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Roswell Capital Partners LLC v. Alternative Construction Technologies

July 20, 2009

ROSWELL CAPITAL PARTNERS LLC, ET AL., PLAINTIFFS,
v.
ALTERNATIVE CONSTRUCTION TECHNOLOGIES, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Denise Cote, District Judge

OPINION & ORDER

Plaintiffs Roswell Capital Partners, LLC ("Roswell"), as "Collateral Agent," BridgePointe Master Fund Ltd. ("BridgePointe"), CAMHZN Master LDC ("CAMHZN"), and CAMOFI Master LDC ("CAMOFI") (collectively, "Plaintiffs") bring this action to foreclose upon their security interests in the collateral of Alternative Construction Technologies Inc. ("ACT") and its affiliates, and for breach of various loan and related agreements created in connection with two rounds of funding provided to ACT. Having received a final judgment in their favor concerning the agreements governing one round of funding, Plaintiffs have moved for summary judgment against affirmative defenses and a counterclaim interposed by Defendants regarding the agreements governing the other round. For the following reasons, the motion is granted.

BACKGROUND

Roswell, the collateral agent for BridgePointe, CAMHZN, and CAMOFI, entered into a series of contracts to provide rounds of funding to ACT, a manufacturer of "green" panels used in construction. Twelve ACT subsidiaries (collectively with ACT, "Defendants") joined ACT as counterparties to the transactions with Roswell.*fn1 Roswell provided two rounds of funding to ACT, in 2007 and 2008 (the "2007 Funding" and the "2008 Funding"). As part of the 2007 Funding, the parties entered into a Securities Purchase Agreement dated June 30, 2007 (the "2007 Security Agreement"), in which the Lenders agreed to purchase from ACT a total of $4 million in senior secured convertible debentures and received warrants to purchase ACT common stock. To effectuate the 2008 Funding, ACT executed a Line of Credit Agreement with BridgePointe and CAMOFI on May 8, 2008. BridgePointe and CAMOFI each agreed to provide up to $1.5 million in credit to ACT. In exchange for the value received, ACT issued Senior Secured Grid Notes (the "Notes"), one payable to BridgePointe and the other to CAMOFI, in the amount advanced to ACT under the Line of Credit Agreement.

In return for the funding, among other obligations, the agreements required ACT to make monthly repayments of the principal owed, with interest, and to direct its customers to make payments owed to ACT to a "lockbox account." The two rounds of funding were linked by, among other provisions, a cross-default provision. The cross-default provision appeared in Section 7(n) of Notes. Section 7(n) of the Notes provided that a default by ACT on "any indebtedness, individually or in the aggregate, in excess of $175,000" also constituted a default under the Notes.

1. This Lawsuit

After ACT failed to repay its obligation and to direct customer funds to the lockbox account, Plaintiffs brought an application for an Order to Show Cause with Temporary Restraining Order ("TRO") on December 9, 2008. Later that day, a hearing with both parties was held, the TRO was entered, and a preliminary injunction hearing was set for January 29, 2009, following a period of fact discovery. On January 20, 2009, Plaintiffs requested consolidation of the preliminary injunction hearing with a trial on the merits pursuant to Rule 65(a)(2), Fed. R. Civ. P. Following a conference with both parties on January 23 and a January 26 submission from Defendants opposing consolidation, an Order of January 26 consolidated the preliminary injunction hearing with a trial on the merits for the issue of Defendants' breaches of contract only. The Order declined to consolidate a preliminary injunction hearing with a trial on the merits with regard to the affirmative defenses and counterclaim that the defendants asserted to excuse any finding of a breach.*fn2 While the affirmative defenses and counterclaim were addressed at the preliminary injunction hearing as necessary to assess whether preliminary relief was warranted, final judgment was reserved on these issues. On January 30, an Opinion and Order found that Defendants had defaulted on the 2007 and 2008 Funding. Roswell Capital Partners LLC v. Alternative Const. Technologies, No. 08 Civ. 10647 (DLC), 2009 WL 222348 (S.D.N.Y. Jan. 30, 2009) (the "January 30 Opinion"). The finding of default was premised on, inter alia, the Defendants' failure to meet their payment obligations under the 2007 Funding, which caused a cross-default under the terms of the Notes that comprised part of the 2008 Funding, Defendants' failure to pay principal and interest due under the 2008 Funding, and ACT's failure to direct its clients to make payments directly to a "lockbox account" to which Plaintiffs had access, rather than to ACT directly. Familiarity with the January 30 Opinion, which sets forth the applicable provisions in the rounds of funding in detail and describes the evidence presented in advance of and at the hearing, is assumed.

2. The Affirmative Defenses and Counterclaim

Defendants answered the complaint on January 12, 2009.*fn3

Their answer included affirmative defenses, one of which is also styled as a counterclaim. At the time of the January 30 Opinion, the allegations supporting the defenses and counterclaims were that Plaintiffs 1) manipulated ACT's stock price in June 2007 to make it drop; 2) frustrated Defendants' ability to seek additional funding from other investors so that they could foreclose on Defendants' businesses; 3) delayed delivery of information required to obtain an effective registration statement and then demanded additional warrants from Defendants as a result; 4) removed more revenues from the lockbox than they were owed, forcing Defendants to default; and 5) intentionally delayed funding Eligible Contracts to "starve" Defendants for cash and create a default.

January 30 Opinion, at *11.*fn4 Defendants pleaded these factual allegations in support of affirmative defenses of unclean hands, frustration of performance, breach of the covenant of good faith and fair dealing (also a counterclaim) and usury. Id. at *11-*15. In their preliminary injunction papers, Plaintiffs argued that Defendants were contractually required to post a bond before raising any affirmative defense or counterclaim to a default alleging that Plaintiffs had engaged in a "violation of law." Plaintiffs contended that this requirement applied to all of the affirmative defenses and the counterclaim. After the parties made submissions on the applicability of the bond requirement, an Opinion and Order issued on February 27, 2009, required Defendants to post a bond before arguing usury and criminal stock-price manipulation, but not before raising the remainder of the affirmative defenses, as they did not involve allegations that Plaintiffs had committed a "violation of law." Roswell Capital Partners LLC v. Alternative Const. Technologies, No. 08 Civ. 10647 (DLC), 2009 WL 497578, at *5 (S.D.N.Y. Feb. 27, 2009). Defendants declined to post such a bond and abandoned those arguments to which the bond requirement applied.

3. Plaintiffs' Motions for Summary Judgment

In a conference held on the record on March 6, 2009, Plaintiffs announced their intention to bring two summary judgment motions, one seeking final judgment in their favor on Defendants' defaults under the 2007 Funding, and another seeking a final judgment in their favor based on Defendants' breaches of the 2008 Funding. Defendants made a submission on March 9 conceding that they had no colorable defenses to a judgment in Plaintiffs' favor regarding Defendants' breach of the 2007 Funding, and a final judgment pursuant to Federal Rule of Civil Procedure 54(b) was entered on March 26, 2009, giving Plaintiffs the right to foreclose upon and possess the collateral enumerated in the 2007 Funding.*fn5 On March 20, Plaintiffs moved for summary judgment against Defendants' remaining defenses and counterclaims that sought to excuse the default under the 2008 Funding.

4. Additional Evidence Offered by Defendants in Opposition to Summary Judgment

The January 30 Opinion made final findings of fact regarding the contracts' formation and various defaults committed by Defendants, which are incorporated here. Plaintiffs offer no additional evidence beyond the evidence submitted in advance of the preliminary injunction hearing, the findings of the January 30 Opinion, and the transcript of the preliminary injunction hearing. Defendants, meanwhile, offer an affidavit from former ACT CEO Michael Hawkins, to which several emails and various other documents are attached. Hawkins' affidavit establishes the facts outlined below.

ACT sought further investment several times, both from Plaintiffs and other investors. When ACT sought additional funding in September 2007, Roswell refused to provide more capital until the SEC declared ACT's Registration Statement effective. Roswell then "refused or neglected" to supply certain unspecified information that ACT needed to respond to the SEC to complete the Registration Statement process. Roswell also voiced disapproval of ACT's effort to obtain a listing on the Frankfurt stock exchange, and ACT acceded to Roswell's request. In early January 2008, ACT accepted $300,000 in financing from an investment fund. Roswell informed ACT that its fundraising violated the 2007 Funding, and demanded ...


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