United States District Court, E.D. New York
GARSON, SEGAL, STEINMETZ, FLADGATE LLP Michael Steinmetz
Attorney for Plaintiff.
JONAS BLOCK Attorney for Defendant.
MEMORANDUM AND ORDER
JOHNSON, SENIOR DISTRICT JUDGE.
LG Capital Funding, Inc. ("Plaintiff or "LG")
brings this diversity action against defendant One World
Holdings, Inc. ("Defendant," sometimes referred to
by its former ticker symbol, "OWOO"), principally
alleging that Defendant breached its obligations under three
convertible promissory notes by, inter alia, failing
to convert part of the principal of, and interest from, one
of the notes into 3, 707, 681 shares of Defendant's
Common Stock and failing to redeem the notes on the
"Maturity Date" specified therein. After Plaintiff
successfully moved for preliminary injunctive relief, and
after Defendant failed to answer or move to dismiss
Plaintiffs complaint (the "Complaint"), Plaintiff
moved for a default judgment, a permanent injunction, and
contempt sanctions on the ground that Defendant had failed to
place the 3, 707, 681 shares in escrow as ordered by the
Court. These motions were respectfully referred to Magistrate
Judge Orenstein for a report and recommendation.
August 6, 2015, Judge Orenstein issued his report and
recommendation (the "R&R"), which recommended
granting a default judgment with respect to Plaintiffs breach
of contract claim and awarding money damages totaling $284,
500.97. With respect to one of the Notes, the R&R
recommended enforcing a liquidated damages clause which
provided that upon certain breaches of Defendant's
obligation to convert principal and interest into shares,
Defendant would pay Plaintiff a "Default Sum"
(essentially the outstanding principal and accrued interest,
plus "Default Interest") multiplied by two (the
"2.0 Multiplier"). The R&R also recommended
denying the permanent injunction on the ground that Plaintiff
had not establish that it had complied with certain
conditions precedent to converting principal and interest
into shares, and denying the contempt motion because it
sought the same kind of injunctive relief. Both Plaintiff and
Defendant timely objected to the R&R, with Plaintiff
principally challenging the recommendation regarding
injunctive relief and Defendant arguing that the 2.0
Multiplier was usurious and against public policy. For the
reasons set forth below, the R&R is adopted except with
respect to that portion which recommended the denial of
permanent injunctive relief.
case involves three convertible promissory notes issued by
Defendant to Plaintiff (the "Notes"), which are
attached to the Complaint as Exhibits A-C.Defendant issued
the first of the three (the "First Note") on or
about July 23, 2013, upon its receipt of $62, 000.
See Complaint, ¶ 5 & Ex. A, p. 1. It issued
a nearly identical instrument (the "Second Note")
on or about October 25, 2013, upon its receipt of $52, 000.
See id., ¶ 6 & Ex. B, p. 1.
last of the Notes (the "Third Note") is a
restatement of a note which was originally issued to
non-parties, who assigned it to Plaintiff on October 25,
2013. When it was restated, the principal on the Third Note
was $50, 000. At only 10 pages long, the Third Note is about
half the length of the other two, but contains some of the
same contractual provisions. All three Notes expressly
provide that they "shall be governed by and construed in
accordance with the laws of the State of New York ...."
First & Second Notes, § 4.6; Third Note, § 3.6.
The Conversion Right
of the three Notes, Defendant promises to repay a principal
amount, plus interest calculated at the rate of 8% per annum,
nine months after the "Issue Date" -the date on
which the note was issued (or restated, in the case of the
Third Note). However, each note provides that during a
specified period, Plaintiff has the right to convert any or
all of the outstanding principal and accrued, unpaid interest
into shares of Defendant's Common Stock. If Plaintiff
exercises this "conversion right," Plaintiff
receives the shares at ¶ 50% discount.
duration of the conversion right varies depending on the
note. The First and Second Notes provide that Plaintiff can
exercise the conversion right "at any time commencing
one hundred eighty (180) days from the Issue Date ...."
First & Second Notes, §1.1. The Third Note provides
that the conversion right can be exercised beginning on the
Issue Date. See Third Note, §1.1. However, all
three Notes provide that the right does not end until
"the later of: (i) the Maturity Date and (ii) the date
of payment of the Default Amount (as defined in [the
Note])." All Notes, § 1.1.
three notes contain in Section 1.4(a) a provision entitled
"Mechanics of Conversion," which specifies the
manner in which a Holder can exercise the conversion right.
This section provides, in pertinent part: "[T]his Note
may be converted by the Holder ... by ... submitting to the
Borrower a Notice of Conversion ...." All Notes define
the term "Notice of Conversion" to mean a notice
"in the form attached [to the Note] as Exhibit A,"
id., § 1.1, and the term "Borrower"
to mean Defendant One World Holdings, Inc., id., p.
1. In addition, all Notes provide that all notices required
or permitted to be sent to Defendant, whether by facsimile or
otherwise, must be addressed to the attention of its Chief
Executive Officer. First & Second Notes, § 4.2;
Third Note, § 3.2.
three Notes make clear that Defendant's conversion
obligation is conditioned on Plaintiffs compliance with the
provisions of Section 1.4(a). The Notes provide:
Upon receipt by the Borrower from the Holder of a facsimile
transmission (or other reasonable means of communication) of
a Notice of Conversion meeting the requirements for
conversion as provided in ... Section 1.4, the Borrower shall
issue and deliver or cause to be issued and delivered to ...
the Holder certificates for the Common Stock issuable upon
such conversion within three (3) business days after such
& Second Notes, § 1.4(d); Third Note, § 1.4(c).
The Notes further provide:
Upon receipt by the Borrower of a Notice of Conversion, the
Holder shall be deemed to be the holder of record of the
Common Stock issuable upon such conversion, the outstanding
principal amount and the amount of accrued and unpaid
interest on this Note shall be reduced to reflect such
conversion, and, unless the Borrower defaults on its
obligations under this Article I, all rights with respect to
the portion of this Note being so converted shall forthwith
terminate except the right to receive the Common Stock or
other securities, cash or other assets, as herein provided,
on such conversion. If the Holder shall have given a Notice
of Conversion as provided herein, the Borrower's
obligation to issue and deliver the certificates for Common
Stock shall be absolute and unconditional ....
First & Second Notes, § 1.4(e); Third Note, §
order to ensure the availability of enough Common Shares to
enable Defendant to honor its conversion obligations, all
three Notes contain reserve requirements. The First and
Second Notes both require Defendant "at all times to
have authorized and reserved four times the number of shares
that is actually issuable upon full conversion of the Note
...." First & Second Notes, § 1.3. These two
notes specifically provide that "if the Borrower
shall... make any change to its capital structure which would
change the number of shares of Common Stock into which the
Notes shall be convertible at the then current Conversion
Price, the Borrower shall at the same time make proper
provision so that thereafter there shall be a sufficient
number of shares of Common Stock authorized and reserved ...
for conversion of the outstanding Notes." Id.
The Third Note does not contain either of these provisions,
but requires the Borrower to "covenant[ ] that during
the period the conversion right exists, the Borrower will
reserve from its authorized and unissued Common Stock a
sufficient number of shares ... to provide for the issuance
of Common Stock upon the full conversion of this Note
...." Third Note, §1.3.
The Events of Default
all of the Notes list over a dozen "Events of
Default," only a few such events are relevant here.
First, the Notes provide that Defendant's failure
"to pay the principal hereof or interest thereon when
due" under the terms of the Note constitutes an
"Event of Default." First & Second Notes,
§ 3.1; Third Note, § 2.1. Second, Defendant is in
default if it "fails to issue shares of Common Stock to
the Holder (or announces or threatens ... that it will not
honor its obligation to do so) upon exercise by the Holder of
the conversion rights of the Holder in accordance with the
terms of this Note ...." First & Second Notes,
§ 3.2; Third Note, § 2.2. Third, it is an
"Event of Default" if Defendant "breaches any
material covenant or other material term or condition
contained in this Note ... and such breach continues for a
period often (10) days after written notice thereof to the
Borrower from the Holder." First & Second Notes,
§ 3.3; Third Note, § 2.3.
fourth relevant Event of Default is listed in the First &
Second Notes, but not in the Third Note. These two notes
provide that it is an Event of Default if "[t]he
Borrower effectuates a reverse split of its Common Stock
without twenty (20) days prior written notice to the
Holder." First & Second Notes, § 3.14. In
addition, only the First and Second Notes contain a
"Cross-Default" provision which states that a
default under one of the Notes will constitute a default
under all of the Notes. First & Second Notes, §
The Damages Provisions
methods for calculating damages vary depending on the note
and the Event of Default. All three Notes provide that if
Defendant fails to pay the principal and interest thereon at
the Maturity Date, the Defendant "shall pay to the
Holder ... an amount equal to the Default Sum ...."
First & Second Notes, Art. Ill; Third Note, Art. II. A
"Default Sum" is defined in the First and Second
Notes as consisting of the outstanding principal owed on the
Note, the accrued and unpaid interest on that amount, the
"Default Interest," and "any amounts owed to
the Holder pursuant to Sections 1.3 and 1.4(g)" of the
Note. First & Second Notes, Art. III. "Default
Interest" is calculated at the rate of 22% per annum and
is to be paid on the principal and interest "from the
date due ... until the same is paid." Id., P.
three Notes, the damages for a breach of Defendant's
conversion obligations depend on the cause of the breach. If
the breach is not due to a failure to maintain the
reserves required in section 1.3 of all three Notes, and the
Defendant fails to deliver the shares within three days after
the Deadline, Defendant "shall pay to the Holder $2, 000
per day in cash, for each day beyond the Deadline that [it]
fails to deliver such Common Stock." First & Second
Notes, § 1.4(g); Third Note, § 1.4(f). Conversely,
if the breach is due to a failure to maintain the
reserves required in section 1.3, the First and Second Notes
provide that Defendant "shall pay to the Holder ... an
amount equal to ... the Default Sum ... multiplied by ... two
...." First & Second Notes, § 1.3 & Article
III. This provision does not appear in the Third Note.
case of all other Events of Default, the First and Second
Notes require Defendant to pay "150% times" the
Default Sum or the "parity value" of that amount,
whichever is greater. First & Second Notes, Art. III. The
Third Note requires the Defendant to pay "150%
times" the "Default Amount," which is
calculated in the same manner as the Default Sum is
calculated under the First and Second Notes. Third Note, Art.
II. The Third Note does not mention "parity value,"
but provides that "[i]f the Borrower fails to pay the
Default Amount within five (5) business days of written
notice that such amount is due and payable," the Holder
has the option to require the Borrower, upon written notice,
to immediately convert the Default Amount into shares of
Common Stock. Id.
The Complaint in this Case
February 2015, Plaintiff commenced this action, alleging that
Defendant breached its obligations under the Notes in various
respects. First, the Complaint alleges that Defendant
violated Section 3.2 of the First Note by refusing to deliver
shares of Common Stock after Plaintiff exercised its
conversion right in accordance with the terms of Section 1.1
of the Note. Specifically, Plaintiff alleges that on November
11, 2014, Plaintiff "duly submitted a Notice of
Conversion to OWOO," seeking to convert $6, 800 of the
principal and $1, 233.21 of unpaid, accrued interest into 3,
707, 681 shares of Defendant's Common Stock. Complaint,
¶ 17. A day later, "Gayle Terry, an employee of...
OWOO's transfer agent, informed LG, via email, that OWOO
did not 'have enough available shares to process
[LG's] conversion.'" Id., ¶ 19
(quoting an email from Gayle Terry, employee of Colonial
Stock Transfer, to Nochum Greenberg of LG, dated Nov. 12,
2014, at 6:23 p.m. (included in Ex. E to the Complaint)).
However, the Complaint implies that Terry's explanation
is untrue, noting that the Form 10-Q which Defendant filed
with the SEC for the quarter ending September 30, 2014
(attached to the Complaint as Exhibit G), states that
"there were 48, 869, 166 outstanding shares of
OWOO's Common Stock" on November 12, 2014-enough
"to provide LG the conversion it sought."
Id., ¶ 36.
the Complaint alleges that Defendant never provided it with
written notice of the reverse stock split which allegedly
caused the shortfall in reserves. Id., ¶ 33(c).
Plaintiff alleges that it first became aware of the 1:750
reverse split one year after it occurred, when Terry informed
LG that its 15 million share reserve had been reduced to 20,
000 shares. Id. (citing email from Gayle Terry to
Nochum Greenberg of LG, dated Nov. 12, 2014, at 6:50 p.m.
(included in Ex. E to the Complaint)). Although the Complaint
claims that this was a "[b]reach of § 3.15,"
the Court notes that Defendant's ...