Adar Bays, LLC v. AIM Exploration, Inc.

• Decision Date: 19 January 2018
• Docket Number: 17–cv–1290 (VM)
• Parties: ADAR BAYS, LLC, Plaintiff, v. AIM EXPLORATION, INC., Defendant.
• Court: U.S. District Court — Southern District of New York

285 F.Supp.3d 698

ADAR BAYS, LLC, Plaintiff,

v.AIM EXPLORATION, INC., Defendant.

17–cv–1290 (VM)

United States District Court, S.D. New York.

Signed January 19, 2018

Kevin Kehrli, Garson, Segal, Steinmetz, Fladgate LLP, New York, NY, Michael Myer Steinmetz, Office of Michael M. Steinmetz, for Plaintiff.

Mark R. Basile, The Basile Law Firm, Jericho, NY, for Defendant.

DECISION AND ORDER

VICTOR MARRERO, United States District Judge.

On February 21, 2017, Plaintiff Adar Bays, LLC ("Adar Bays" or "Plaintiff") commenced this action against Aim Exploration, Inc. ("Aim Exploration" or "Defendant") alleging breach of contract and unjust enrichment. ("Complaint," Dkt. No. 1; "First Amended Complaint," Dkt. No. 11.)

On August 25, 2017, Aim Exploration moved for a judgment on the pleadings and to dismiss Plaintiff's First Amended Complaint pursuant to Federal Rule of Civil Procedure 12(c). ("Motion," Dkt. Nos. 27, 31.) For the reasons stated below, the Motion is DENIED.

I. BACKGROUND

The contracts at issue in the case are an 8% convertible redeemable note ("Note," Dkt. No. 11, Ex. B) and a securities purchase agreement ("SPA"). The Note and the SPA, both dated November 6, 2014, provided for a principal amount of $45,000, a per annum interest rate of 8%, and a maturation date of November 6, 2015, and also granted Adar Bays a right to convert portions of the Note's principal and accrued interest into shares of Aim Exploration's common stock. (See Dkt. No. 11, Exs. A & B.) Specifically, Adar Bays was entitled,

at its option, at any time ... to convert all or any amount of the principal face amount of this Note then outstanding into shares of [Aim Exploration's] common stock (the "Common Stock") ... at a price ("Conversion Price") for each share of Common Stock equal to 55% of the lowest trading price of the Common Stock ... for the fifteen prior trading days including the day upon which a Notice of Conversion is received.

(Note ¶ 4(a)(emphasis in original).)

Relatedly, the Note also required Aim Exploration to reserve on account of Plaintiff 1,168,000 shares of the company's common stock for conversion under the Note. (See id. ¶ 12 (Aim Exploration "shall issue irrevocable transfer agent instructions reserving 1,168,000 shares of its Common Stock for conversions under this Note (the ‘Share Reserve’).").)

In case of certain "Events of Default," the Note provided for a default interest rate of 24% per annum as well as various penalties. (See id. ¶ 8.) For example, the Note provided for a $250 and $500 daily penalty if Aim Exploration failed to deliver stock to Adar Bays pursuant to the conversion feature of the Note, and purported to increase the outstanding principal amounts due under the Note by various percentages in the event of other breaches by Aim Exploration. (See id. )

On June 30 2015, Aim Exploration issued a partial redemption against the value of $11,250 to Adar Bays. (First Amended Complaint ¶ 14.) In January and February 2016, Aim Exploration validly effectuated four conversions for the value of $21,000. (Id. ¶ 15.) However, on December 21, 2016, Adar Bays submitted a notice of conversion for $12,750 of the principal amount of the Note to be converted into 8,831,943 shares of Aim Exploration stock, and Aim Exploration failed to deliver the shares. (Id. ¶¶ 16, 23.) On January 3, 2017, the parties entered into an agreement whereby Aim Exploration could redeem the Note by paying $50,000 prior to 4:00 p.m. on January 6, 2017. (Id. ¶¶ 17–19.) Aim Exploration failed to make the payment. (Id. ¶ 20.)

On April 6, 2017, Adar Bays filed the First Amended Complaint alleging breach of the Note and SPA contracts and unjust enrichment. (Dkt. No. 11.) In its Answer, Aim Exploration asserted, among other affirmative defenses, that the Note was unenforceable because Plaintiff charged a criminally usurious rate of interest. (Dkt. No. 22 ¶ 67.)

In its Motion, Aim Exploration moves for a judgment on the pleadings and to dismiss Plaintiff's First Amended Complaint pursuant to Federal Rule of Civil Procedure 12(c) because: (1) the conversion discount value of 45% is interest to be included in a usury analysis and violates New York usury laws; (2) the value of the reservation of shares reserved to Adar Bays at the time of the loans is interest under New York law and violates New York usury law; (3) the default rates of interest charged at the time the loans were made violate New York usury laws; (4) usurious intent is clear from the four corners of the Note; (5) the loan is void because it is criminally usurious; and (6) no equitable relief can be granted for usurious transactions. (See generally Defendant's Memorandum of Law in Support of Motion to Dismiss ("Def. Mem."), Dkt. No. 31.)

In opposition, Adar Bays argues: (1) the discounted price to acquire stock is not interest; (2) the share reserve is not interest; (3) the post-default interest rate is irrelevant to the usury determination; (4) Aim Exploration cannot prove the intent necessary for a finding of usury; and (5) even if the court were to find provisions of the contracts usurious, the loans should be adjusted, rather than voided. (See generally Plaintiff's Opposition to Defendant's Motion to Dismiss ("Pl. Opposition"), Dkt. No. 32.)

II. DISCUSSION

A. STANDARD OF REVIEW

Federal Rule of Civil Procedure 12(c) permits a party to "move for judgment on the pleadings." Fed. R. Civ. P. 12(c). "Disposition of a litigation on the pleadings ‘is appropriate where material facts are undisputed and where a judgment on the merits is possible merely by considering the contents of the pleadings.’ " Aristocrat Leisure Ltd. v. Deutsche Bank Tr. Co. Americas, No. 04-cv-10014, 2005 WL 1950116, at *3 (S.D.N.Y. Aug. 12, 2005) (quoting Sellers v. M.C. Floor Crafters Inc., 842 F.2d 639, 642 (2d Cir. 1988) ). "The standard for addressing a Rule 12(c) motion for judgment on the pleadings is the same as that for a Rule 12(b)(6) motion to dismiss for failure to state a claim." Cleveland v. Caplaw Enters., 448 F.3d 518, 521 (2d Cir. 2006). A complaint should be dismissed if the plaintiff has not offered sufficient factual allegations that render the claim facially plausible. See Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). The complaint should not be dismissed if the factual allegations "raise a right to relief above the speculative level." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). "The granting of a motion for judgment on the pleadings is appropriate only if, with all reasonable inferences drawn in favor of the non-moving party, the non-moving party has failed to allege facts that would give rise to a plausible claim or defense." Prowley v. Hemar Ins. Corp. of Am., No. 05-CV-981, 2010 WL 1848222, at *3 (S.D.N.Y. May 7, 2010).

B. APPLICATION

Under New York law, a loan is criminally usurious when the lender "charges ... as interest on the loan ... a rate exceeding twenty-five per centum per annum or the equivalent rate for a longer or shorter period." N.Y. Penal Law § 190.40 ; see also Scantek Med., Inc., v. Sabella, 582 F.Supp.2d 472, 474 (S.D.N.Y. 2008). "Usury is an affirmative defense and a heavy burden rests upon the party seeking to impeach a transaction for usury." Hillair Capital Investments, L.P. v. Integrated Freight Corp., 963 F.Supp.2d 336, 339 (S.D.N.Y. 2013) (citing Gandy Mach., Inc., v. Pogue, 106 A.D.2d 684, 483 N.Y.S.2d 744, 745 (3d Dep't 1984) ).

1. Conversion Discount

Aim Exploration argues that Adar Bays "reserved" to itself a 45% discount as to the market price of Aim Exploration's stock, which guaranteed that Adar Bays would always receive 45% more on each dollar that it converted into stock under the Note. (See Def. Mem. at 10–13.) According to Aim Exploration, the Court therefore must include the 45% discount rate in its interest computations. (See id.)

As Adar Bays points out in its brief, this exact question—whether an option to convert stock at a discount is included in a usury calculation—has been addressed in two recent decisions by courts in this District. In a case involving a contract with provisions substantially similar to those at issue here, the Court considered a criminal usury defense involving a note with an 8% interest rate on a $75,000 loan and an option on the part of the lender to convert any or all of the borrower's common stock at 58% of the lowest trading price within thirteen days prior to receipt of the notice. See Union Capital LLC v. Vape Holdings Inc., No. 16-cv-1343, 2017 WL 1406278, at *1 (S.D.N.Y. Mar. 31, 2017). In response to the borrower's argument that the Court consider the 42% conversion discount in calculating the effective interest rate, the Court disagreed and concluded that:

[Lender] simply held an option to convert shares, and it could have elected to obtain repayment in cash, which would clearly not have been usurious. Moreover, even if [lender] chose to convert the loan principal into shares, any potential profit [lender] might realize would still be dependent on the market price at the time of conversion and so, therefore, would be too uncertain to incorporate into an interest rate calculation." See Phlo Corp. v. Stevens, 00–cv–3619 (DC), 2001 WL 1313387, at *5 (S.D.N.Y. Oct. 25, 2001) ("[I]t was not clear that any effective interest rate in excess of 25% would ever have to be paid, as the value of the warrants was uncertain.").

Id. at *5.

It could be argued that any potential profit a lender might realize from such an arrangement would not necessarily be dependent on the market price of the borrower's stock at the time of conversion because the percentage discount is always the same. Assuming full liquidity and immediate disposition, the profit realized from the purchase of stock at a fixed percentage discount at a fixed overall purchase price should generally be the same regardless of the undiscounted price of the stock. However, stock is not necessarily fully liquid and...