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Roswell Capital Partners LLC v. Alternative Construction Technologies

September 1, 2010

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 BridgePointe Master Fund Ltd., CAMHZN Master LDC, and CAMOFI Master LDC (collectively, the "Lenders"), and Roswell Capital Partners, LLC, as Collateral Agent for the Lenders ("Roswell," and together with the Lenders, the "Plaintiffs") bring this action to foreclose on the assets of defendant Alternative Construction Technology, Inc. ("ACT"), a Florida-based manufacturer of "green" construction materials. Defendants James Beshara ("Beshara") and his sole proprietorship, JMB Associates (collectively, "JMB"), claim to have a perfected security interest in ACT's assets senior to that of the Plaintiffs. Plaintiffs contend that JMB has no valid security interest in ACT's assets. On May 12, 2010, the Plaintiffs moved for summary judgment. For the following reasons, the motion is granted.

BACKGROUND

Much of the factual background concerning this litigation is set forth in the January 30, 2009 Opinion granting Plaintiffs' application for preliminary injunctive relief, see Roswell Capital Partners, LLC v. Alt. Constr. Techs., Inc., No. 08 Civ. 10647(DLC), 2009 WL 222348 (S.D.N.Y. Jan. 30, 2009) ("Roswell I"), and the July 20, 2009 Opinion granting final judgment in favor of Plaintiffs. See Roswell Capital Partners, LLC v. Alt. Constr. Techs., Inc., 638 F. Supp. 2d 360 (S.D.N.Y. 2009) ("Roswell II"). The following facts are relevant to the instant matter and are not in dispute unless otherwise indicated.

1. JMB's Security Interest

JMB's purported security interest in ACT's assets is predicated on two loans that JMB made to ACT in 2005. As described below, these two loans resulted in the issuance of notes, which were ultimately converted into ACT common stock issued to JMB.

The 2005 loans were documented by two "Secured Convertible Promissory Notes" dated February 22 and June 30, 2005 (the "2005 Notes"). The 2005 Notes cumulatively reflect a principal debt of $630,000, due and payable on July 1, 2006, and bear interest at 18% per year. Each of the 2005 Notes indicates that its obligations are secured by collateral described in a Uniform Commercial Code ("UCC") financing statement ("UCC-1") attached as an exhibit to the note. Although there is no UCC-1 attached to the 2005 Notes, it is undisputed that a UCC-1 financing statement in favor of JMB was filed on July 8, 2005.

In 2006, the 2005 Notes were "cancelled and void[ed]" and "replace[d]" by an "Amended and Restated Convertible Promissory Note" dated June 1, 2006 (the "2006 Note").*fn1 The 2006 Note has a principal amount of $630,000, due and payable on December 31, 2006.*fn2 Section 3 of the 2006 Note, entitled "Securities," states in full: "It is understood that JMB Associates has filed a UCC-1 against the assets of [ACT] as identified in the Exhibit B. [ACT] shall be required to seek the endorsement of JMB Associates prior to the removal of the UCC-1 upon payment."*fn3

Although there is no Exhibit B attached to the 2006 Note, it is undisputed that a UCC-1 financing statement in favor of JMB was filed on May 8, 2006.*fn4

Section 1.2 of the 2006 Note provides that the Note could be paid by check or wire, "or converted into equity of the Company at the option of the Payee [JMB]." Section 1.4 contains a mandatory conversion provision that states that the note "will be converted into [315,000] Shares of Common Stock [of ACT] at any time, but no later than the company's active trading on the OTC Bulletin Board ('Next Round'), plus an additional amount for interest conversion." (Emphasis added.)

Despite the mandatory conversion requirement, JMB contends that it had the right to return the shares and reinstate the debt obligation, a right that it exercised in 2008. The right to unwind the conversion from debt to equity is addressed in § 1.4, which provides:

It is understood by both parties in the event the Payee [JMB] elects to convert into equity stock prior to the selling of shares by the Payee [JMB], in order to break-even [sic] with this convertible promissory note, the stock price falls below $2.00 per share, the Payee [JMB] has the right at its sole discretion to unwind the transaction.

The 2006 Note provides that Florida law shall govern without regard to choice of law principles.

2. The 2006 Note is Converted into ACT Common Stock

The entirety of ACT's debt to JMB represented by the 2006 Note was converted to stock. On September 22, 2006 ACT filed a Form SB-2 (the "2006 SB-2") to publicly register its common stock with the Securities and Exchange Commission ("SEC"). The 2006 SB-2 acknowledged $630,000 in principal and $136,933 in accrued interest owed to JMB pursuant to the 2006 Note.*fn5 The 2006 SB-2 states that JMB's debt and accumulated interest "will be converted into common stock of [ACT] during an initial SB-2 filing process." (Emphasis added.) The amounts owed by ACT to JMB are also included in a chart listing all of ACT's outstanding convertible debt as of June 30, 2006, that "is being converted to equity as part of this registration." (Emphasis added.)

JMB's intention to convert the 2006 Note into shares of ACT common stock is documented in a letter dated September 27, 2006, from Beshara to Michael Hawkins, the chief executive ...


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