Adar Bays, LLC v. Genesys Id, Inc.
| Decision Date | 20 September 2018 |
| Docket Number | 17-cv-01175 (ALC) |
| Citation | 341 F.Supp.3d 339 |
| Parties | ADAR BAYS, LLC, Plaintiff, v. GENESYS ID, INC., Defendant. |
| Court | U.S. District Court — Southern District of New York |
Chris Han, Kevin Kehrli, Garson Segal Steinmetz Fladgate LLP, New York, NY, for Plaintiff.
Mark R. Basile, The Basile Law Firm, Jericho, NY, for Defendant.
Plaintiff Adar Bays, LLC ("AB") brings this action alleging breach of a Securities Purchase Agreement ("SPA") providing for the purchase and issuance of two Convertible Redeemable Notes ("Notes"). Plaintiff seeks summary judgment on its claims. Defendant GeneSYS ID, Inc. ("GNID") contends that the Notes are void as usurious, and accordingly moves to dismiss the complaint on usury grounds. For the following reasons, Plaintiff's motion for summary judgment is GRANTED and Defendant's motion to dismiss is DENIED.
The following facts are drawn from the parties' Rule 56.1 statements. Facts are agreed upon unless otherwise noted.
AB is a limited liability company based in Florida. Rule 56.1 Statement of Material Facts ¶ 1 (ECF No. 52) ("SMF"). GNID is a corporation based in Nevada whose shares are publicly traded on the Over-The-Counter ("OTC") Market. Id. ¶¶ 2-3.1
On May 24, 2016, AB and GNID entered into an SPA. Id. ¶ 5; see Declaration of Aryeh Goldstein ("Goldstein Decl") Ex. A (ECF No. 53-1) ("SPA"). AB contends that the SPA provided for, inter alia , the purchase and issuance of a $35,000 8% Convertible Redeemable Note. Id. ¶ 7. GNID disputes this characterization, and contends that GNID borrowed $35,000 and executed a promissory Note reflecting the same. Response to SMF ¶ 7 (ECF No. 58) ("RSMF").
The Note stated that GNID promised to pay AB the aggregate principal amount of $35,000 on the Maturity Date, May 24, 2017, and to pay interest on the principal outstanding at the rate of 8% per annum, commencing on May 24, 2016. Id. ¶¶ 11-12; Goldstein Decl Ex. B (ECF No. 53-2) ("Note"). As detailed below, GNID contends that the effective interest rate on the Note was actually significantly higher than 8%, and accordingly the Note is usurious. See generally RSMF.
The Note provides that AB is entitled, at any time after 180 days from Note issuance, to convert any or all of the outstanding balance of the Note into shares of GNID's common stock ("Common Stock") at a price ("Conversion Price"). Id. ¶¶ 22-23; see Note § 4(a). The Conversion Price would be 65% of the lowest trading price of the Common Stock on the OTC Market for the twenty prior trading days. Id. ¶ 24; see Note § 4(a). AB was required to submit a Notice of Conversion prior to exercising this right. Id. ¶ 25; see Note § 4(a). Then, GNID was required to effectuate the conversion by delivering the shares of Common Stock within three business days of receipt of the Notice of Conversion. Id. ¶ 27; see Note § 4(a). AB contends that the conversion right is a material term of the Note. Id. ¶ 29.
The SPA states that GNID would authorize and reserve shares for the purposes of conversion. Id. ¶ 31; see SPA § 3(c). Under the Note, GNID would initially issue irrevocable transfer agent instructions reserving 278,000 shares of Common Stock for the purposes of conversion ("Share Reserve"). Id. ¶ 32; see Note § 12. The Note further required GNID to "reserve a minimum of three times the amount of shares required if the note would be fully converted." Id. ¶ 34; see Note § 12. It also allowed AB to "reasonably request increases from time to time to reserve such amounts." Id. ¶ 35 see Note § 12.
The Note provides for several "Events of Default." Id. ¶ 47; See Note § 8. Under § 8(k), failure to deliver converted stock within three business days triggers default. Id. ¶ 48; see Note § 8(k). Section 8(b) states that default will occur if any "representations or warranties made by [GNID]" in connection with the Note or SPA "shall be false or misleading in any respect." Id. ¶ 52; see Note § 8(b). Further, § 8(c) provides for default if GNID fails to perform or observe "any covenant, term, provision, condition, agreement, or obligation" under the Note. Id. ¶ 56; see Note § 8(c). The Note states that upon default, interest would accrue at 24% per annum, or – if usurious or otherwise not permitted by law – at the highest rate permitted by law. Id. ¶ 74; Note § 8.
The Note provides for two alternative remedies if GNID breaches by failing to deliver shares. Id. ¶ 64; see Note § 8. First, liquidated damages would accrue in the amount of $250 per day beginning on the fourth day after the Notice of Conversion was delivered, and increase to $500 per day beginning on the tenth day. Id. ¶ 65; see Note § 8. Second, the "Make-Whole for Failure to Deliver Loss" provision allows AB to provide GNID with written notice of the amounts payable, and requires GNID to make it whole as follows: Failure to Deliver Loss = [ (High trade price at any time on or after the day of exercise) × (Number of conversion shares) ]. Id. ¶¶ 69-70; see Note § 8. Additionally, the Note provides that GNID will pay reasonable attorneys' fees, costs, and expenses. Id. ¶¶ 80-81; see Note §§ 7, 8. Finally, the Note provides that if any section is held to be invalid or unenforceable, it "shall be adjusted rather than voided, if possible." Id. ¶ 82; see Note § 9.
Terms of the Note were reflected in GNID's Quarterly Statement for the period ending on September 30, 2016. Id. ¶ 13; see also Goldstein Decl Ex. C ("ECF No. 53-3") ("10-Q").
On May 24, 2016, GNID issued a Disbursement Memorandum that directed AB to disburse (1) $2,000 to New Venture Attorneys, P.C. and (2) $33,000 to GNID, in conjunction with the funding of the Note. Id. ¶¶ 15-17; see Goldstein Decl Ex. D (ECF No. 53-4) ("Disbursement Memo"). On May 26, 2016, AB wired the requisite funds per the instructions in the Disbursement Memo. Id. ¶ 20; see Goldstein Decl Ex. E (ECF No. 53-5).
AB thus contends that the Note was fully funded. GNID, however, maintains that only $33,000 was funded, since $2,000—6% of the loan amount—was disbursed to AB's attorneys. Counterstatement to Statement of Material Facts ¶¶ 1-2 (ECF No. 58) ("CSF").
On November 28, 2016, AB submitted a Notice of Conversion to GNID for $5,000 of the Note to be converted into 439,560 shares of GNID Common Stock at $.011375 per share. SMF ¶¶ 36-38; see Goldstein Decl Exs. F, G (ECF Nos. 53-6, 53-7). The following day Lorraine Yarde, GNID's Chief Executive Officer ("CEO"), acknowledged receipt of the Notice of Conversion but stated that GNID would not be honoring it. Id. ¶ 39; see Goldstein Decl. Ex. H (ECF No. 53-8). GNID did not deliver the shares. Id. ¶ 40.
GNID's 10-Q for the period ending September 30, 2016 stated that the company "terminated it transfer agent on September 6, 2016, preventing further toxic conversions and bringing all parties to the table to discuss a satisfactory settlement...." Id. ¶ 41; see 10-Q at 36.
Around December 15, 2016, AB emailed a Default Notice to Yarde. Id. ¶ 42; see Goldstien Decl. Ex. I (ECF No. 53-9). The Notice reiterated the terms of the Note and SPA, stated that GNID breached the Note by failing to tender the requested shares, and demanded immediate delivery of the requested shares. Id. ¶¶ 42-45.
To date, GNID has not delivered the requested shares. Id. ¶ 46.
AB alleges that GNID has breached the following provisions of the Note: § 8(k), by failing to deliver the requested shares of Converted Stock; § 8(b), by breaching its representations that it would deliver the requested shares, maintain a share reserve, and repay the Note upon maturity; and § 12, by terminating its relationship with its transfer agent. Id. ¶¶ 48-49, 52-55, 59, 61. It further alleges that GNID breached Section 3(c) of the SPA by failing to deliver the requested shares and terminating the transfer agent. Id. ¶¶ 50-51, 59, 60.
AB contends that as a result of this breach, GNID is in default and owes payments at the default interest rate as well as damages as provided for in the Note. GNID contends that the Note is void ab initio as usurious.
AB filed the complaint commencing this action on February 16, 2017. ECF No. 1. AB filed an amended complaint on April 19, 2017, bringing claims for breach of the SPA, breach of the Note, unjust enrichment, anticipatory breach of the Note and SPA, and costs, expenses, and attorneys' fees. ECF No. 18 ("FAC"). That is the operative complaint in this motion.
On January 16, 2018, GNID moved to dismiss this action pursuant to Fed. R. Civ. P. 12(c) on the grounds that the Note is void as usurious. ECF No. 48 (Def Mem). Also that day, AB moved for summary judgment under Fed. R. Civ. P. 56 on all counts. ECF No. 54 ("Pl Mem"). The parties filed their respective opposition motions on February 13 and 14, 2018. ECF No. 55 ("Pl Opp"); ECF No. 59 ("Def Opp"). On February 27, 2018, both parties filed their respective reply briefs. ECF No. 60 ("Def Reply"); ECF No. 61 ("Pl Reply"). Accordingly, the Court considers the motions fully submitted.
Summary judgment is appropriate if there is "no genuine dispute as to any material fact." Fed. R. Civ. P. Rule 56(a) ; see also Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 247, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The moving party "bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (internal quotation marks omitted).
Then, the burden shifts to the non-moving party to "set forth specific facts showing that there is a genuine issue...
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