Tarpon Bay Partners LLC v. Zerez Holdings Corp.

• Docket Number: 21-1916-cv,21-2010-cv,August Term, 2022
• Decision Date: 11 August 2023
• Citation: 79 F.4th 206
• Parties: TARPON BAY PARTNERS LLC, Plaintiff-Consolidated Defendant-Counterclaim Defendant-Appellant-Cross-Appellee, Stephen M. Hicks, Southridge Advisors II, LLC, a Delaware limited liability company, Consolidated Defendants-Counterclaim Defendants-Appellants-Cross-Appellees, v. ZEREZ HOLDINGS CORPORATION, an Oklahoma corporation, FKA Definitive Rest Mattress Company, Defendant-Consolidated Plaintiff-Counterclaim Plaintiff-Appellee-Cross-Appellant, Does, 1-25, Consolidated Defendants-Counterclaim Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

79 F.4th 206

TARPON BAY PARTNERS LLC, Plaintiff-ConsolidatedDefendant-CounterclaimDefendant-Appellant-Cross-Appellee,Stephen M. Hicks, Southridge Advisors II, LLC, a Delaware limited liability company, ConsolidatedDefendants-CounterclaimDefendants-Appellants-Cross-Appellees, v. ZEREZ HOLDINGS CORPORATION, an Oklahoma corporation, FKA Definitive Rest Mattress Company, Defendant-ConsolidatedPlaintiff-CounterclaimPlaintiff-Appellee-Cross-Appellant,Does, 1-25, ConsolidatedDefendants-CounterclaimDefendants-Appellees.^*

No. 21-1916-cv

No. 21-2010-cv

August Term, 2022

United States Court of Appeals, Second Circuit

Argued: March 3, 2023

Decided: August 11, 2023

Appeal from the United States District Court for the District of Connecticut(Underhill, J.)

George O. Richardson, III, Sullivan & Worcester LLP, New York, NY, for Plaintiff-Appellant and Counterclaim Defendants-Appellants.

Jonathan M. Shapiro, (Evan K. Buchberger, on the brief), Aeton Law Partners, Middletown, CT, for Defendant-Cross-Appellant.

Before: Nardini, Merriam, Circuit Judges, and Katzmann,¹ Judge.

Gary S. Katzmann, Judge:

Before us are the appeal of Plaintiff-AppellantTarpon Bay Partners LLC("Tarpon Bay") and cross-appeal of Defendant-AppelleeZerez Holdings Corporation("Zerez") from the Judgment of the United States District Court for the District of Connecticut.Tarpon Bay and Zerez are commercial parties who regularly transact in the capital markets and attempted to reach an arm's-length investment deal.After the deal broke down, Tarpon Bay sued to enforce an allegedly valid promissory note issued by Zerez (the "Signing Fee Note").Among other defenses and counterclaims, Zerez raised the defense of unconscionability and counterclaimed that Tarpon Bay, Southridge Advisors II, LLC("Southridge"), and Stephen M. Hicks("Hicks")(together, "Counterclaim Defendants") had violated the Connecticut Unfair Trade Practices Act ("CUTPA"), Conn. Gen. Stat. §§ 42-110a to -110q.

In September 2019, the district court denied summary judgment for Tarpon Bay on its enforcement claims because genuine issues of material fact remained as to whether the Signing Fee Note was supported by consideration.It then held in the same opinion that the Signing Fee Note was unconscionable and therefore unenforceable.Tarpon Bay challenges these two holdings on appeal.In July 2021, the district court granted summary judgment for Tarpon Bay on Zerez's CUTPA counterclaim, which Zerez challenges on cross-appeal.

We first hold that the record at the summary judgment stage did not establish that the Signing Fee Note was unconscionable under Connecticut law.We next hold that the district court correctly denied summary judgment for Tarpon Bay on its enforcement claims.Finally, we hold that the district court's grant of summary judgment on Zerez's CUTPA claim was warranted on the alternative grounds that CUTPA does not apply to the case at bar.Accordingly, weVACATE in part, AFFIRM in part, and REMAND for further proceedings consistent with this opinion.

I.Background

A.Factual Background

Unless otherwise stated, the parties do not dispute the following facts.Zerez and Tarpon Bay are sophisticated commercial parties who are routine players in the capital markets.Zerez is a publicly traded holding company, formed in Oklahoma and operated out of California, that invests in and manages emerging technology businesses.Joint App'xat 867, 915, 1149.Trading at fractions of a cent, Zerez's common stock is a penny stock listed on the over-the-counter ("OTC") market under the stock symbol "SCNA."²Id. at 867, 870.Tarpon Bay is a Florida limited liability company managed by Southridge, an investment advisory firm based in Connecticut and headed by Hicks.Id. at 867-68, 874.

In January 2016, Zerez sought new capital to fund its continued operations and growth.Id. at 1150.The company had more than $500,000 of debt on its books, so it entertained offers from fundraising brokers to provide or procure new capital in exchange for stock or other debt.Id.Juan Carlos Murga, Zerez's then-CEO, was in contact with individuals from several venture capital and investment funds but ultimately proceeded with Anish Aswani of Southridge.³Id. at 1149-51.The parties dispute how they were initially put in touch.⁴However it happened, Aswani and Murga engaged in discussions that Tarpon Bay would purchase Zerez's debt obligations and, in exchange, receive a commensurate amount of stock in Zerez.Id. at 915-16, 1296.The transaction would reduce Zerez's carried debt and make the company more attractive for future lenders or investors.Id. at 916, 1296.Because Zerez would need to issue equity in exchange for its outstanding debt, the parties were aware that the transaction would require a court order approving the fairness of the terms pursuant to section 3(a)(10) of the Securities Act of 1933.⁵Joint App'xat 915-16, 1296.

Aswani sent Murga a proposed term sheet outlining the key aspects of the deal (the "Term Sheet").Id. at 916, 1296.Under the Term Sheet, Tarpon Bay would individually engage and execute agreements with Zerez's creditors to buy the debt; Tarpon Bay would seek court approval of the section 3(a)(l0) transaction within five days of executing the agreements with Zerez's creditors; and Zerez would issue a commensurate amount of stock to Tarpon Bay, subject to certain limitations not relevant here.Id. at 981-82.The Term Sheet also specified that Tarpon Bay would receive (1) a $25,000 fee payable in cash or a promissory note for stock at Tarpon Bay's election ("Signing Fee") and (2) a fee worth $75,000 at minimum upon judicial approval of the transaction.Id. at 983.But the signature page of the Term Sheet indicated that the Term Sheet "merely represent[s] proposed terms for possible liabilities satisfaction.Until definitive documentation is executed by all parties, there shall not exist any binding obligation," other than two provisions relating to confidentiality and exclusivity.Id. at 984.Murga was personally involved in the discussions with Aswani, but Zerez alleges that it played no role in drafting the Term Sheet.Id. at 917, 1297, 1303.Zerez signed the Term Sheet on January 15, 2016.Id. at 984.

On January 27, 2016, Zerez executed a convertible promissory note to Tarpon Bay for the Signing Fee ("Signing Fee Note").Id. at 1005, 1012.The Signing Fee Note was issued pursuant to the Signing Fee provision in the Term Sheet.Id. at 917-18, 1296-98.Crucially, the Signing Fee Note was payable on demand and allowed Tarpon Bay "to convert all . . . of the Outstanding Principal Amount . . . into Common Stock at a conversion price . . . for each share of Common Stock at a 50% discount from the lowest closing bid price in the 30 trading days prior to the day that [Tarpon Bay] requests conversion."Id. at 1005-06.The Signing Fee Note also obligated Zerez "to reserve at least Five hundred million (500,000,000) shares of its Common Stock for issuance to Holder in connection with conversion of this Note."Id. at 1011.Aswani told Murga that Zerez was issuing the Signing Fee Note solely for the services that Southridge and Tarpon Bay would provide as part of the section 3(a)(10) transaction, and that Murga would need to execute the Signing Fee Note to proceed because it was a prerequisite to entering into a definitive agreement.Id. at 918, 1304.Zerez alleges that it played no role in drafting the Signing Fee Note and that it felt that it had no meaningful choice in negotiating its terms given its financial condition.Id. at 1304.One day after Zerez executed the Signing Fee Note, Hicks signed the Term Sheet on January 28, 2016.Id. at 984.Murga alleges that he was unaware of Hicks's involvement prior to that point.Because Hicks had been the subject of unrelated lawsuits filed by federal and state securities regulators, Murga further alleges that Zerez would not have agreed to move forward with Tarpon Bay and Southridge had it known that Hicks was involved.Id. at 1151-52.

Between February and April 2016, Tarpon Bay proceeded to reach out to Zerez's creditors and ultimately executed agreements, termed "Claim Purchase Agreements," with eight creditors to purchase a total of $512,874.06 of Zerez's debt.Id. at 428, 919.Zerez has not disputed that it was aware of this process; two of Zerez's largest creditors, whom Tarpon Bay had engaged with Claim Purchase Agreements, were Murga himself and Claudia Lima(Zerez's Secretary and Treasurer).Id. at 428, 919, 1000.On June 13, 2016—more than five days after the last Claim Purchase Agreement was executed, which was the time period expressly required by the Term Sheet⁶—Tarpon Bay filed an action against Zerez in Florida state court seeking a fairness hearing to approve the securities transaction pursuant to section 3(a)(10) of the Securities Act.SeeTarpon Bay Partners, LLC v. Zerez Holdings, No. 2016-CA-001300(Fla. Cir. Ct. filed June 13, 2016);see alsoJoint App'xat 920-21, 1299.

But the section 3(a)(10) transaction was never approved.Zerez did not appear at the hearing, and the parties dispute why.⁷Id. at 921, 1299.On September 22, 2016, Murga emailed Aswani stating that Zerez wished to "stop and cancel the [3(a)(10)] filing" and to "pull back on the filing."Id. at 1067.The next day, Tarpon Bay was informed that three creditors were exercising their undisputed rights to cancel the Claim Purchase Agreements.⁸Id. at 1178-79.On October 10, 2016, Zerez sent a letter to Tarpon Bay on official letterhead informing Tarpon Bay that Zerez "HEREBY rescinds and cancels any and all consulting and/or services relationships with Southridge and/or Tarpon Bay . . . , and further HEREBY rescinds and cancels the $25,000" Signing Fee Note, citing the lack of "sufficient, adequate, [ ]or material services" rendered to Zerez.Id. at 1069.Tarpon Bay responded via letter on October 17, 2016, asserting that Zerez had "no grounds to rescind" the...