CD International Enterprises, Inc. v. Rockwell Capital Partners, Inc.
251 F. Supp. 3d 39
D.D.C.2017Background
- CD International Enterprises, Inc. (CDII) borrowed $600,000 from Kong Tung; the parties executed an amended promissory instrument that allowed assignment and conversion of the debt into CDII common stock.
- Rockwell Capital Partners purchased the note from Tung, and the parties executed a Convertible Note that (among other changes) cut interest from 24% to 8%, removed the fixed maturity date, made payment due on demand, and expressly permitted Rockwell to convert the debt into shares at any time.
- CDII sent an Instruction Letter to its transfer agent, Colonial, authorizing Colonial to reserve and issue shares upon Rockwell’s conversion requests without further action by CDII.
- Rockwell exercised conversion rights repeatedly over ~two months; Colonial issued the shares and Rockwell sold them through broker Alpine, after which CDII’s stock price fell sharply.
- CDII sued Rockwell, Colonial, Alpine, Rockwell’s counsel and president alleging (inter alia) lack of consideration, fraud in inducement, violation of public policy (death-spiral convertible), breach of contract (failure to give notice), and wrongful conversion; defendants moved to dismiss under Rule 12(b)(6).
- The court dismissed the complaint in full, holding that the Convertible Note and conversions were enforceable under the written agreements and applicable law.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Convertible Note lacked consideration | Note is void because Rockwell did not provide valid consideration (claims Rockwell never truly lent money) | Convertible Note was supported by bargained-for benefits: lower interest rate, eliminated maturity date, reduced security scope | Denied — consideration is legally sufficient under contract law |
| Fraud in inducement (representations that Rockwell would not liquidate shares) | CDII relied on pre-contract oral promises that Rockwell would not liquidate without giving CDII an opportunity to repay | The final written, integrated Convertible Note contained no such restriction; reliance on pre-contract statements was unjustified as a matter of law | Dismissed — reliance on negotiation-stage statements not justifiable where final integrated agreement omits them |
| Public-policy challenge to ‘‘floorless/toxic/death-spiral’’ convertible | The Convertible Note is unenforceable as against public policy because it enabled a rapid conversion-and-sale scheme that devastated shareholder value | Such convertible instruments, while potentially harmful to common shareholders, are not per se illegal and can provide capital to distressed companies | Dismissed — enforcement interest not clearly outweighed by public policy |
| Breach of contract for failing to give CDII notice before Default Conversions | Rockwell violated §4(b) by not giving written notice directly to CDII before conversions | Rockwell notified the transfer agent and CDII’s Instruction Letter authorized Colonial to act without further CDII confirmation; CDII did not plead resulting damages and failed to contest dismissal arguments | Dismissed — CDII conceded the argument and failed to plead damages plausibly |
| Tort of conversion / wrongful conversions | Conversions and sales were wrongful and caused damages to company and shareholders | Conversions were authorized by the written agreements and Instruction Letter; thus not tortious | Dismissed — no actionable conversion where conduct was authorized by contract |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (pleading standard for plausibility)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (plausibility standard for complaints)
- ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (floorless convertibles not inherently manipulative; can provide capital)
- Washington Investment Partners of Delaware, LLC v. Security House, K.S.C.C., 28 A.3d 566 (consideration sufficient if bargained-for detriment or promise)
- Jacobsen v. Oliver, 555 F. Supp. 2d 72 (public-policy standard for unenforceable contract terms)
- Scaffidi v. United Nissan, 425 F. Supp. 2d 1159 (elements and nature of tort of conversion)
- Langley v. FDIC, 484 U.S. 86 (fraud renders contract voidable, choice-of-law considerations)