307 F. Supp. 3d 84
E.D.N.Y2018Background
- LG Capital Funding (plaintiff), holder of a $52,500 convertible redeemable note issued by 5Barz International (defendant), delivered conversion Notices in March and May 2016 converting principal and accrued interest into shares.
- The Note (governed by New York law) required a written Notice of Conversion in the form annexed as Exhibit A and delivery of conversion shares within 3 business days; failure to deliver could be rescinded and triggered default remedies including fee/penalty and a "failure to deliver/make-whole" cash remedy.
- Plaintiff emailed the March and May Notices (executed by its vice president) to defendant's CEO and the transfer agent; defendant did not deliver the shares and plaintiff rescinded the March Notice but left the May Notice in effect and sued.
- Plaintiff moved for summary judgment on breach of contract (delivery of shares), conversion, and contractual attorneys' fees; defendant opposed and sought limited relief (delivery of shares) and raised form/execution, notice, and usury defenses.
- The court found the March and May Notices validly executed and delivered, rejected defendant's form/execution/notice and usury defenses, dismissed the conversion claim as duplicative, and held defendant liable for breach and for attorneys' fees liability but declined to award damages or fees yet due to insufficient record evidence.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Validity of conversion notices (form & execution) | Notices complied with Exhibit A; Sayegh authorized to sign; sent by email to CEO/transfer agent | Notices deviate from form, signed by wrong person, should have gone to Geoghegan | Notices were validly executed and delivered; differences immaterial; Sayegh had authority; notice to CEO sufficed |
| Notice delivery method & recipient | Delivery by email to CEO/transfer agent satisfied Note/SPA notice provisions | Transfer agent instruction to forward inquiries to Geoghegan meant notices should go to him | Email to CEO met Note/SPA requirements; transfer-agent email (third party) did not change contractual notice obligations |
| Usury defense | N/A (plaintiff seeks enforcement of conversion to equity) | Note terms/usury render money damages impermissible or limited | Rejected: once conversion exercised, converted portion characterizes as equity; corporate defendant cannot assert civil usury; usury defense fails |
| Remedies and damages | Seek breach damages via either contractual daily "penalties" or "failure to deliver/make-whole" formula; and attorneys' fees | Seeks only delivery of 1,699,580 shares (specific performance) | Conversion-specific penalty and make-whole formulas are unenforceable penalties; specific performance not required as sole remedy; plaintiff entitled to actual damages but must supply market-value evidence (breach date price) and fee documentation before award |
Key Cases Cited
- Anderson v. Liberty Lobby, 477 U.S. 242 (1986) (standard for summary judgment)
- Scherer v. Equitable Life Assurance Soc'y of U.S., 347 F.3d 394 (2d Cir. 2003) (amount in controversy presumptively as pleaded)
- U.S. Fidelity & Guar. Co. v. Braspetro Oil Servs. Co., 369 F.3d 34 (2d Cir. 2004) (standards for enforceability of liquidated-damages provisions)
- Truck Rent-A-Ctr., Inc. v. Puritan Farms 2nd, Inc., 41 N.Y.2d 420 (1977) (contractual damages that are "plainly or grossly disproportionate" are penalties and unenforceable)
- Sharma v. Skaarup Ship Mgmt. Corp., 916 F.2d 820 (2d Cir. 1990) (measure of damages for breach to deliver securities is market value at time of breach)
- Simon v. Electrospace Corp., 28 N.Y.2d 136 (1971) (principle on measuring damages for breach of agreement to purchase securities)