LG Capital Funding, LLC v. 5Barz International, Inc.

          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 ...