J.P. Carey Enters., Inc. v. Cuentas, Inc.

Citation361 Ga.App. 383,864 S.E.2d 588
Decision Date12 October 2021
Docket NumberA21A0703
CourtUnited States Court of Appeals (Georgia)

Scott Lester Bonder, Christopher Todd Giovinazzo, Michael Brian Terry, Atlanta, Carson Leigh Modrall, for Appellant.

Franklin Peeples Brannen Jr., Joshua David Curry, Atlanta, Ronald Scott Masterson, for Appellee.

Dillard, Presiding Judge.

J.P. Carey Enterprises, Inc. filed suit against Cuentas, Inc., f/k/a Next Group Holdings, Inc., alleging that Cuentas defaulted on a convertible note. Both parties moved for summary judgment, and despite ruling that Cuentas breached the note, the trial court granted Cuentas's motion and denied JPC's motion, finding that the note's default provisions were unenforceable penalties rather than liquidated damages. On appeal, JPC contends the trial court erred in denying its motion for summary judgment and granting Cuentas's, arguing that the default provisions were enforceable liquidated damages and it did not waive default interest. JPC further contends the trial court erred in striking its expert witness's affidavit. For the reasons set forth infra , we affirm in part and reverse in part.

Viewed in the light most favorable to JPC,1 the record shows that in 2015, the Circuit Court in Broward County, Florida, entered a judgment for $66,000 against Cuentas's predecessor, Next Group Holdings, Inc. The judgment holder assigned it to JPC, and on January 2, 2017, in an effort to resolve that judgment, JPC and Cuentas entered into an "8% Convertible Redeemable Note" with Cuentas agreeing to owe a principal balance of $70,000. Interest on the note's principal accrued at eight percent per annum, and it matured in seven months—on August 2, 2017. Additionally, the parties expressly agreed that the note would be governed by Georgia law.

Turning to its actual terms, the note was convertible in that it allowed JPC to convert any outstanding debt into an equity interest in Cuentas. As a result, under paragraphs 4 (a) and (b) of the note, Cuentas was to either pay JPC $70,000 plus eight percent interest by August 2, 2017, or issue JPC stock in Cuentas equal to the principal plus then-accrued interest within three days of a demand by JPC to convert the note to shares. Specifically, under paragraph 4 (a), if JPC elected to convert the note, it would receive the principal and currently accrued interest in Cuentas stock, priced at "50% of the lowest trading price" for "twenty prior trading days"2 with a "floor of $0.02 per share." In addition, paragraph 4 (b) provided that "[JPC] may, at any time, send in a Notice of Conversion to [Cuentas] for Interest Shares based on the formula provided [for conversions of principal]. The dollar amount converted into Interest Shares shall be all or a portion of the accrued interest calculated on the unpaid principal balance of this Note to the date of such notice." Furthermore, the note required Cuentas to appoint a transfer agent and provide this agent with irrevocable instructions to reserve at least 10,000,000 shares of its common stock. The note also directed Cuentas to "reserve a minimum of four times the amount of shares required if the [note] would be fully converted." And in the event of a conversion, the note required Cuentas to pay "all transfer agent costs associated" with delivering the shares to JPC.

Paragraph 8 of the note described "Events of Default," which included the failure to reserve the required number of shares and the failure to deliver shares to JPC within three days of it providing a Notice of Conversion. In the event of a default "unless cured within 5 days" or unless "waived in writing," JPC could "consider this Note immediately due and payable" and pursue any of its available remedies. Most of these remedies are outlined in Paragraph 8, but the note initially states, in Paragraph 4 (a), that upon default "the conversion discount shall be increased by 10%, the lookback period will be increased to 25 days and the floor of $0.02 per share shall be eliminated." Paragraph 8 then provides that upon default "interest shall accrue at a default interest rate of 24% per annum."

Finally, the note outlines two specific remedies in the event Cuentas fails to deliver shares within three days of JPC issuing a Notice of Conversion. First, the note imposed what it characterized as a "penalty" of $250 per day beginning on the fourth day after notice and increasing to $500 per day upon the tenth day. Second, the note includes what it terms a "Make-Whole for Failure to Deliver Loss" remedy which provides:

At [JPC's] election, if [Cuentas] fails for any reason to deliver to [JPC] the conversion shares by the 3rd business day following the delivery of a Notice of Conversion to [Cuentas] and if [JPC] incurs a Failure to Deliver Loss, then at any time [JPC] may provide [Cuentas] written notice indicating the amounts payable to [JPC] in respect of the Failure to Deliver Loss and [Cuentas] must make [JPC] whole as follows: Failure to Deliver Loss = [(High trade price at any time on or after the day of exercise) x (Number of conversion shares)]. [Cuentas] must pay the Failure to Deliver Loss by cash payment, and any such cash payment must be made by the third business day from the time of [JPC's] written notice to [Cuentas].

Approximately one week following the note's execution, JPC received a letter from Cuentas, stating that it appointed a transfer agent and reserved 3,500,000 shares. At that time, JPC did not object to Cuentas's failure to comply with the note's 10,000,000 share reserve requirement.

On April 13, 2017, JPC sent a Notice of Conversion to Cuentas's transfer agent, seeking to convert $71,549.59 of the note ($70,000 in principal and $1,549.59 in interest at the non-default rate of 8 percent) into 3,577,480 shares of Cuentas's stock. A few days later, the transfer agent responded, via email, stating that it required a $250 conversion fee (contrary to the terms of the note) and informing JPC that Cuentas currently had only 3,500,000 shares in reserve. The agent, therefore, inquired if JPC wanted to submit a revised Notice of Conversion for that number of shares or if it wanted Cuentas to issue an additional 77,480 shares. On April 27, 2017, JPC sent an updated Notice of Conversion to the agent, accounting for the agent's requested fee and the additional interest that had accrued since the April 13 Notice. Thus, JPC now sought to convert $72,014.38 into 3,600,720 shares, again using the note's standard conversion formula and its non-default interest rate.

Nonetheless, that same day, the agent again responded that Cuentas only had 3,500,000 shares in reserve and asked JPC if it would accept that amount or if it wanted JPC to issue an additional 100,720 shares and/or increase the reserve. And over the course of the next two months, similar inquiries by JPC were met with a similar response, with no progress being made. Finally, on June 29, 2017, after yet another email from the agent stating that Cuentas only currently had 3,500,000 shares reserved, JPC responded with an email, exhorting, "SEND THE 3.5MM PLEASE I WILL DEAL W. REST AND OPINION LATER." But the next day, before receiving JPC's revised Notice of Conversion, the transfer agent contacted Cuentas, notifying it of JPC's request for 3,600,720 shares and requesting authorization to issue additional shares. That same day, JPC emailed Cuentas, reminding it that the note required 10,000,000 shares to be in reserve and requesting that such shares be issued. The email concluded by stating, "If this is not agreeable I am still demanding that at a minimum the 3.5mm be sent immediately." The following day, Cuentas authorized the issuance of the additional 100,720 shares necessary to comply with JPC's April 27 Notice of Conversion. And on July 5, 2017, JPC received the entirety of the 3,600,720 shares it requested.

Nearly six months later, on December 1, 2017, JPC sent a demand to Cuentas for what it termed "penalties due" for Cuentas's breaches of the note, specifically its failure to maintain the minimum reserve amount of shares and its failure to timely deliver shares after JPC's Notice of Conversion. In the demand, JPC calculated the purported amount owed by applying the note's Default Conversion Formula, Failure to Deliver Daily Penalty, and the Make-Whole provision. JPC also applied the default interest, resulting, it claimed, in a total amount owed of $305,368.63. But Cuentas refused JPC's demand.

On December 14, 2018, JPC filed a lawsuit against Cuentas, alleging that Cuentas breached the note in several respects and requesting damages well in excess of $1,000,000 under the note's various default provisions. Cuentas filed an answer, and discovery ensued. On June 21, 2019, the trial court issued a scheduling order, in which it set deadlines for discovery and dispositive motions. But a few months later, the parties filed a joint motion to modify that order, seeking an extension on the various deadlines set by the June 21 order. On November 15, 2019, the trial court granted that motion, and the modified scheduling order set deadlines as follows: "Complete Party document productions and depositions" by November 19, 2019; "Mediate" by December 20, 2019; and "Daubert and dispositive motions" by January 24, 2020.

On January 15, 2020, JPC amended its complaint so that it was no longer seeking damages under the note's "Failure to Deliver Daily Penalty." Subsequently, on January 24, 2020, both parties filed motions for summary judgment. Specifically, JPC argued that Cuentas breached the terms of the note and, thus, it was entitled to damages under the note's default provisions. In turn, Cuentas argued, inter alia , that the note's default provisions were unenforceable penalties rather than lawful liquidated damages clauses. And in the subsequent weeks, the parties filed responses to each other's summary judgment motions.

On April 27, 2020, JPC filed a motion requesting permission to...

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