The opinion of the court was delivered by: Kenneth M. Karas, District Judge
This case is before the Court on Plaintiff's Motion for Partial Summary Judgment and Defendants' Motion to Amend to Assert Counterclaims.
GEM Global Yield Fund Ltd. ("GEM"), Plaintiff, seeks partial summary judgment on its claim for payment under the Convertible Promissory Note appended to an Agreement signed between the Parties on April 11, 2003. In the event that Plaintiff's Motion is granted, Plaintiff also seeks a preliminary injunction preventing Defendants from dissipating assets that would frustrate enforcement of the judgment.
SurgiLight, Inc., Colette Cozean, and Stuart Michelson, Defendants, seek to amend their Answer to assert four counterclaims.
For the reasons stated below, Plaintiff's Motion for Partial Summary Judgment is denied in part and granted in part. Defendants' Motion to Amend is also denied in part and granted in part.
Plaintiff GEM is a West Indies corporation. (Compl. ¶ 6) Defendant SurgiLight is a Florida corporation with its principal place of business in Florida. (Compl. ¶ 3) SurgiLight acquires and develops laser technologies for applications in ophthalmology and dermatology. (Compl. ¶ 3) SurgiLight's securities are registered with the Securities and Exchange Commission ("SEC") under section 12(g), which was added to the 1934 Securities Exchange Act ("the Act") in 1964. (Compl. ¶ 3) SurgiLight's founder and former Chief Executive Officer, Dr. Jui-Teng Lin, was found guilty on charges of securities fraud and money laundering by a jury in the United States District Court of the Eastern District of New York. (Compl. ¶ 31; Defs.' Rule 56.1 Statement ¶ 21) Defendant Colette Cozean, a resident of California, is a Director, Chairwoman of the Board, and an officer of SurgiLight. (Compl. ¶ 4) Defendant Stuart Michelson, a resident of Florida, is a Director and Officer of SurgiLight. (Compl. ¶ 5)
2. The Convertible Debenture Purchase Agreement and Amendment Agreement
On June 30, 2000, GEM and SurgiLight entered into a Convertible Debenture Purchase Agreement ("Debenture Agreement"). Pursuant to the Debenture Agreement, SurgiLight issued and sold to GEM its three percent Convertible Debentures in the principal amount of $3,000 due November 8, 2003. (Compl. ¶ 7) When Plaintiff wished to convert part of the outstanding balance, it was to make a written request to its counsel, who would then release the requested number of shares from escrow. (Defs.' Mem. of Law in Opp. to Pl.'s Mot. for Partial Summ. J. ("Defs.' Opp.") 7)
On November 22, 2002, GEM and SurgiLight executed an Amendment Agreement in the amount of $1,960,000, which was the outstanding balance due on the Debenture Agreement. (Compl. ¶ 8) Under the Amendment Agreement, SurgiLight agreed to pay GEM a cash payment of $1,000,000 within thirty days and warranted payment of the right to purchase 100,000 shares of its common stock at $0.12 per share. (Compl. ¶ 9)
On December 30, 2002, GEM declared SurgiLight in default of the Debenture Agreement and Amendment Agreement for its failure to make the cash payment, deliver common shares, and register the shares with the SEC. (Compl. ¶ 10) SurgiLight explains that its financing for the $1,000,000 payment was delayed, so that SurgiLight was unable to make the payment, leading GEM to declare SurgiLight in default. (Defs.' Rule 56.1 Statement ¶ 6)
3. The April 11, 2003 Agreement
In January 2003, GEM informed SurgiLight of its intent to convert the convertible debentures it held into shares of SurgiLight common stock. (Compl. ¶ 11) Thereafter, on April 11, 2003, GEM and SurgiLight entered into an Agreement ("April 11, 2003 Agreement") in which the Parties agreed that the outstanding balance under the Debenture Agreement was $2,000,000. (Grocock Decl. Ex. E 1 ¶ 1) Pursuant to the April 11, 2003 Agreement, GEM executed and delivered a Convertible Promissory Note ("Note") in the amount of $2,000,000 in exchange for the original Debenture. (Compl. ¶ 13; Grocock Decl. Ex. E 1 ¶ 1) The April 11, 2003 Agreement states that the "Note replaces and supercedes the Debenture and Debenture Purchase Agreement in all respects, and all obligations and rights of the parties under the Debenture and Debenture Purchase Agreement are hereby terminated and of no further force or effect." (Grocock Decl. Ex. E 1 ¶ 1)
The Note is convertible into 21,500,000 shares of SurgiLight's common stock at the conversion price of $0.093 per share. (Compl. ¶ 15) On June 17, 2003, pursuant to the April 11, 2003 Agreement, SurgiLight issued to GEM 5,800,216 shares of its common stock. When combined with the previously escrowed 4,002,132 shares that collateralized the original Debenture, GEM owned a total of 9,802,348 shares ("Initial Shares"). (Compl. ¶ 18; Defs.' Rule 56.1 Statement ¶ 18)
Additionally, the Parties agreed in the April 11, 2003 Agreement that upon the effectiveness of an amendment to SurgiLight's Certificate of Incorporation to increase the number of authorized shares of common stock, the outstanding balance under the Note of 11,697,652 shares would be automatically converted ("Remaining Shares"). (Grocock Decl. Ex. E 2 ¶ 3(b)) SurgiLight agreed to use its best efforts to obtain shareholder approval of the proposed Certificate of Amendment. (Grocock Decl. Ex. E 2 ¶ 3(b)) A failure to secure the Certificate of Amendment by July 31, 2003 constituted a default under the Note and triggered SurgiLight's obligation to pay eight percent interest in cash on the balance of the Note from the date of default until the date of full conversion. (Compl. ¶ 21; Defs.' Rule 56.1 Statement ¶ 14)
The Parties further agreed that SurgiLight would use its best efforts to register the Initial and Remaining Shares for resale under the Act and to comply with all state securities laws. The registration for the Initial Shares was to be effective withing six months of signing the agreement, and for the Remaining Shares the registration was to be effective within six months of July 31, 2003. (Grocock Decl. Ex. 3 ¶ 8(a)(i)) Failure to register the Initial or Remaining Shares within the specified time frame would require SurgiLight to issue additional shares to GEM. (Grocock Decl. 3 ¶ 8(b)) To date, SurgiLight has not issued the Remaining Shares and has not registered either the Initial or Remaining Shares. (Compl. ¶ 24)
Finally, the Parties agreed that, in the event a suit was brought to enforce the April 11, 2003 Agreement, the prevailing party was entitled to attorneys' fees. (Pl.'s Rule 56.1 Statement ¶ 15; Defs.' Rule 56.1 Statement ¶ 15)
4. Assignment of Intellectual Property
From 1991 to 1999, Defendant Cozean founded and managed a company by the name of Premier Laser Systems. (Compl. ¶ 33) In October 2000, SurgiLight acquired the inventory, intellectual property, and technology of the ophthalmic laser division of Premier. (Compl. ¶ 35) Plaintiff alleges that the infrared erbium laser acquired from Premier is the product supporting the core business of SurgiLight. (Compl. ¶ 36) In November 2000, SurgiLight entered into an agreement with Cozean whereby she would serve as SurgiLight's CEO in return for certain compensation. (Compl. ¶ 37)
In October 2002, SurgiLight granted Cozean and Defendant Michelson liens on the intellectual property acquired from Premier in connection with two $20,000 loans made to SurgiLight by Cozean and Michelson and a $6,000 loan made to SurgiLight by Michelson. (Compl. ¶ 38) Plaintiff alleges that the existence of the liens was not publicly disclosed until more than one year after the execution of the transactions and after GEM entered into the April 11, 2003 Agreement with SurgiLight. (Compl. ¶ 41)
SurgiLight's Board of Directors ("Board") is comprised of nine directors elected to staggered terms of three years, with three directors' seats subject to election each year. (Compl. ¶ 43) The April 11, 2003 Agreement entitled GEM to nominate one director for election to the Board. (Compl. ¶ 44) Currently GEM's nominee, Edward Tobin is one of the nine members of the Board. (Compl. ¶ 44)
Plaintiff alleges that pursuant to Florida law and SurgiLight's bylaws, SurgiLight must hold a meeting of shareholders annually for the election of directors. (Compl. ¶¶ 45-46) SurgiLight failed to hold a meeting in 2003 or 2004. (Compl. ¶¶ 45-46; Defs.' Rule 56.1 Statement ¶ 21)
GEM filed its Complaint against Defendants on June 14, 2004. The Complaint alleges that (1) SurgiLight breached the April 11, 2003 Agreement by failing to issue the Remaining Shares, failing to register the Initial and Remaining Shares, and failing to remit payments due under the Agreement (Compl. ¶ 50); (2) SurgiLight breached its obligations under the Convertible Promissory Note by failing to issue shares as agreed in the Note (Compl. ¶ 57); (3) SurgiLight, Cozean, and Michelson violated section 10(b) and Rule 10b-5 of the Act in connection with the purchase and sale of SurgiLight stock pursuant to the Debenture Agreement and the April 11, 2003 Agreement by concealing the liens acquired by Cozean and Michelson (Compl. ¶ 62); (4) SurgiLight, Cozean, and Michelson violated section 10(b) and Rule 10b-5 of the Act by knowingly engaging in a "pump and dump" scheme which artificially elevated SurgiLight's stock price and volume during the period of negotiation of the Debenture Agreement (Compl. ¶¶ 71-74); (5) as a controlling person of SurgiLight, Michelson violated section 20 of the Act by engaging in self-interested transactions (Compl. ¶ 80); (6) as a controlling person of SurgiLight, Cozean violated section 20 of the Act by engaging in self-interested transactions (Compl. ¶ 84); (7) SurgiLight, Cozean, and Michelson committed common law fraud by failing to disclose the liens acquired by Cozean and Michelson, and SurgiLight committed common law fraud by engaging in a "pump and dump" scheme. (Compl. ¶¶ 87-89); and (8) GEM is entitled to attorneys' fees pursuant to paragraph 16(i) of the April 11, 2003 Agreement. (Compl. ¶ 99) Plaintiff seeks monetary relief for these alleged wrongs. Defendants oppose Plaintiff's Motion on the grounds that the Note is not a negotiable instrument and that granting partial summary judgment would result in piecemeal litigation.
2. The Preliminary Injunction
On June 14, 2004, Plaintiff also sought by an Order to Show Cause a preliminary and permanent injunction ordering SurgiLight to: (1) issue to GEM 11,697,652 in common stock; (2) register the Initial and Remaining Shares; (3) issue to GEM an additional 107,500 shares under the April 11, 2003 Agreement; (4) hold an annual shareholder meeting; (5) permit GEM to vote all of its shares of SurgiLight stock whether issued or not; and (6) produce the names and addresses of all its shareholders. (Compl. ¶ 97)
On June 17, 2004, Defendants were served with the Complaint and Order to Show Cause. On June 21, 2004, Defendants retained counsel. The Parties appeared before Judge Gerald E. Lynch on June 25, 2004 and discussed the merits of Plaintiff's application for a preliminary injunction, and subsequently exchanged briefs. On August 2, 2004, Plaintiff withdrew its application for a preliminary injunction, and on August 10, 2004, Judge Lynch ...