United States District Court, E.D. New York
NICHOLAS G. GARAUFIS UNITED STATES DISTRICT JUDGE.
March 7, 2017, Plaintiff LG Capital Funding, LLC
("LG") commenced this breach of contract action
against Defendant PositivelD Corporation ("PSID").
(Compl. (Dkt. 1).) LG alleges that PSID breached the
parties' convertible note agreement by failing to (1)
replenish its share reserve; and (2) deliver stock to which
LG is entitled under the terms of the parties' agreement.
(Id. ¶¶ 10-14.) LG further avers that PSID
has anticipatorily breached the parties' contract by
making clear that it will not abide by its terms.
(Id. ¶¶ 16, 49-50.)
moved for a preliminary injunction and for preliminary
declaratory relief pursuant to Federal Rule of Civil
Procedure 65 and 28 U.S.C. § 2201, pending final
determination of this action (the "Motion"). (Mot.
for Prelim. Inj. ("Mot.") (Dkt. 2).) For the
reasons set forth below, LG's Motion is DENIED.
a "life sciences tools and diagnostics company
specializing in biological detection and molecular diagnostic
systems for America's homeland defense and the global
healthcare market." In or about 2012, PSID sought capital
to grow its business. (Decl. of William Caragol in Opp'n
to Mot. ("Caragol Decl") (Dkt. 13) ¶
Since then, PSID has borrowed several million dollars from a
group of lenders, including LG, and has approximately $6
million in outstanding debt today. (IcL¶3.) PSID's
stock is publicly traded. (Id. ¶48.)
7, 2016, PSID issued a $66, 150, 10% convertible redeemable
note to LG (the "Note"). (Compl. ¶ 1; see
also Note (Dkt. 2-2).) According to LG, this Note is the
sixth investment that LG has made in PSID. (PL Reply Mem. in
Supp. of Mot. ("PL Reply") (Dkt. 15) at 1.) The
relevant terms of the Note are summarized below.
4(a) of the Note entitles LG to convert any portion of the
outstanding balance owed on the Note into shares of
PSID's common stock ("Conversion Shares") at a
price per share "equal to 65% of the lowest trading
price reported ... for the fifteen prior trading days, "
inclusive of the day upon which the request is received.
(Note § 4(a).) If LG elects to exercise its conversion
right, it must provide written notice to PSID ("Notice
of Conversion"). (Id. § 3.) PSID must
deliver the Conversion Shares to LG within three business
days of receiving the Notice of Conversion. (Id.
12 of the Note requires PSID to "at all times reserve a
minimum of four times the amount of shares required if the
note would be fully converted." (Id. §
12.) LG may "reasonably request increases from time to
time to reserve such amounts." (Id.)
Events of Default & Damages Penalty Provision
8 of the Note outlines certain "Events of Default."
(Id. § 8.) These events include: PSID's
non-payment of principal or interest (Note § 8(a));
PSID's failure to deliver stock within three days of
receipt of a Notice of Conversion (id. § 8(k)); and
PSID's failure to replenish the share reserve upon
request from LG (id. § 8(1)).
Event of Default is not cured within five days, the Note
becomes immediately due and payable. (Id. at 5.)
Upon default, interest shall accrue at a default interest
rate of 24% per annum. (Id.) If PSID fails to
deliver stock within three days of LG submitting a Notice of
Conversion, PSID must pay LG $250 per day that the Conversion
Shares are not issued, beginning on the 4th day after LG
submits a Notice of Conversion to PSID. (Id.) The
penalty increases to $500 per day beginning on the 10th day.
Note also includes what PSID refers to as the "Damages
Penalty Provision": if PSID fails to deliver the
Conversion Shares to LG by the 3rd business day following
delivery of a Notice of Conversion and LG suffers a
"Failure to Deliver Loss, " then PSID must make LG
whole by paying the "Failure to Deliver Loss."
(Id. at 6.) The "Failure to Deliver Loss"
is the "high trade price at any time on or after the day
of exercise" multiplied by the "number of
conversion shares." (Id.)
LG's Share Reserve and Conversion Requests
about January 9, 2017, LG requested an increase in the number
of shares in PSID's share reserve. (Compl. ¶ 7.) In
accordance with the terms of the Note, LG submitted this
request to PSID's transfer agent, VStock Transfer LLC
("VStock"). (Id.) On that same day, VStock
replied as follows: "[a]t this time we are unable to
process the request below as the company does not have any
shares available in treasury." (Id. ¶ 8.)
about January 24, 2017, LG submitted a Notice of Conversion
to PSID, electing to convert $16, 150.00 of the principal
amount and $889.36 of accrued interest of the Note into 65,
536, 000 Conversion Shares. (Id. ¶ 10; Not. of
Conversion (Dkt. 2-5).) The conversion remains outstanding.
(Compl. ¶ 11.)
considers these events "Events of Default" under
Section 8 of the Note. (Id. ¶¶ 15-23.) On
or about February 2, 2017, LG sent PSID a letter, demanding
that PSID deliver "65, 536, 000 shares of Common Stock
to LG and maintain the requisite number of shares in the
reserve to allow for future conversions under the Notes in
accordance with PSID's obligation under Section 12 of the
Notes." (See Decl. of Joseph Lerman in Supp. of
Mot. ("Lerman Decl.") (Dkt. 2-1) ¶ 27; Default
Letter (Dkt. 2-6) at 2.) PSID has not delivered the
Conversion Shares to LG and admits that it is in default on
its obligations. (See Tr. of Hr'g on Mot.
("Hr'gTr.") (Docket Number forthcoming)
seeks a mandatory preliminary injunction and preliminary
declarative relief to remedy the alleged Events of Default.
The requested injunction is a "mandatory
injunction" because it serves to alter the status quo by
requiring PSID to take certain affirmative actions.
See Tom Dohertv Assocs., Inc. v. Saban
Entrn't Inc., 60 F.3d 27, 34 (2d Cir. 1995) (holding
that a mandatory injunction is one which "alter[s] the
status quo by commanding some positive act").
LG seeks an order, pending final determination of this
i. requiring PSID to deliver immediately to [LG] 65, 536, 000
shares of its Common Stock, along with the necessary
corporate resolutions to enable LG to sell such Common Stock
publicly without restriction; and,
ii. requiring PSID to instruct its Transfer Agent, or any
future Transfer Agents, should PSID change Transfer Agents,
to reserve the requisite amount of shares of PSID common
stock, and replenish the reserve as needed, to allow for the
full conversion of the remaining principal balance and
accrued interest of the Positive© Corporation 10%
Convertible Redeemable Note held by LG; and,
iii. directing PSID, during the pendency of this action, to
honor, in accordance with the agreement between the parties,
all conversion requests hereafter duly submitted by LG to
convert all or any portion of the PositivelD Corporation 10%
Convertible Redeemable Note held by LG into shares of PSID
Common Stock, and to deliver all necessary ...