341 F. Supp. 3d 339
S.D.N.Y.2018Background
- AB (Adar Bays, LLC) and GNID entered a Securities Purchase Agreement and a $35,000 8% Convertible Redeemable Note in May 2016; AB funded $35,000 (GNID disputes $2,000 paid to AB’s counsel).
- The Note allowed AB, after 180 days, to convert outstanding principal into GNID common stock at 65% of the lowest market price over the prior 20 trading days; GNID was to reserve shares and deliver converted shares within 3 business days of notice.
- AB served a Notice of Conversion for $5,000 on November 28, 2016; GNID acknowledged receipt but refused to honor conversion and later terminated its transfer agent, preventing conversions.
- AB sued for breach of the SPA and Note, seeking damages and fees; GNID moved to dismiss arguing the Note is void as usurious, and AB moved for summary judgment on breach.
- The district court found no genuine dispute of material fact on breach, rejected GNID’s usury defense, struck certain liquidated/"make-whole" remedies as penalties, awarded expectation damages, and granted summary judgment for AB on the breach claims.
Issues
| Issue | Plaintiff's Argument (Adar Bays) | Defendant's Argument (GNID) | Held |
|---|---|---|---|
| Existence/performance of contract | SPA/Note existed; AB funded note and performed by wiring funds | GNID disputes characterization, contends note is usurious so funding irrelevant | Court: Agreement existed; AB performed; facts undisputed for summary judgment |
| Breach by failing to deliver converted shares | GNID failed to honor conversion and terminated transfer agent, breaching §§8(k), 8(b), §12 and SPA §3(c) | GNID admits non-delivery but contends it need not comply because note is void as usurious | Court: GNID breached by refusing conversion and terminating transfer agent |
| Enforceability of liquidated damages and make‑whole clauses | Seeks $250/$500 per day and make-whole formula alternatively | GNID defends provisions as contract remedies and part of damages | Court: Liquidated damages and make-whole clauses are unenforceable penalties and struck |
| Usury defense (criminal usury cap and effective interest) | AB: Note states 8% interest; conversion option and contingent benefits are not interest; default rate 24% is below criminal cap | GNID: Effective interest exceeds statutory caps when accounting for attorney fees, conversion discount (35%), share reserve (400%), and default remedies; thus note is usurious and void | Court: Note not usurious. 8% is not usurious on its face; GNID failed to prove usurious intent or that conversion discount/share reserve constitute interest; default rate (24%) below criminal cap; GNID’s usury defense rejected |
Key Cases Cited
- Celotex Corp. v. Catrett, 477 U.S. 317 (summary judgment burden-shifting framework) (1986)
- Anderson v. Liberty Lobby, 477 U.S. 242 (summary judgment standard; genuine issue of material fact) (1986)
- Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (inferences drawn for nonmoving party) (1986)
- In re Venture Mortgage Fund, L.P., 282 F.3d 185 (2d Cir. 2002) (criminal usury statute and limits on voiding loans)
- Hillair Capital Inv., L.P. v. Integrated Freight Corp., 963 F. Supp. 2d 336 (S.D.N.Y. 2013) (reasonable fees not usurious; treatment of equity conversion value in usury analysis)
- LG Capital Funding, LLC v. 5Barz Int'l, Inc., 307 F. Supp. 3d 84 (E.D.N.Y. 2018) (similar liquidated-damages and make‑whole clauses struck as penalties)
- Blue Wolf Capital Fund II, L.P. v. American Stevedoring, Inc., 105 A.D.3d 178 (N.Y. App. Div.) (2013) (usury can be gleaned from face of instruments in some contexts)
- Adar Bays, LLC v. Aim Exploration, Inc., 285 F. Supp. 3d 698 (S.D.N.Y. 2018) (conversion rights may render transaction more like equity and affect usury analysis)