United States District Court, E.D. New York
MEMORANDUM & ORDER
KIYO
A. MATSUMOTO United States District Judge
Plaintiff
LG Capital Funding, LLC (“plaintiff”), a New York
corporation with its principal place of business in Brooklyn,
New York, commenced the instant action on May 31, 2016 by
filing, together with certain other documents, a verified
complaint (“Compl.” or the “complaint,
” ECF No. 1) in this court against 5Barz International,
Inc. (“defendant”), a Nevada corporation with its
principal place of business in San Diego, California. The
complaint alleges that defendant failed to abide by the terms
of a certain convertible note issued by defendant to
plaintiff, and seeks injunctive relief, damages of not less
than one hundred thousand dollars, and an award of costs,
expenses, and reasonable attorneys' fees. (See
generally Compl.)
Presently
before the court is plaintiff's motion for summary
judgment as to liability and damages on the complaint's
second, fifth, and sixth claims for relief. Defendant opposes
the motion, and has submitted what defendant refers to as an
opposition and cross-motion for summary judgment as to
damages.
For the
reasons set forth below, the court denies in its entirety
plaintiff's motion for summary judgment as to claim five,
which seeks recovery for defendant's breach of contract
on a conversion theory, as conversion is not the appropriate
cause of action on the facts here. Additionally, the court
grants plaintiff's motion as to liability with respect to
claim two, which seeks recovery on a breach of contract
theory, and claim six, which seeks an award of attorneys'
fees pursuant to a contractual provision. Further, the court
denies plaintiff's motion without prejudice as to damages
on claim two, and as to an award of, as opposed to a finding
of liability for, attorneys' fees. Finally, to the extent
defendant's opposition constitutes a cross-motion, the
court denies it in its entirety.
JURISDICTION
AND VENUE
Plaintiff
and defendant are diverse and, because the complaint seeks
damages in the amount of “not less than” $100,
000 with respect to its second and fifth claims for relief,
(Compl. at 12), the amount in controversy exceeds $75, 000.
The court therefore has diversity jurisdiction over the
instant action pursuant to 28 U.S.C. § 1332(a)(2).
See Scherer v. Equitable Life Assurance Soc'y of
U.S., 347 F.3d 394, 397 (2d Cir. 2003) (“[W]e
recognize ‘a rebuttable presumption that the face of
the complaint is a good faith representation of the actual
amount in controversy.'” (quoting Wolde-Meskel
v. Vocational Instruction Project Cmty. Servs., Inc.,
166 F.3d 59, 63 (2d Cir. 1999))). Venue is proper in this
district pursuant to 28 U.S.C § 1391(b)(2) because a
substantial part of the events and omissions giving rise to
plaintiff's claims in the instant dispute occurred in
this district.
BACKGROUND
I.
Factual Background
The
following facts are taken from the parties' Local Civil
Rule 56.1 statements of undisputed material facts, as well as
documents submitted in connection with the instant motion,
including those incorporated by reference into the
parties' summary judgment papers, as applicable. The
court notes that defendant's Local Civil Rule 56.1
statement in opposition to plaintiff's motion and in
support of defendant's cross-motion includes a number of
denials, partial denials, and qualifications that are not
supported by any citation to admissible evidence. The court
does not endeavor to note each of defendant's unsupported
denials, and instead summarizes the material facts that are
supported by admissible evidence and are not genuinely in
dispute.
A.
The Note
On June
16, 2015, pursuant to a Securities Purchase Agreement by and
between plaintiff and defendant, (the “SPA, ”
Lerman Declaration in Support of Plaintiff's Motion for
Summary Judgment (“Lerman MSJ Decl.”), ECF No.
47-2, Ex L, ECF No. 47-4), defendant issued a Convertible
Redeemable Note, (the “Note, ” Lerman Declaration
in Support of Plaintiff's Application for Preliminary
Injunctive Relief (“Lerman PI Decl.”), ECF No.
2-5, Ex. A, ECF No. 2-6), [1] in the principal amount of $52, 500,
with interest accruing at 8% per annum. (PSMF ¶
5; DSMF ¶ 5.)[2] On June 18, 2015, plaintiff funded the
Note in an amount of $50, 000, representing the Note's
principal less $2, 500 in defendant's attorneys'
fees. (PSMF ¶ 6, DSMF ¶ 6.) The Note is governed by
New York law, (Note § 14), and includes a conversion
feature entitling its holder to, “at its option, at any
time, ” convert “any amount of the principal face
amount then outstanding, ” as well as “[a]ccrued
but unpaid interest, ” into defendant's common
stock. (Note § 4(a).)
The
Note provides that if its holder wishes to exercise its
conversion right, it must comply with the requirements set
forth in section 4(a) of the Note and provide “the
Company, ” i.e., defendant, with
“written confirmation that th[e] Note is being
converted ([a] ‘Notice of Conversion') in the form
annexed [to the Note] as Exhibit A.” (Note § 3.)
Exhibit A to the Note, in turn, consists of a form of Notice
of Conversion (the “Form of Notice”), which, in
addition to indicating the information that the Note's
holder must convey to convert debt under the Note to shares,
states that it is “To be Executed by the Registered
Holder [i.e., LG Capital] in order to Convert the
Note.” The Note further provides that “[t]he date
of receipt (including receipt by telecopy) of such Notice of
Conversion shall be the Conversion Date.” (Note §
3.) Although the Note itself does not include a separate,
specific provision governing how notices may be given,
section 5(f) of the SPA provides that
[a]ny notice or other communication required or permitted to
be given hereunder shall be deemed effective (a) upon hand
delivery or delivery by facsimile, with accurate confirmation
generated by the transmitting facsimile machine, at the
address or number designated below . . . or delivery via
electronic mail, or the first business day following such
delivery (if delivered other than on a business day during
normal business hours . . .) or (b) on the second business
day following the date of mailing by express courier service
. . . or upon actual receipt of such mailing, whichever shall
first occur.
The SPA
then sets forth specific physical addresses for the parties
to receive notice, and, in relevant part, states that notices
to defendant should be sent to the attention of “Daniel
Bland, CEO, ” and notices to plaintiff should be sent
to the attention of “Joseph Lerman, Manager.”
(SPA § 5(f).)
Also
relevant to the instant action, the Note sets forth a formula
for determining the price of defendant's common stock for
purposes of conversion. Specifically, it provides that the
conversion price will be
equal to 60% of the lowest trading price of the Common Stock
as reported on the National Quotations Bureau OTCQB exchange
[on] which [defendant's] shares are traded or any
exchange upon which the Common Stock may be traded in the
future . . . with a floor of $0.00001 per share, for the
fifteen prior trading days including the day upon which a
Notice of Conversion is received by [defendant] or its
transfer agent (provided such Notice of Conversion is
delivered by fax or other electronic method of communication
to the Company or its transfer agent after 4 P.M. Eastern
Standard or Daylight Savings Time if the Holder wishes to
include the same day closing price).
(Note § 4(a) (emphasis omitted).)[3]
Section
12 of the Note requires that defendant create a share reserve
by “issu[ing] irrevocable transfer agent instructions
reserving 3, 684, 000 shares of its Common Stock for
conversions under th[e] Note.” It also provides that
defendant “should at all times reserve a minimum of
four times the amount of shares required if the note would be
fully converted, ” and that the reserve “shall be
replenished as needed to allow for conversions of th[e] Note
using said 4x reserve.” (Note § 12.)
The
Note further provides that, upon delivery of a Notice of
Conversion, “[i]f the shares have not been delivered
within 3 business days, the Notice of Conversion may be
rescinded.” (Note § 4(a).) Additionally,
defendant's failure to deliver common stock
“without restrictive legend within 3 business days of
its receipt of a Notice of Conversion” to the
Note's holder pursuant to the Note's conversion
provisions constitutes an event of default. (Note §
8(k).) Other events of default set forth in the Note include
defendant's failure to perform or observe any
“covenant, term, provision, condition, agreement, or
obligation under th[e] Note, ” (Note § 8(c)), and
failure by the defendant to remain “‘current'
in its filings with the Securities and Exchange
Commission.” (Note § 8(m).)
The
Note provides that unless a default is cured within five days
or “waived in writing by the Holder, ” the holder
may accelerate the Note's maturity, that is,
“consider th[e] Note immediately due and
payable.” (Note § 8.) Further, the Note provides
for a default interest rate of “24% per annum
or, if such rate is usurious or not permitted by current law,
. . . the highest rate of interest permitted by law”
upon an event of default. (Note § 8.)
Section
8 of the Note also sets forth certain
“penalt[ies]” for breaches of specific sections.
For instance, the “penalty” for a “breach
of [s]ection 8(k), ” which requires that defendant
deliver common stock within three days of defendant's
receipt of a Notice of Conversion, is $250 per day that the
shares are not issued beginning on the fourth day after
issuance of the conversion notice, and $500 per day beginning
on the tenth day. (Note § 8.)
Further,
the Note provides for a cash payment to its holder by
defendant in the event defendant “fails for any reason
to deliver the Holder the conversion shares by the 3rd
business day following the delivery of a Notice of Conversion
to [defendant].” (Note § 8.) Specifically, should
defendant fail to deliver shares by the third business day
after receiving a Notice of Conversion, a “Failure to
Deliver Loss” is to be calculated by multiplying the
“[h]igh trade price at any time on or after the day of
exercise” by the “[n]umber of conversion
shares.” (Note § 8.) The holder may elect to
demand cash payment in the amount of the Failure to Deliver
Loss by “provid[ing] [defendant] written notice
indicating the amounts payable to the Holder in respect of
the Failure to Deliver Loss.” (Note § 8.) Should
the holder so elect, defendant must “make the Holder
whole” by paying the Failure to Deliver Loss in cash.
(Note § 8.)
Finally,
the Note provides that defendant shall reimburse the
Note's holder “for its attorneys' fees and
other costs and expenses incurred in the investigation,
preparation and prosecution” of any “action or
proceeding to enforce any provisions of th[e] Note, ”
should the holder prevail in such an action. (Note § 8;
see also Note § 7 (“The Company agrees to
pay all costs and expenses, including reasonable
attorneys' fees and expenses, which may be incurred by
the holder in collecting any amount due under this
Note.”).)
B.
The Instant Dispute
Defendant
became delinquent in its filings with the Securities and
Exchange Commission (“SEC”) on November 22,
2015.[4](PSMF ¶ 17; DSMF ¶ 17.) On March
14, 2016, defendant filed an SEC Form 10-Q for the period
ending September 30, 2015 and thereby became current in its
SEC filings. (PSMF ¶ 18; DSMF ¶ 18.)
The
next day, March 15, 2016, plaintiff sent by e-mail a document
styled as a “Notice of Conversion” (the
“March Notice, ” Lerman PI Decl. Ex. C, ECF No.
2-8) to defendant (specifically, to defendant's CEO,
Daniel Bland) and to defendant's transfer agent (the
“Transfer Agent”). (PSMF ¶¶ 19, 26.)
Defendant admits that, with respect to the March Notice,
plaintiff “purported to submit a Notice of
Conversion” to “[defendant's] CEO” by
e-mail, but, in sum and substance, denies that the March
Notice was of any legal effect. (DSMF ¶¶ 19, 26.)
The
March Notice contained several pieces of information that are
also set forth in the Form of Notice annexed to the Note as
Exhibit A, including the dollar amounts of principal and
interest to be converted, the number of shares to be issued,
the name of the borrower, the date of conversion, the
applicable conversion price, plaintiff's EIN, the name in
which the shares were to be registered, and the name of the
account and account number to which the shares were to be
sent. (PSMF ¶ 20; compare Form of Notice, Note,
Ex. A with March Notice.) Additionally, the March
Notice was executed by Gabe Sayegh and lists his title as a
“Vice President” of plaintiff. (PSMF ¶ 21;
March Notice.)
In the
March Notice, plaintiff requested that defendant convert $7,
500 in loan principal and $445.48 in accrued and unpaid
interest of the note into 174, 242 shares of defendant's
common stock, representing a conversion price of $0.0456 per
share. (PSMF ¶ 27; DSMF ¶ 27; March Notice.) On
April 27, 2016, an employee of defendant's Transfer Agent
advised plaintiff in an e-mail that the Transfer Agent
“d[id] not have a reserve in place to process
conversions” and would “need authorization from
[defendant] to issue shares from the treasury.” (PSMF
¶ 29; Lerman PI Decl. Ex. D, ECF No. 2-9 (attaching
e-mails); see also DSMF ¶ 29 (referring to
language in Transfer Agent's e-mail).)
Defendant
never honored the March Notice, (PSMF ¶ 28; DSMF ¶
28), and on May 3, 2016, plaintiff rescinded the March Notice
and executed and delivered a new Notice of Conversion (the
“May Notice, ” Lerman PI Decl. Ex. F, ECF No.
2-11). (PSMF ¶¶ 34-35, 37; DSMF ¶¶ 34-35,
37.) The May Notice, like the March Notice, was executed by
Mr. Sayegh, and plaintiff submitted it to defendant via Mr.
Bland and the Transfer Agent.[5](PSMF ¶¶ 36-37;
see DSMF ¶¶ 36-37 (arguing that the May
Notice was not valid but not disputing that plaintiff
executed it and submitted it to defendant).) The May Notice
requested that defendant convert all amounts outstanding
under the Note, that is, $52, 500 in principal and $4, 809.86
in interest, into 1, 699, 580 shares of defendant's
common stock at a conversion price of $0.03372 per share.
(PSMF ¶ 38; see DSMF ¶ 38 (arguing that
the May Notice was not valid but not disputing its content).)
After
submitting the May Notice, plaintiff once again received a
notification from the Transfer Agent that there were not
sufficient shares available to the Transfer Agent to fulfill
the conversion request. (PSMF ¶ 39; DSMF ¶ 39.) The
Transfer Agent explained that the shares were unavailable
because no share reserve was in place and defendant had not
executed irrevocable transfer agent instructions. (PSMF
¶ 39; DSMF ¶ 39.) To date, plaintiff has not
received the shares. (PSMF ¶ 40; DSMF ¶ 40.)
Defendant
has presented a supplemental declaration of Mark Geoghegan
(“Geoghegan Supp. Decl., ” ECF No. 49-1),
defendant's director of finance, detailing, inter
alia, his negotiations with plaintiff during the period
that plaintiff served the March and May Notices of
conversion. (Geoghegan Supp. Decl. ¶¶ 9-11.) The
Geoghegan supplemental declaration is neither signed nor
dated. (See generally Geoghegan Supp. Decl.) In it,
Mr. Geoghegan states that “from the outset of the
litigation, ” defendant offered to deliver conversion
shares pursuant to the May Notice, but was rebuffed by
plaintiff. (Id. ¶ 15.)
II.
Procedural History
Plaintiff
commenced the instant action by filing a verified complaint
on May 31, 2016, four weeks after submitting the May Notice.
(See generally Compl.) Immediately after filing the
complaint, plaintiff sought a preliminary injunction
requiring, in relevant part, that defendant immediately
provide fully executed irrevocable instructions to the
Transfer Agent regarding the share reserve, and immediately
deliver 1, 699, 580 shares of its common stock to plaintiff.
(Plaintiff's Memorandum of Law in Support of Motion for
Preliminary Relief, ECF No. 2-1, at 1.)
On July
7, 2016, the court held a hearing regarding plaintiff's
motion for a preliminary injunction, which was ultimately
held in abeyance pending settlement discussions between the
parties. A settlement conference was held on July 28, 2016
but was not successful. (See Minute Entry, ECF No.
17.) Nevertheless, following the settlement conference, on
August 1, 2016, the parties requested that plaintiff's
motion for a preliminary injunction continue to be held in
abeyance pending further settlement discussions.
(Parties' Joint Letter, ECF No. 19.) The court continued
to hold the preliminary injunction motion in abeyance until
November 9, 2016, when the court deemed plaintiff's
preliminary injunction motion withdrawn in light of a joint
status letter filed by the parties. (See November 9,
2016 Docket Order.)
The
court granted plaintiff leave to file the instant motion on
February 27, 2017, and the motion was submitted to the court
on May 1, 2017. Through the instant motion, plaintiff seeks
summary judgment on its second, fifth, and sixth claims for
relief. (See Plaintiff's Memorandum of Law
(“Mem.”), ECF No. 47-11, at 1, 18.)
Plaintiff's second and fifth claims relate to
defendant's failure to deliver shares under the terms of
the Note and seek damages for the failure to deliver
“in an amount to be determined at trial but not less
than one-hundred thousand dollars.” (Compl.
¶¶ 56-57, 71-72.) The only difference between the
complaint's second and fifth claims for relief is that
the second claim is for breach of contract, and the fifth
claim is styled as one for conversion. (See id.) The
sixth claim for relief seeks an award of “costs and
expenses, including reasonable attorneys' fees and
expenses, incurred by [plaintiff] in collecting any amount
under the Note.” (Id. ¶¶ 73-74.)
In
addition to seeking a finding that defendant is liable to
plaintiff for failure to perform its obligations under the
Note, plaintiff seeks an award of damages at the summary
judgment stage, and offers two alternative damages
calculations for the court's consideration. (Mem. at
9-10.) The first of these calculations is based on
outstanding principal and interest due on the Note and the
“penalty” for plaintiff's failure to deliver
conversion shares as set forth in section 8 of the Note,
which plaintiff characterizes as a liquidated damages
provision, and results in a damages amount of $256, 328.91.
(Id. at 10-14.) The second of these calculations is
based on the Note's “Failure to Deliver
Loss/Make-Whole” provision and results in a damages
amount of $203, 949.60. (Id. at 14-16.)
Although
plaintiff seeks summary judgment as to its entitlement to
attorneys' fees, plaintiff does not, in its memorandum of
law or otherwise, state the amount of attorneys' fees to
which plaintiff believes it is entitled. (See Id. at
16-18.) Additionally, plaintiff has not submitted any billing
records or other relevant information regarding the amount of
attorneys' fees that plaintiff seeks.
Defendant
opposes plaintiff's motion and seeks summary judgment
limiting plaintiff's recovery, if any, to delivery of 1,
699, 580 shares of common stock in defendant under the May
Notice. (Defendant's Memorandum of Law
(“Opp.”), ECF No. 49-5, at 2.)
LEGAL
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