Auctus Fund, LLC v. Drone Guarder, Inc.
| Decision Date | 08 March 2023 |
| Docket Number | Civil Action 21-11193-WGY |
| Parties | AUCTUS FUND, LLC, Plaintiff, v. DRONE GUARDER, INC., and ADAM TAYLOR, Defendants. |
| Court | U.S. District Court — District of Massachusetts |
This case involves the enforceability of contracts pursuant to two loans. Drone Guarder, Inc. (“Drone”) and Auctus Fund, LLC (“Auctus”), executed two transactions as part of Auctus's investment in Drone. When Drone continuously failed to pay on the loans, Auctus filed suit. After a one-day bench trial held on November 3, 2022, this Court files these Findings of Fact and Rulings of Law.
As part of the two transactions Drone and Auctus executed, Drone received from Auctus loans of $165,000 and $125,000 with a rate of 12% per annum. Compl., Ex. 2, Convertible Promissory Note, (“January Note”), at 1, ECF No. 1-2; Compl., Ex. 4, Convertible Promissory Note, (“May Note”), at 1, ECF No. 1-4.
On July 23, 2021, Auctus filed suit against Drone and Adam Taylor, the Chairman, Chief Executive Officer, and Chief Financial Officer of Drone, alleging that Drone failed to pay back the loans, accumulated interest, and fees. Compl. ¶¶ 2122, ECF No. 1. The complaint alleges seven counts: breach of contract (count I); breach of the implied covenant of good faith and fair dealing (count II); unjust enrichment (count III); breach of fiduciary duty (count IV); fraud and deceit (count V); negligent misrepresentation (count VI); and violations of the Massachusetts Unfair Trade Practices, Mass. Gen. Laws ch. 93A, §§ 2, 11, (count VII). Id. ¶¶ 35-68.
Drone filed an answer to the complaint on October 25, 2021. Answer, ECF No. 12. On January 20, 2022, the Court dismissed the fraud claim (count V) as withdrawn. Elec. Clerk's Notes (January 20, 2022) ECF No. 28.
The Court held a bench trial on November 3, 2022. Elec. Clerk's Notes (November 3, 2022) ECF No. 40. The Court made findings of fact ore tenus, Trial Tr. at 48:14-25, but reserved the right to enter more detailed findings, as it now does, in conjunction with the following rulings of law.
Drone and Auctus entered into two transactions, as part of Auctus's investment in Drone. Each transaction contained a Securities Purchase Agreement and Promissory Note. Compl., Ex. 1, Securities Purchase Agreement (“January Purchase Agreement”) at 1-27, ECF No. 1-1; Compl., Ex. 3, Securities Purchase Agreement (“May Purchase Agreement”) at 1-27, ECF No. 1-3; January Note at 1-25; May Note at 1-25. Both Securities Purchase Agreements and both Convertible Promissory Notes contain essentially the same relevant terms, except different principal amounts and dates. Compare January Purchase Agreement 1-27, with May Purchase Agreement 1-27; and compare January Note 1-25, with May Note 1-25.
The first transaction took place on January 22, 2018.
Drone and Auctus entered into a Securities Purchase Agreement where Auctus agreed to issue a “12% convertible note” in an aggregate principal amount of $165,000.00. January Purchase Agreement at 2. Drone and Auctus executed the Promissory Note on the same date. January Note at 2. The interest rate of the January Note was set at 12% per annum, which began accruing on the day the parties executed the January Note. Id.
On May 10, 2018, Drone and Auctus executed the second transaction. May Purchase Agreement at 1-27. The parties entered into a Securities Purchase Agreement where Auctus agreed to issue a “12% convertible note” in an aggregate principal amount of $125,000.00. May Purchase Agreement at 2. Drone and Auctus executed the Promissory Note on the same day. May Note at 2. The interest rate on the May Note was set at 12% per annum, which began accruing on the date of execution. May Note at 2.
Adam Taylor, who was the Chairman, Chief Executive Officer, and Chief Financial Officer of Drone, and Lou Posner, Managing Director of Auctus, signed the January and May Purchase Agreements. January Purchase Agreement at 27; May Purchase Agreement at 27. Adam Taylor signed the January and May Notes, agreeing to the terms set therein. January Note at 25; May Note at 25.
Drone was required to pay the principal amount and any accumulated interest on the “Maturity Date” of the note.
January Note, at 2; May Note at 2. The Maturity Date for the January Note was October 22, 2018, January Note at 2, and February 10, 2019, for the May Note, May Note, at 2.[1]Drone
failed to pay the full principal amount and interest due for either the January or May Notes. Pl.'s Req. Findings of Fact and Rulings of L. ¶¶ 4, 6, at 2, ECF No. 38. In relevant part, the January and May Notes state:
Any amount of principal or interest on this Note which is not paid when due shall bear interest at the rate of the lesser of (i) twenty four percent (24%) per annum or (ii) the maximum amount allowed by law from the due date thereof until the same is paid (“Default Interest”).
May Note at 2; January Note at 2. On October 22, 2018, the Maturity Date of the January Note, the 24% default interest rate began accruing on the January Note. Trial Tr. at 27:2-6. In contrast to the January note, Auctus never enforced a 24% interest rate on the May Note. DRNG Note 2 Conversion Spreadsheet 1, Ex. 5. Instead, the May Note accrued 12% interest from May 10, 2018, forward. Id.
On May 30, 2019, Auctus notified Drone regarding Drone's default on the Notes and demanded payment of the principal, accumulated interests, penalties, and other fees on both the January and May Notes. See Pl.'s Req. Findings of Facts and Rulings of L., ¶ 7, at 2, ECF No. 38.
The terms of the January and May Notes allow Auctus to convert portions of the unpaid loan into fully paid and non-accessible shares of common stock of Drone. January Note at 3; May Note at 3. Auctus could convert the Notes at any time after the issue date until the Maturity Date or date of payment of default amount. Id. Moreover, Auctus could convert the outstanding balance at a discount rate of 30%, or 70% if the loan was in default, of the market price of the stock. Id.
The May Note was never converted. DRNG Note 2, Conversion Spreadsheet 1, Ex. 5.
Kevin Singh, who has been a Financial Operations Analyst for Auctus since March 10, 2020, testified as a witness for Auctus regarding four different conversion sheets used to convert the January and May Notes. Trial Tr. at 7:11-40:25. Analysts enter data from the promissory note into the conversion sheet, including the principal, interest rate, and dates. Trial Tr. at 11:19-12:7. Only the promissory note and any payments on the note are taken into account on the conversion sheet. Trial Tr. at 12:15-13:1. The conversion sheets are used to track the balance and accumulated interest of a note and convert principal due into shares of stock. Trial Tr. at 37:6-18.
Auctus converted the January Note 16 times, DRNG Note 1, Conversion Spreadsheet 17, Ex. 7, resulting in an aggregate amount of $108,822 of the January Note being converted into stock.[2]Auctus charged a $500 “conversion fee” each time the note was converted. January Note at 4. Any portion of the principal, accrued and unpaid interest, or conversion fee could be converted into shares of stock. Id.
Singh testified that the conversion sheet for the May Note shows that the May Note was never converted into stock. Trial Tr. at 15:11-23. Singh additionally testified to the interest rate calculations on the conversion sheet, which uses the daily interest rate for a certain number of days. Trial Tr. at 16:518. The conversion sheet for the May Note states a “Daily Default Interest” of $41.10 per diem, for 1,626 days, between May 10, 2018, the day the note was issued, and October 27, 2022, the date the conversion sheet was last used for the May Note. DRNG Note 2, Conversion Spreadsheet 1, Ex. 5. The Daily Default Interest of the May Note provided for a “Total Default Interest” of $66,828.60 and a “Total Outstanding Balance” of $191,828.60. Id. In sum, Auctus has never converted the May Note, and has only been enforcing a 12% interest rate.
The January Note has seventeen conversion spreadsheets, two of which have been provided to the Court. DRNG Note 1, Conversion Spreadsheet 16, Ex. 6; DRNG Note 1, Conversion Spreadsheet 17, Ex. 7. Singh testified to both conversion sheets for the January Note, the first of which was the conversion 16 sheet. Trial Tr. at 21:4-26:10; DRNG Note 1 Conversion Spreadsheet 16, Ex. 6.
The conversion 16 sheet for the January Note shows that, between May 13, 2021, and June 3, 2021, Auctus was enforcing a 24% interest rate on the January Note at $99.12/day. DRNG Note 1, Conversion Spreadsheet 16, Ex. 6. The conversion 16 sheet first calculates the total accumulated interest of the Note. Trial Tr. at 22:2-22:18. Then, the conversion 16 sheet factors in the conversion price - the amount being deducted from the principal in exchange for shares of stock. Trial Tr. at 22:1123:18. The conversion 16 sheet shows that Auctus deducted $4,130.1 from the $44,151.67 in default interest in exchange for shares of stock. Id. The remaining $39,521.57 in default interest is carried over to the conversion 17 sheet, Exhibit 7.
Singh next testified to the conversion 17 sheet for the January Note. Trial Tr. at 24:11-26:11. DRNG Note 1, Conversion Spreadsheet 17, Ex. 7. Conversion 17 took place on October 27, 2022, 511 days after conversion 16. DRNG Note 1, Conversion Spreadsheet 17, Ex. 7. The Conversion 17 sheet shows that Auctus only enforced a 12% interest rate on...
To continue reading
Request your trial