Am. E Grp. LLC v. Livewire Ergogenics Inc.

• Decision Date: 28 January 2020
• Docket Number: 1:18-cv-3969-GHW
• Parties: AMERICAN E GROUP LLC, Plaintiff, v. LIVEWIRE ERGOGENICS INC., Defendant.
• Court: U.S. District Court — Southern District of New York

AMERICAN E GROUP LLC, Plaintiff, v. LIVEWIRE ERGOGENICS INC., Defendant.

1:18-cv-3969-GHW

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

January 28, 2020

MEMORANDUM OPINION AND ORDER

GREGORY H. WOODS, United States District Judge:

Defendant Livewire Ergogenics Inc. borrowed $30,000 from Plaintiff American E Group LLC. In exchange, Livewire agreed to repay the loan in full in six months at an annual interest rate of 20%. Livewire also agreed to issue AEG $50,000 worth of Livewire's stock as "additional consideration" for the loan. Defendant failed to either issue the stock or pay the loan, and now argues that the implied interest rate of the loan is criminally usurious, and, thus, that the promissory note representing the loan is void. Because the usury-savings clause in the note is ineffective under New York law, the note is criminally usurious on its face. And because the amount of the loan is less than $250,000, it is void under New York's civil usury law. Accordingly, Livewire's motion to dismiss is GRANTED.

I. BACKGROUND¹

A. Facts²

Livewire "is a non-reporting publicly-traded corporation in the business of creating anddeveloping nutritional products, acquiring and licensing special purpose real estate properties, and the management of legal, fully-controlled and self-contained greenhouses on such properties." SAC ¶ 11. In 2015, Livewire sought funding to continue its operations. Id. ¶ 13. In November 2015, Livewire was introduced to AEG as a potential source of funding. Id. ¶ 15. AEG initially sought a personal guarantee of the value of the loan from Livewire CEO Bill Hodson. Id. ¶ 16. However, Hodson refused to execute a personal guarantee. Id. Eventually, AEG agreed to loan Livewire $30,000 without a personal guarantee from Hodson because Livewire agreed to grant AEG $50,000 of restricted stock in Livewire. Id. ¶ 17.

In connection with the loan, Livewire executed a promissory note (the "Note"). Id. ¶ 19. The Note is attached as an exhibit to the SAC. Dkt No. 175-1. The Court described the terms of the Note in a previous opinion in this case. See Livewire I, 2018 WL 5447541, at *1-2. As the Court previously explained:

Defendant promised to repay the principal amount of the loan six months after the date of the Note (the "Maturity Date"). Defendant also agreed to pay interest on the Note at a rate of 20% per annum, due in full on the Maturity Date.

The Note also required Defendant to pay additional consideration for the loan through the issuance of stock to Plaintiff. The Note provided that

Moreover, as additional consideration for this Note, the Borrower will give to the Lender restricted shares of the Borrower equal to US$50,000.00 (the "Restricted Shares") that will be convertible to freely tradeable shares on the Maturity Date. The Borrower will provide to the Lender, at the Borrower's expense, an opinion of counsel stating that, on the Maturity Date, the Restricted Shares are freely transferrable pursuant to SEC Rule 144A . . . .

The Note set forth a number of events of default and described the consequences of those defaults. Failure by Defendant to pay the principal and interest on the Note within 30 days after the Maturity Date constituted an event of default. The Note included a particularly rich bounty for Plaintiff following the occurrence of such a default: "if an Event of Default shall occur, then the Restricted Shares shall be freelytransferable and this Note shall be immediately convertible to ten (10) times the liquidated value of the Indebtedness."

The Note contained a cap on the maximum interest rate that could be charged pursuant to its terms. Section 5 ["Section 5"] reads as follows

Maximum Interest Rate: In no event shall any agreed to or actual interest charged, reserved or taken by the Lender as consideration for this Note exceed twenty percent (20%). In the event that the interest provisions of this Note shall result at any time or for any reason in an effective rate of interest that exceeds twenty percent (20%), then without further agreement or notice the obligation to be fulfilled shall be automatically reduced to such limit and all sums received by the Lender in excess of those lawfully collective as interest shall be applied against the principal of this Note immediate upon the Lender's receipt thereof . . . .

Section 7 ["Section 7"] of the Note expressly provided for the severability of unenforceable provisions of the Note. The relevant language from the Note is quoted below.

Severability: If any provision of this Note is, for any reason, invalid or unenforceable, the remaining provisions of this Note will nevertheless be valid and enforceable and will remain in full force and effect. Any provision of this Note that is held invalid or unenforceable by a court of competent jurisdiction will be deemed modified to the extent necessary to make it valid and enforceable and as so modified will remain in full force and effect.

The Note is governed by New York law.

Id. (citations and footnote omitted) (ellipses in original).

The Note also provides that "[i]n the event that this Note, or any part hereof, is collected by or through an attorney-at-law, the Borrower shall pay all costs of collection, including, but not limited to, reasonable attorneys' fees." Note § 4. In addition, in a section titled "Entire Agreement[,]" the Note states

[t]his Note (including any recitals hereto) sets forth the entire understanding of the parties with respect to the subject matter hereof, and shall not be modified or affected by any offer, proposal, statement or representation, oral or written, made by or for any party in connection with the negotiation of the terms hereof, and may be modified only by instruments signed in writing by all of the parties hereto.

Note § 13.

The SAC alleges that Livewire failed to deliver the Restricted Shares upon the execution of the Note. SAC ¶ 25. The SAC also alleges that "Hodson, as [Livewire's] CEO, and as its majority shareholder, had almost complete control over [Livewire], and had control over the determination of whether [Livewire] would comply with the Note and the actions required to comply therewith." Id. ¶ 26. According to the SAC, "Hodson caused [Livewire] to breach its obligations under the Note to deliver the shares of [Livewire] stock so that he could maintain control over [Livewire]." Id. ¶ 27. Livewire "failed to pay the $30,000, together with interest at the rate of 20% per annum on the Maturity Date." Id. ¶ 28.

B. Procedural History

AEG initiated this lawsuit on May 3, 2018, Dkt No. 1, and filed an amended complaint on May 10, 2018, Dkt No. 7. Livewire filed a motion to dismiss on June 8, 2018, arguing that the Note was criminally usurious. Dkt Nos. 22-23. The Court denied that motion because it could not "determine that the Note was criminally usurious on its face" on the basis of the briefing presented by the parties. Livewire I, 2018 WL 5447541, at *1. The Court concluded that "but for section 5, the Note is criminally usurious on its face." Id. at *3 (capitalization altered).³ The Court noted that the parties' briefing did not address the effect of the savings clause on the usury analysis. Id. at *5 ("Oddly, neither part[y] discusses the impact of Sections 5 and 7 of the Note in their briefing.").Without the benefit of briefing on the issue of whether Section 5 or 7 could render the Note non-usurious, the Court declined to dismiss AEG's claims based on Livewire's usury defense. Id. In a subsequent conference, the Court invited further briefing on that issue.

On December 7, 2018, Plaintiff filed a motion requesting leave to amend the complaint. Dkt No. 61. The Court granted that motion in part and denied it in part. Livewire II, 2019 WL 3553293, at *1. AEG proposed to amend the complaint to "characterize the Note as reflecting two separate transactions—a loan, and a separate purchase of shares[.]" Id. at *3. However, the Court held that "[t]he Note unambiguously states that the issuance of Restricted Shares was in consideration for the issuance of the Loan." Id. Therefore, the Court concluded that Plaintiff's request to amend on this ground was futile—i.e., that it could not survive a motion to dismiss. Id.⁴

The Court also held that Plaintiff's proposed tortious interference with contractual relations claim against Hodson was not futile. Id. at *4. The Court concluded that AEG "specifically pleads that Hodson personally owned a majority stake in Livewire, and that his personal interest in, and control over, the company would be diluted as a result of the issuance of stock pursuant to the Note." Id. (citation omitted). This was sufficient for the Court to conclude that the proposed amendment adding a tortious interference claim was not futile.

AEG filed the SAC on August 29, 2019. Dkt No. 175. The SAC asserts five claims for relief. First, the SAC asserts a claim against Livewire for enforcement of the terms of the Note. SAC ¶¶ 31-36. This claim seeks payment of $33,000—the amount that Livewire was allegedlyrequired to pay on the Maturity Date under the terms of the Note—plus interest from the Maturity Date. Second, the SAC asserts a claim for enforcement of the conversion-of-stock provision the Note. Id. ¶¶ 37-42. This claim asserts that AEG is entitled to convert ten times the liquidated value of the indebtedness under the Note to shares of Livewire stock. Because Livewire allegedly owed AEG $33,000, AEG asserts that it is entitled to $330,000 worth of Livewire common stock. Third, AEG asserts a claim for breach of contract for the costs of collection under the Note. Id. ¶¶ 43-48. Fourth, AEG asserts a claim for tortious interference with contract against Hodson. Id. ¶¶ 49-55. Fifth, the SAC asserts a claim for unjust enrichment against Livewire. Id. ¶¶ 56-60. In Livewire II, the Court noted that it understood that the unjust enrichment claim is "pleaded in the alternative, in the event that the Court ultimately concludes that the Note is...