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LG Capital Funding, LLC v. Positiveid Corp.

United States District Court, E.D. New York

June 12, 2017

LG CAPITAL FUNDING, LLC, Plaintiff,
v.
POSITIVEID CORPORATION, Defendant.

          ORDER

          NICHOLAS G. GARAUFIS UNITED STATES DISTRICT JUDGE.

         On 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.)

         LG has 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.

         I BACKGROUND

         PSID is 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."[1] In or about 2012, PSID sought capital to grow its business. (Decl. of William Caragol in Opp'n to Mot. ("Caragol Decl") (Dkt. 13) ¶ 2.)[2] 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.)

         A. The Note

         On July 7, 2016, PSID issued a $66, 150, 10% convertible redeemable note to LG (the "Note"). (Compl. ¶ 1; see also Note (Dkt. 2-2).)[3] 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.

         1. Conversion Rights

         Section 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. § 4(a).)

         2. Share Reserve

         Section 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.)

         3. Events of Default & Damages Penalty Provision

         Section 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)).

         If an 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. (Id.)

         The Note also includes what PSID refers to as the "Damages Penalty Provision"[4]: 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.)

         B. LG's Share Reserve and Conversion Requests

         On or 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.)

         On or 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.)

         LG 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) 14:21-15:1.)

         II. DISCUSSION

         LG 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").

         Specifically, LG seeks an order, pending final determination of this action:

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 ...

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