurus. (Id.)
A second security agreement between Laurus and certain Versacom officers gave Laurus a security interest in shares of Versacom stock held by the officers. (Security Agreement, section 9, Laifer Aff. Ex. D.)
Laurus and Versacom also entered into an escrow agreement which provided that, on October 17, 2001, Versacom would deliver the Note and 50,000 shares of Versacom stock to an escrow agent. (Funds Escrow Agreement, section 2.1, Laifer Aff., Ex. E.) Laurus was to deliver $300,000 to the escrow agent on or about October 17, 2001. (Funds Escrow Agreement, section 2.2.)
Versacom filed a registration statement with the SEC on December 7, 2001, which was six days late. (Laifer Aff. ¶ 27.) In addition, the registration statement was not declared effective by the effective date provided for in the Purchase Agreement. (See Affidavit of Pat Regan, sworn to September 12, 2002, ¶ 8; Laifer Aff. ¶ 28; Purchase Agreement, section 9.4.) Because Versacom failed to effect a timely registration statement, it was in default under the terms of the financing agreements. (See Note, section 3.11; Purchase Agreement, section 9.4.)
In January of 2002, Laurus discovered that Versacom had failed to turn over certain funds in respect of accounts receivable that had been paid. Laurus asked Versacom to cure this breach of the financing agreements. (Laifer Aff. ¶ 22, Notice of Default and Acceleration, Ex. H.)
Subsequent to Versacom's defaults concerning the accounts receivable and the untimely registration statement, Laurus foreclosed on its security interest in the shares of stock held by Versacom officers. (Laifer Aff. ¶ 24, Notice of Default and Acceleration, Ex. H.) Thus, Laurus became a shareholder of Versacom, holding 2,142,000 shares. Its shareholder status gave Laurus rights to inspect certain Versacom records. (Id.) Laurus has never received any shareholder notices from Versacom. (Id.)
On May 31, 2002 Laurus delivered a notice seeking to convert $54,400 of the Note (of which $51,832.52 was principal) into 34,000,000 shares. (Laifer Aff. ¶ 25, Conversion Notice, Ex. L.) Versacom failed to deliver the shares which were due pursuant to the May 31, 2002 conversion notice.
On June 27, 2002, Laurus made a demand pursuant to Section 624 of the Business Corporation Law of the State of New York for the inspection, examination and copying of the minutes and proceedings of Versacom shareholders and record of Versacom's common and preferred shareholders. (Laifer Aff. ¶ 33, Shareholders Demand for Inspection, Ex. N.) Versacom has not made available the minutes and proceedings of the Versacom shareholders or the records requested in the June 27, 2002 demand for inspection. (Laifer Aff. ¶ 33.)
Under New York law, a plaintiff seeking specific performance must demonstrate the following: "(1) there is a valid contract; (2) plaintiff has substantially performed under the contract and is willing and able to perform its remaining obligations; (3) defendant is able to perform its obligations; and (4) plaintiff has no adequate remedy at law." U.S. Fidelity and Guar. Co. v. J. United Elec. Contracting Corp., 62 F. Supp.2d 915, 921 (E.D.N.Y. 1999); see also Hadcock Motors, Inc. v. Metzger, 92 A.D.2d 1, 459 N.Y.S.2d 634, 636-37 (4th Dep't 1983). Once that showing is made, "[a] party seeking [specific performance] must show equitable factors in its favor . . . and must also demonstrate that its risk of injury, if the injunction is denied, is one that after balancing the equities entitles it to relief." Nemer Jeep-Eagle, Inc. v. Jeep-Eagle Sales Corp., 992 F.2d 430, 433 (2d Cir. 1993). "The decision whether or not to award specific performance is one that rests in the sound discretion of the trial court." Sokoloff v. Harriman Estates Development Corp., 96 N.Y.2d 409, 415, 729 N.Y.S.2d 425, 754 N.E.2d 184 (2001).
Whether There is A Valid Contract
The affidavits and exhibits attached to Laurus' motion for default judgment show agreements in respect of the Purchase Agreement, the Note and two security agreements. The affidavit of Daniel Laifer, which is uncontroverted, indicates that these agreements are valid and enforceable contracts. (See Laifer Aff. ¶ 6.) In addition, Plaintiffs have submitted the Affidavit of Pat Regan, sworn to March 3, 2003 ("Regan Aff.") which states that on October 17, 2001, Fred Schwartz, then President and CEO of Versacom, came to Laurus' offices and executed and delivered the Purchase Agreement, the Convertible Note and the security agreements. Accordingly, based on the representations in the Laifer Affidavit and the Regan Affidavit, the Court finds that the Purchase Agreement, the Note, and the security agreements are valid and enforceable contracts.
Whether Plaintiff has Substantially Performed its Obligations
Laurus has proffered uncontroverted evidence that it tendered $300,000 in connection with its obligations under the financing agreements. This is the extent of Laurus' relevant obligation under the financing agreements.
Whether Defendant is Able to Perform its Obligations
Versacom has 100 million authorized but unissued shares of common stock. (See Registration Statement, dated December 7, 2001, Ex. J to Affidavit of Hillary Richard, sworn to September 13, 2002.)*fn1 There is nothing in the record showing that Versacom is unable to issue the 34,000,000 shares of common stock owing to Laurus under the financing agreements.
Whether Plaintiff Has An Adequate Remedy at Law
As stated above, according to the registration statement, Versacom has 100 million authorized but unissued shares of stock. (See id.) Because there are insufficient outstanding shares for Laurus to purchase all of the shares owing to it under the financing agreements on the open market, Laurus cannot obtain the interest in the company for which it contracted by purchasing the shares on the open market. In light of these circumstances, Laurus has no adequate remedy at law.
Whether the Equities Favor Specific Performance
The equities favor granting specific performance because the Versacom stock is not available on the open market. See Haymarket v. D.G. Jewellry of Canada, Ltd., 290 A.D.2d 318, 736 N.Y.S.2d 356 (1st Dep't 2002) (specific performance upheld where plaintiff would "be unable to purchase the number of shares to which it is entitled on the open market"); Goddard v. Gladstone, 137 N.Y.S.2d 393, 395-96 (N.Y.Sup.Ct. 1955) (citing treatise: "specific performance is . . . frequently decreed where the contract involved corporate stock of a peculiar or special value to the complainant, or where the subject of the contract is of unknown and of not easily ascertainable value") (citation omitted).
In light of all of the foregoing, Laurus' motion for injunctive relief is granted and it is hereby ordered that Versacom shall issue and deliver to Laurus 34,000,000 shares of Versacom common stock immediately.
Breach of Contract
Laurus also seeks damages for breach of contract. Under New York law, a party awarded specific performance is also entitled to recover damages for losses resulting from the breaching party's refusal to convey property in accordance with terms of the contract. See Bergman v. Meehan, 479 N.Y.S.2d 422, 422 (N.Y.Sup.Ct. Nassau Co. 1984). In addition, the presence of a liquidated damages clause does not bar specific performance unless there is language which provides that recourse to liquidated damages shall be the sole remedy. See Rubinstein v. Rubinstein, 23 N.Y.2d 293, 297-298, 296 N.Y.S.2d 354, 358-359, 244, N.E.2d 49, 51-52 (1968). Because Versacom did not timely file the registration statement or timely cause the registration statement to be declared effective, failed to timely deliver shares pursuant to the notice of conversion, and otherwise defaulted on the Note, Laurus is entitled to liquidated damages for late performance as set forth in the financing agreements. In addition, Laurus is entitled to consequential damages because of Versacom's default on the Note in addition to specific performance concerning the conversion of $54,000 of the Note.
In order to succeed on a breach of contract claim under New York law, a plaintiff must demonstrate: (1) the existence of a valid agreement, (2) adequate performance of the contract by the plaintiff, (3) breach of the contract by the defendant, and (4) damages. Harsco Corp. v. Segui, 91 F.3d 337, 348 (2d Cir. 1996). As established above, the financing agreements are valid and enforceable contracts. Laurus has performed its obligations under the financing agreements. Versacom breached the financing agreements by failing to secure a timely and effective registration statement. In addition, it is uncontroverted that Versacom has failed to deliver to Laurus monies received under the Accounts Receivable Agreement and has failed to issue shares due and owing Laurus pursuant to the conversion notice.
The Purchase Agreement required Versacom to file the registration statement within 45 days and provided for liquidated damages of 2% of the outstanding principal per day for each day after the 45 day period. (See Laifer Aff. ¶ 27 and Ex. M.) Versacom having filed the registration statement six days late, Laurus is entitled to liquidated damages of $1,183.56.
In addition, the Purchase Agreement provided that Versacom was to have the registration statement declared effective by March 1, 2002 and provided for liquidated damages of 2% of the outstanding principal for each day after March 1, 2002 that Versacom that failed to do so. It is undisputed that Versacom remains in default in respect of its obligation to have the registration statement declared effective and Laurus is therefore entitled to liquidated damages of 2% of the outstanding principal for each day of default from March 1, 2002 to the date of judgment. (See Laifer Aff. ¶ 28, Ex. M.)
Under the terms of the Purchase Agreement, Laurus was entitled to liquidated damages if Versacom failed to deliver shares owing under the conversion provisions of the Note, (See section 8.1, Purchase Agreement, Laifer Aff. Ex. B.) Laurus sought to convert an amount of $51,853.52 in principal. The liquidated damages provision in the Note provided for damages in the amount of $100 per day for each $10,000 of principal that was not converted. The penalty amount is thus $500.00 per business day. It is undisputed that Versacom remains in default in respect of the shares to be delivered under the conversion provisions of the Note. Accordingly, Laurus is entitled to liquidated damages of $500.00 for each business day from June 5, 2002 to the date of judgment. (See Laifer Aff. ¶ 29; Ex. M.)
Taking into account the conversion value of the 34,000,000 shares, Laurus is entitled to $212,922.48 in respect of the unpaid principal obligation on the Note. (See Laifer Aff. ¶¶ 25-31.) Laurus invested $300,000 in Versacom and received a total of $51,679.97 in accounts receivable due under the financing agreements which was applied to fees interest under the Note and to reduce outstanding principal. Thereafter, the outstanding principal was $264,755. (See Laifer Aff. ¶ 21.) On May 31, 2002, Laurus elected to convert $54,400 of the Note of which $51,832.52 was principal and $2,567.48 was interest. Thus, after the Notice of Conversion, the principal outstanding was $212,922.48. (See Laifer Aff. ¶ 25, Ex. L.)
The Note also provides for interest accruing from the date of the agreement at an annual rate of 8%. (Laifer Aff., Ex. B at 1.) Because the shares were not issued, Laurus is entitled to interest on the outstanding principal amount of $264,755. (See id.; section 1.1, Note.) Also, in the event of default, interest accrues at an annual rate of 20%. Versacom has been in default since March 1, 2002; given the five-day grace period under the Note, the default rate began accruing on March 6, 2002. Thus, Laurus is owed interest on the principal amount of $264,755 at the rate of 8% from October 17, 2001 to March 5, 2002 for a total amount of $8,065.96. (See Laifer Aff. ¶ 30.) Because Versacom has been in default since March 6, 2002, and Laurus is entitled to the default rate of interest from March 6, 2002 to the date of judgment.
Furthermore, section 12.9 of the Purchase Agreement provides that Laurus is entitled to an award of attorneys' fees and costs because it is the prevailing party in an action brought to enforce the Purchase Agreement. Because it is the prevailing party in this action, Laurus is entitled to an award of reasonable attorneys' fees and costs.
Demand for Inspection
It is well settled that a shareholder has both statutory and common-law rights to inspect the books and records of a corporation if inspection is sought in good faith and for a valid purpose. See Peterborough Corp. v. Karl Ehmer, Inc., 628 N.Y.S.2d 134 (2d Dep't 1995); N.Y. Business Corp. Law § 624(b) (McKinney 2002). Laurus is a Versacom shareholder of record, holding 2,142,000 shares of common stock. (See Laifer Aff. ¶ 24, Ex. K.) On June 27, 2002, Laurus made a demand for inspection of shareholder records and in accordance with Section 624(b) of New York Business Corporation Law, submitting an affidavit by a Laurus director attesting that the inspection demand was made for the purpose reasonably related to Laurus's interest as a Versacom shareholder. (Id.) Once a shareholder alleges compliance with New York Business Corporation Law, "it becomes incumbent on the corporation to justify its refusal by showing an improper purpose or bad faith." Lampert v. Kirsch Beverages, Inc., 411 N.Y.S.2d 404 (2d Dep't 1978) (citation omitted). Versacom has not justified its refusal to provide Laurus access to the requested shareholder records. (Id.)
In light of Laurus' status as a shareholder of record of Versacom, its evidence of compliance with the requirements of section 624(b) of the New York Business Corporation Law and Versacom's failure to justify its refusal to provide Laurus access to its books and records, the Court directs Versacom to permit Laurus or its agent or attorneys immediately to inspect the books and records of Versacom as identified in the demand for inspection dated June 27, 2002.
For all of the foregoing reasons, Laurus' motion for judgment by default is granted. Versacom shall immediately issue and deliver to Laurus 34,000,000 shares of Versacom common stock. Laurus is hereby awarded liquidated damages in the amount $1,183.56 for late filing of the registration statement; liquidated damages of 2% of the outstanding principal for each day after March 1, 2002 to the date of judgment herein; liquidated damages in the amount of $500.00 per business day from June 5, 2002 to the date of the judgment herein in respect of Versacom's failure to deliver shares owing under the conversion provisions of the Note; $212,922.48 in outstanding principal of the Note; interest in the amount of $8,065.96 owing on the principal amount of $264,755 from October 17, 2001 to March 5, 2002; interest on the outstanding principal of $264,755 at the default rate of 20% from September 12, 2002 to the date of the entry of judgment. Versacom shall permit inspection of the books and records specified in Laurus' shareholder demand of June 28, 2002. In addition, Versacom shall pay the attorneys' fees and costs reasonably incurred by Laurus in prosecution of this action.
Within fifteen (15) days of the date hereof, Laurus shall submit to the Court and serve upon Versacom a proposed judgment consistent with this Opinion, accompanied by competent evidence and appropriate calculations establishing the amounts of liquidated damages, interest and attorneys fees and costs owed to Laurus resulting from Versacom's default. Any counter-proposed judgment or objections to Laurus' evidence or calculations shall be served on Laurus and submitted to the Court no later than ten (10) days after service of Laurus' papers.
IT IS SO ORDERED.