79 F.4th 206
2d Cir.2023Background
- Tarpon Bay (investor) and Zerez (public penny‑stock issuer) negotiated a debt‑for‑equity deal under a Term Sheet that contemplated a Section 3(a)(10) fairness filing; the Term Sheet promised a $25,000 "Signing Fee" payable in cash or a convertible promissory note.
- On January 27, 2016 Zerez executed the Signing Fee Note: payable on demand, convertible into common stock at a price equal to a 50% discount to the lowest closing bid in the prior 30 trading days, and requiring Zerez to reserve 500,000,000 shares for conversion.
- Tarpon Bay later performed by negotiating purchase agreements with Zerez’s creditors and filing a Florida Section 3(a)(10) fairness action; the 3(a)(10) transaction was never consummated and Zerez rescinded the note.
- On November 29, 2016 Tarpon Bay demanded conversion of the note into ~278,958,900 shares (about 55.6% of the reserved shares); Zerez refused and litigation followed.
- The district court denied Tarpon Bay summary judgment on enforcement because of a factual dispute over consideration but held the note unconscionable and unenforceable; it later granted summary judgment to defendants on Zerez’s CUTPA claim.
- The Second Circuit vacated the district court’s unconscionability ruling (finding the record insufficient to establish unconscionability as a matter of law), affirmed that genuine fact issues exist on consideration (so denial of Tarpon Bay’s summary judgment stands), and affirmed dismissal of CUTPA on the ground CUTPA does not apply to this securities‑related transaction.
Issues
| Issue | Plaintiff's Argument (Tarpon Bay) | Defendant's Argument (Zerez) | Held |
|---|---|---|---|
| Whether the Signing Fee Note is unconscionable | Note is arm’s‑length and enforceable; no basis to void it | Note was procedurally and substantively unconscionable given Zerez’s weak bargaining position and the conversion provision’s windfall | Vacated district court’s unconscionability holding; on this record note not unconscionable as a matter of law (sophisticated parties, no unfair surprise or oppressive terms) |
| Whether the Signing Fee Note is supported by consideration | The note’s “FOR VALUE RECEIVED” language raises a presumption of consideration; Zerez failed to rebut so summary judgment should enter for Tarpon Bay | Genuine disputes exist: whether Tarpon Bay made a return promise, whether Term Sheet was binding, or whether Tarpon Bay was entitled to fee regardless of performance | Affirmed that genuine issues of material fact exist as to consideration; remand for further proceedings |
| Whether CUTPA applies to Zerez’s counterclaim alleging deceptive conduct | Zerez argued CUTPA covers the alleged deceptive acts and that it suffered an ascertainable loss | Tarpon Bay argued CUTPA does not apply because the dispute arises from a Section 3(a)(10) securities transaction governed by federal securities antifraud provisions | Affirmed summary judgment for defendants on alternative ground: CUTPA does not apply to deceptive conduct in transactions governed by federal securities laws (Section 3(a)(10) transaction) |
Key Cases Cited
- Bender v. Bender, 292 Conn. 696 (Conn. 2009) (Connecticut rule generally requires both procedural and substantive unconscionability)
- Smith v. Mitsubishi Motors Credit of Am., Inc., 247 Conn. 342 (Conn. 1998) (recognizes that in some circumstances substantive unconscionability alone may suffice)
- Cheshire Mortg. Serv., Inc. v. Montes, 223 Conn. 80 (Conn. 1992) (unconscionability is a matter of law for the court to decide based on the circumstances)
- Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (U.S. 1986) (standard for summary judgment and materiality of factual disputes)
- Russell v. Dean Witter Reynolds, Inc., 200 Conn. 172 (Conn. 1986) (CUTPA does not reach conduct in transactions subject to the comprehensive regulatory scheme of federal securities laws)
- Gold v. N.Y. Life Ins. Co., 730 F.3d 137 (2d Cir. 2013) (merger/appealability principles: prior interlocutory rulings can merge into a final judgment for appellate review)