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Dominion Capital LLC v. Shiftpixy, Inc.

United States District Court, S.D. New York

January 10, 2020

DOMINION CAPITAL LLC, Plaintiff,
v.
SHIFTPIXY, INC., Defendant.

          ORDER

          Paul G. Gardephe, United States District Judge

         On October 14, 2019, Plaintiff Dominion Capital LLC moved for summary judgment in this breach of contract action against Defendant Shiftpixy, Inc. (Dkt. No. 34) On October 22, 2019, this Court referred Plaintiff's motion to Magistrate Judge Robert Lehrburger for a Report and Recommendation (“R&R”). (Dkt. No. 45) Judge Lehrburger submitted his R&R on November 22, 2019. (R&R (Dkt. No. 46)) For the reasons stated below, the R&R is adopted in its entirety.

         BACKGROUND

         I. FACTS

         Plaintiff is a Connecticut limited liability company with its principal place of business in New York. (Am. Cmplt. (Dkt. No. 23) ¶ 9) Its members are domiciled in New York, Connecticut, Florida, Delaware, Georgia, Virginia, and the Republic of Seychelles. (Id.) Defendant is a Wyoming corporation with its principal place of business in California. (Id. ¶ 10)

         Plaintiff purchased three notes from Dominion: (1) a June 4, 2018 Note with a face value of $2.5 million and a warrant to purchase 251, 004 shares of Defendant's common stock (the “June 2018 Note”), pursuant to a securities purchase agreement of that same date; (2) a December 20, 2018 Note in the principal amount of $222, 222.22, pursuant to a settlement agreement for defaults under the June 2018 Note; and (3) a March 11, 2019 Note with a face value of $633, 333.33 and a warrant to purchase 378, 788 shares of Defendant's common stock (the “March 2019 Note”), pursuant to a securities purchase agreement of that same date. (Pltf. R. 56.1 Stmt. (Dkt. No. 35) ¶¶ 1-7) The June 2018 and March 2019 Notes allow Plaintiff to convert the Notes into shares of common stock at a specified price. (Id. ¶¶ 13-14, 27) The Notes also prohibit Defendant from repurchasing “more than a de minimis number of shares of its Common Stock, ” or alternatively, “any of its capital stock.” (Id. ¶¶ 16, 20, 29)

         On November 29, 2018, March 15, 2019, April 3, 2019, and May 30, 2019, Plaintiff submitted conversion requests, which Defendant honored. (Id. ¶¶ 32-33, 40-47) Defendant also made a number of amortization payments to Plaintiff during this time period, by way of stock in lieu of cash. (Id. ¶¶ 34-39) On June 3, 2019, however, Defendant failed to make a scheduled amortization payment under the June 2018 Note (id. ¶¶ 48-50), and on June 25, 2019, Plaintiff submitted another conversion request, which Defendant refused to honor. (Id. ¶¶ 51-52) On July 5, 2019, Plaintiff requested the conversion of the remaining value of the March 2019 Note, which Defendant refused to honor. (Id. ¶¶ 59-61)

         In a June 27, 2019 Form 8-K filing, Defendant announced that it would no longer honor conversions of any senior convertible note, including the June 2018 and March 2019 Notes. (Id. ¶ 56) The Form 8-K states that “[t]he Company has informed its convertible note holders that it will cease honoring conversion requests of the 2018 Notes and 2019 Notes forcing a voluntary default of these instruments . . . .” (Id.) Moreover, on July 12, 2019, Defendant announced a plan to repurchase up to 10 million shares of its common stock over a period of 18 months (the “Buyback”). (Id. ¶¶ 62-63)

         II. PROCEDURAL HISTORY

         The Complaint was filed on July 18, 2019, and alleged a breach of contract claim. (Cmplt. (Dkt. No. 1)) In the Complaint, Plaintiff moved for a preliminary and permanent injunction (1) directing Defendant to deliver 1, 600, 496 shares of its common stock to Plaintiff, in satisfaction of the June 25, 2019 and July 5, 2019 conversion requests, and (2) enjoining Defendant from pursuing its proposed buyback of ten million shares of its common stock. (Cmplt. (Dkt. No. 1) at 20; Order to Show Cause (Dkt. No. 4))[1] On August 12, 2019, this Court denied Plaintiff's motion for a preliminary injunction. (Dkt. No. 19)

         The Amended Complaint was filed on August 23, 2019, and seeks the injunctive relief described above, along with money damages for breach of contract under the Notes. (Am. Cmplt. (Dkt. No. 23)) The Amended Complaint also seeks a declaratory judgment “clarifying, affirming and declaring that (1) [Plaintiff] received the Notes in exchange for good and valuable consideration and that [Plaintiff] has the right to demand and receive common stock and payments due and owing under the Notes; (2) [Defendant] violated its duties and obligations to act in accordance with the Notes; (3) [Defendant] is in default under the Notes; and (4) the proposed buyback in the July 12, 2019 press release is in violation of [Defendant]'s obligations to [Plaintiff] under the Notes.” (Id. at 20)

         On September 23, 2019, Defendant filed counterclaims for breach of contract and unjust enrichment in connection with Plaintiff's alleged receipt and subsequent sale of Defendant's shares. (Dkt. No. 28) On October 4, 2019, the parties stipulated to the dismissal of Defendant's counterclaims, which this Court so-ordered on December 23, 2019. (Dkt. Nos. 33, 49)

         On October 14, 2019, Plaintiff moved for summary judgment on its claim for breach of contract and its request for a declaratory judgment.[2] (Dkt. No. 34) On October 22, 2019, this Court referred Plaintiff's motion to Magistrate Judge Lehrburger for an R&R. (Dkt. No. 45)

         On November 22, 2019, Judge Lehrburger issued a thorough 15-page R&R, which recommends that Plaintiff's motion for summary ...


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