Oceana Capitol Grp. Ltd. v. Red Giant Entm't, Inc.

• Decision Date: 17 December 2015
• Docket Number: Case No.: 3:15-cv-00428-MMD-WGC
• Citation: 150 F.Supp.3d 1219
• Parties: Oceana Capitol Group Limited, Plaintiff, v. Red Giant Entertainment, Inc., a Nevada Corporation Defendant.
• Court: U.S. District Court — District of Nevada

150 F.Supp.3d 1219

Oceana Capitol Group Limited, Plaintiff,

v.Red Giant Entertainment, Inc., a Nevada Corporation Defendant.

Case No.: 3:15-cv-00428-MMD-WGC

United States District Court, D. Nevada.

Signed December 17, 2015

Jarrad C. Miller, Jonathan J. Tew, Robertson, Johnson, Miller & Williamson, Reno, NV, for Plaintiff.

Amy N. Tirre, Reno, NV, for Defendant.

[PROPOSED] MEMORANDUM AND ORDER

Hon. Miranda Du, United States District Court Judge

The Motion for Approval of Stipulation for Settlement of Claims (Doc. 6) of Plaintiff OCEANA CAPITAL GROUP LIMITED (“Plaintiff ” or “Oceana Capital”) came on for hearing on December 17, 2015 before the Honorable Miranda Du, U.S. District Judge presiding. The Court having been presented with a Stipulation for Settlement of Claims (Doc. 5) (“Stipulation ”), between Plaintiff and Defendant RED GIANT ENTERTAINMENT, INC. (“Defendant ” or “Red Giant”), considered the Motion and supporting and responding papers, Declaration of Tatenda Gotosa (Doc. 6-1), Declaration of Benny R. Powell (Doc. 6-2), and arguments of counsel, conducted a fairness hearing on the Motion as set forth in the Stipulation, and good cause appearing therefor, the Court grants to Motion for the reasons explained below.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

The Court makes the following Findings of Fact, Conclusions of Law and decision.

FINDINGS OF FACT

Defendant is a Nevada corporation. (See Powell Decl. at ¶ 1.) Defendant is an intellectual property development company in business to produce entertainment properties, including comic book publications that reach over one million readers every week. (See Powell Decl. at ¶ 3.) Defendant's stock is publicly traded on the OTC Pink marketplace under the ticker symbol “REDG.” (Id. )

Plaintiff is a British Virgin Islands company. (See Gotosa Decl. at ¶ 1.) Plaintiff asserts claims in the sum of $180,288.00. (See First Amended Complaint (Doc. 4).) Plaintiff is a creditor of Defendant. Plaintiff purchased $180,288.00 in outstanding accounts receivable from creditors of Defendant, pursuant to the agreements attached as exhibits to the operative First Amended Complaint in this action. (Id.; Powell Decl. at ¶ 4.)

Defendant has acknowledged that the claims held by Plaintiff are bona fide outstanding, resulted from arms-length agreements negotiated in good faith, and that the amounts being settled are currently due debts arising in the ordinary course of business. (Id. at ¶ 5.) Defendant further acknowledges that it is obligated to pay the full amount of the claims without counterclaim or right of offset. (Id. )

Plaintiff and its U.S. attorneys, advisors and representatives have worked cooperatively with Defendant and its attorneys and advisors, to reach a mutually-beneficial agreement. (Id. at ¶ 6.) The parties have entered into a stipulation, to settle the outstanding claims in exchange for stock, subject to Court approval following a fairness hearing. (Id. at ¶ 7.) The terms and conditions of the settlement are set forth in the Stipulation for Settlement of Claims (Doc. 5) filed in this action. Defendant's CEO and board of directors have determined that the settlement is fair to Defendant, and in the best interests of its stockholders. (Id. at ¶ 6.)

Trading in Defendant's shares is volatile and unpredictable. (Id. at ¶ 8.) Over the last year, the trading price and volume for the shares have fluctuated substantially. (Id. , Exh. “A.”) Accordingly, the Stipulation provides for an adjustment mechanism, whereby the number of shares will be calculated based upon an agreed formula. (Id. at ¶ 7; Gotosa Decl. at ¶ 5; Stipulation at ¶¶ 7, 8.) Defendant is a small business with a fairly low stock price, and as such will likely require millions and possibly billions of Defendant's shares to settle the claims, which will be immediately resold by Plaintiff into the public markets. Given the size of the claims relative to Defendant's market capitalization, the settlement will likely result in substantial dilution. However, the alternative for Defendant is to incur a monetary judgment it cannot afford to pay, go out of business or file bankruptcy.

Plaintiff is a highly sophisticated institutional investor who regularly enters into transactions of this type, and is fully aware of the significant risks in exchanging debt for common equity of a small public company that has substantial doubt as to its ability to continue as a going concern. (See Gotosa Decl. at ¶ 6.) Plaintiff can afford a complete loss of its investment, and is willing to accept that risk provided Defendant abides by the terms of the Stipulation. (Id. at ¶ 5.) If Defendant succeeds and performs, there is the potential for Plaintiff to fully recoup its investment and possibly generate a sizable return. Plaintiff is receiving shares that it should be able to sell for more than the amount of the claims. (Id. ) Plaintiff has analyzed the provisions of the stipulation, company fundamentals and market dynamics, and determined that the negotiated agreement is fair and reasonable, and adequate to settle its claim. (Id. at ¶ 7.)

CONCLUSIONS OF LAW

I. Proposed Settlement

The parties have agreed to settle the claims in this action in exchange for issuance of Defendant's stock to Plaintiff, subject to obtaining the Court approval required by Section 3(a)(10) of the Securities Act of 1933, as amended, 15 U.S.C. § 77c(a)(10)

, and the comparable provision of Nevada state “blue sky” law, Nevada Revised Statutes § 90.280(6)(c).

Court approval is required because payment for the settlement will be in the form of unregistered shares of Defendant's common stock, and the parties are relying on the state and federal exemptions that allow such stock to be issued without registration if court approval is obtained. See ScripsAmerica, Inc. v. Ironridge Global LLC , 56 F.Supp.3d 1121, 1132, fn. 16 (C.D.Cal.2014)

( “Because the shares were unregistered, [Defendant] and [Plaintiff] had to obtain court approval under [state] and federal securities laws before a transfer of the stock could take place.”). All parties believe that the terms of the settlement are fair and reasonable, as expressed by each party's willingness to enter into the stipulation. There is no objection from any party, and indeed Plaintiff and Defendant jointly ask that the stipulation be approved by the Court.

II. Jurisdiction and Venue

This court has subject matter jurisdiction under 28 U.S.C. § 1332(a)(2)

, because the amount in controversy exceeds $75,000 and the action is between a citizen of a State and a citizen of a foreign state. Plaintiff is a British Virgin Islands company, and asserts claims in the sum of $180,288.00. Defendant is a Nevada corporation. See 28 U.S.C. § 1332(c)(1), Hertz Corp. v. Friend , 559 U.S. 77, 93, 130 S.Ct. 1181, 175 L.Ed.2d 1029 (2010).

Since Defendant is a Nevada corporation, venue lies in this district under 28 U.S.C. § 1391(b)(1)

. See 28 U.S.C. § 1391(c)(2), Pacer Global Logistics, Inc. v. Nat'l Passenger R.R. Corp. , 272 F.Supp.2d 784, 788 (E.D.Wis.2003).

III. Background and Purpose of Section 3(a)(10)

Generally, public companies are not permitted to issue their stock, and persons receiving it are not permitted to immediately resell the shares into the public markets, without first filing a registration statement. See 15 U.S.C. § 77e(c)

, 15 U.S.C. § 77d(a)(1). The Securities Act provides an exemption for, “any security which is issued in exchange for one or more bona fide outstanding securities, claims or property interests, or partly in such exchange and partly for cash, where the terms and conditions of such issuance and exchange are approved, after a hearing upon the fairness of such terms and conditions at which all persons to whom it is proposed to issue securities in such exchange shall have the right to appear, by any court...” See 15 U.S.C. § 77c(a)(10).

Section 3(a)(10) was adopted as part of the original Securities Act in 1933, and then amended and recodified to “extend the exemption” and ensure broader application, as part of the adoption of the Securities Exchange Act in 1934.

In re Bd. of Directors of Multicanal S.A. , 340 B.R. 154, 162 (Bankr.S.D.N.Y.2006)

. Congress's objective as stated in the legislative history was to address, “complaints that the present act is too drastic, and is interfering with business.” 78 CONG. REC. 8668 (1934) (statement of Senator Duncan Fletcher). With regard to the § 3(a)(10) exemption in particular, the purpose was to “substantially extend the present provisions [originally in § 4 of the Securities Act] in order to cover various forms of readjustments of the rights of holders of outstanding securities, claims and property interests, where the holders will be protected by court supervision of the conditions of the issuance of their new securities.” Id. Congress did not require that the SEC be named as a party in the proceeding or be given notice of the hearing. Id. The Congressional intent was for the § 3(a)(10) exemption to fall entirely within the purview of the long-established court system, rather than the newly-created commission. “By the requirement that securities, claims and property interests must be bona fide outstanding, the new section will provide protection against resort to the exemption for the purpose of evading the registration requirements of the act.” Id. “The primary purpose of the amendment is to make clear that the exemptions accorded extend beyond the particular transactions therein covered, to the security itself.” Id.

The Section 3(a)(10) exemption is often used to effectuate settlements of claims against public company defendants. See, e.g. In re Tripath Tech., Inc., Sec. Litig. , No. C 04 4681 SBA, 2006 WL 1009228, at *2 (N.D.Cal. Apr. 18, 2006)

(“The Settlement Shares are to be issued in exchange for bona fide outstanding claims; all parties to whom it is proposed to issue such securities have had the right to appear at the hearing on the fairness of the Settlement; and the...