Power up Lending Grp. v. Parallax Health Scis.

• Decision Date: 19 April 2023
• Docket Number: 20-CV-3259 (JMA) (AYS)
• Parties: POWER UP LENDING GROUP, LTD., Plaintiff, v. PARALLAX HEALTH SCIENCES, INC., and PAUL R. ARENA, Defendants.
• Court: U.S. District Court — Eastern District of New York

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POWER UP LENDING GROUP, LTD., Plaintiff, v. PARALLAX HEALTH SCIENCES, INC., and PAUL R. ARENA, Defendants.

No. 20-CV-3259 (JMA) (AYS)

United States District Court, E.D. New York

April 19, 2023

ORDER

JOAN M. AZRACK, UNITED STATES DISTRICT JUDGE

Plaintiff Power Up Lending Group, LTD. (“Plaintiff” or “Power Up”) brought this action against Defendants Parallax Health Sciences, Inc. (“Parallax”) and Paul R. Arena (“Arena”) arising out of Parallax's breach of two convertible promissory notes. Plaintiff alleges that Arena, who was Parallax's CEO, tortiously interfered with those notes, causing Parallax to breach its obligations to Plaintiff. Currently pending before the Court is Plaintiff's motion for a default judgment against Arena. For the reasons stated below, that motion is GRANTED in part and DENIED in part.

I. BACKGROUND

A. Factual Background Based on the Complaint

As discussed infra, because of Arena's default, all the relevant factual allegations from the Complaint-which are set out below-are deemed admitted.

Arena was the Chief Executive Officer of Parallax. (Compl. ¶ 3.) He had “total and unfettered control of' Parallax's “business, legal and financial affairs.” (Id. ¶ 4.) Arena's compensation included a substantial number of stock options.^[1] (Parallax 10-K at 69, ECF No. 369.)

In December 2019 and January 2020, Power Up and Parallax entered into two Convertible Promissory Notes (the “Notes”) and related Securities Purchase Agreements.^[2] In the first Note, dated December 4, 2019, Power Up loaned Parallax $83,000 (the “Dec. 4. Note”). (Compl. ¶ 6.) In the second Note, dated January 22, 2020, Power Up loaned Parallax an additional $78,000 (the “Jan. 22 Note”). (Id. ¶ 7; Kramer Decl. ¶ 5.) The relevant provisions of the Notes discussed below are the same.

Arena signed these agreements on behalf of Parallax but did not personally guarantee either Note. The Notes granted Power Up the right to convert all or part of the outstanding and unpaid principal on the loans into shares of Parallax's common stock. (Dec. 4 Note ¶ 10.) Parallax had the ability to pre-pay the Notes under certain conditions within 180 days of issuance. (Id. ¶ 1.7.) However, after 180 days, Power Up had the right to exercise the conversion option in the Notes. (Id. ¶ 1.4.) Power Up's conversion rights allowed it to convert the principal amount of the loan and any accrued interest into shares of Parallax on the following terms. (Id. ¶ 1.1.) Power Up could exercise this conversion right at the lesser of $0.12 per share or the “Variable Conversion Price,” which was the “Market Price” of the shares minus a 35% discount. (Id. ¶ 1.2.) The Market Price was based on the average of the three lowest share prices during the fifteen-day period before the conversion. (Id.) After exercising its conversion rights, Power Up would then sell those shares to third parties, which could create downward pressure on Parallax's stock price.

The Complaint explains the purposes and value of Power Up's conversion rights in the Notes:

The purpose of the [conversion provisions in the Notes] is to ensure that the [Power Up] will be able to convert debt into stock of [Parallax] and will then be able to sell that stock on the open market, as it is well known to both parties and the investment community in general that companies such as [Parallax] are not expected to pay these obligations as they generally do not have the cash or other resources to do so and instead all parties expect and agree that payment shall be made by the conversion process, such that it is the acquisition of free trading stock that is the purpose of the transaction and without which the transaction is valueless and would never be entered into by the Plaintiff.

(Compl. ¶ 39.)

The Notes included safeguards to protect Power Up in the event that Power Up exercised its conversion rights and Parallax sought to avoid the conversion request. (2019 Note ¶¶ 1.3, 3.12; 2019 Securities Purchase Agreement ¶ 5.) The Notes required Parallax to use a transfer agent who was: (1) bound by irrevocable instructions to effectuate the conversions, and (2) required to hold a reserve of Parallax shares that would be provided to Power Up without necessitating any further action by Parallax. (Id.) The Notes provided that Power Up could declare the Notes in default if Parallax did not abide by these requirements concerning the transfer agent.^[3] (2019 Note ¶¶ 1.3, 3.12.)

The Notes also recount other events that would constitute a default, including the delisting of Parallax's stock. (Id. ¶ 3.7 (stating that an event of default occurs if Parallax “fails [to] maintain the listing of the Common Stock on [a qualifying exchange]”).)

On April 10, 2020, Power Up “discovered that Parallax replaced Action Stock Transfer Corporation as its transfer agent with ClearTrust, LLC and failed to provide a fully executed irrevocable transfer agent instruction letter to PowerUp.” (Apr. 20, 2020 Ltr., ECF No. 36-8.)

On April 13, 2020, the Securities and Exchange Commission (“SEC”) announced the temporary suspension of trading in Parallax's stock pursuant to Section 12(k) of the Securities Exchange Act of 1934. (Id.) Due to this suspension in trading, Parallax failed to maintain the listing of its common stock on a qualified exchange, as required under the Notes. (Id.) This temporary suspension began on April 13, 2020 and ran through April 24, 2020. (Id.) The SEC's April 13 press release-which is incorporated by reference into the Complaint-states:

The Commission temporarily suspended trading in the securities of Parallax because of questions that have been raised about the accuracy and adequacy of information in the marketplace relating to Parallax common stock, including questions relating to statements Parallax made on its website and in press releases on March 12, March 16, March 17, March 23 and March 24, 2020 about its purported development of a rapid screening test for COVID-19 and its purported access to large quantities of COVID-19 diagnostic testing kits and personal protective equipment.

(SEC Press Release, ECF No. 36-10.)

On April 14, 2020, Power Up sent Parallax a notice declaring that Parallax was in default due to the trading suspension and Parallax's changes to the transfer agent. (Apr. 20, 2020 Ltr.)

Power Up demanded immediate payment of $322,000 due under the Notes along with accrued interest and default interest. (Id.; Compl. ¶ 18.)

In support of Plaintiff's claim for tortious interference against Arena, the Complaint also alleges the following:

46. That at all times relevant herein, [Arena] was fully and completely aware of the existence of the Notes and Agreements and the terms thereof, having actually negotiated the Notes and Agreements with the [Plaintiff and having executed them as well as becoming fully familiar with their terms and provisions and the Plaintiffs rights thereunder.

47. That [Arena], deliberately and purposefully caused [Parallax] to breach the terms and provisions of the Notes and Agreements in the manner and circumstances described above, and did so beyond the scope of his duties as an officer of [Parallax] and further caused such breaches to take place for his own financial and economic benefit, and not for the benefit of [Parallax].

48. That the Notes and Agreements were in fact breached through the actions of [Arena] with full knowledge of the existence and terms of the Notes and Agreements for the purpose of benefiting [Arena] and not for any proper corporate purposes, thus causing damage to the Plaintiff.

(Compl. ¶¶ 46-48.)

The Complaint contain two other allegations concerning damages. The Complaint alleges that Parallax's defaults under the Notes have left the Notes “valueless to” Power Up. (Compl. ¶ 20.) The Complaint also alleges that, “as a direct result of the defaults of [Parallax] and its failure to abide by its contractual obligations [Power Up] has been deprived of, and continues to be deprived of, the opportunity to acquire and dispose of the common stock of [Parallax] which profits are irretrievably lost because the markets for the common stock can no longer be recreated.” (Id. ¶ 31.)

B. Procedural History

Plaintiff originally filed this action in New York state court on June 19, 2020. On July 21, 2020, Defendants removed the action to this Court. On August 14, 2020, Defendants filed a premotion conference letter requesting permission to file a motion to dismiss the tortious interference claim against Arena and three of the claims against Parallax. On October 1, 2020, Plaintiff filed a pre-motion letter seeking leave to move for a default judgment. Plaintiff took the position that Defendants should be considered in default because they filed their pre-motion conference letter for their proposed motion to dismiss after their deadline to file an answer had already passed.

On October 7, 2020, counsel for Defendants filed a motion to withdraw. On November 4, 2020, Magistrate Judge Shields granted the motion to withdraw. Judge Shields also stayed the case for 60 days to allow Defendants to obtain new counsel or, in Arena's case, to elect to proceed pro se.

After Parallax failed to obtain counsel, Plaintiff filed letters renewing its request for permission to move for a default judgment against both Defendants. On April 16, 2021 Plaintiff's counsel and Arena appeared before the Court for a pre-motion conference. The Court granted Plaintiff leave to file a motion for default judgment against Parallax within 30 days and set a briefing schedule for Arena's proposed motion to dismiss. Arena was supposed to file his motion by May 17, 2021, and the briefing was supposed to be completed by July 17, 2021. The Court also informed Arena of his obligation to provide the Court with a...